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79–935 2013

TAX REFORM AND 

TAX-FAVORED RETIREMENT ACCOUNTS 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

APRIL 17, 2012 

Serial No. 112–24 

Printed for the use of the Committee on Ways and Means 

( 


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ii 

COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

TOM REED, New York 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JENNIFER SAFAVIAN, Staff Director 

JANICE MAYS, Minority Chief Counsel 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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C O N T E N T S 

Page 

Advisory of April 17, 2012, announcing the hearing ............................................ 2 

WITNESSES 

Jack VanDerhei, Ph.D., Research Director, Employee Benefit Research Institute ........................................................................................................................ 7 

Judy A. Miller, Chief of Actuarial Issues and Director of Retirement Policy, 

American Society of Pension Professionals and Actuaries ............................... 47 

William F. Sweetnam, Principal, Groom Law Group ........................................... 72 

David C. John, Senior Research Fellow in Retirement Security and Financial 

Institutions, The Heritage Foundation .............................................................. 81 

Randy H. Hardock, Partner, Davis & Harman LLP, testifying on behalf 

of the American Benefits Council ....................................................................... 102 

SUBMISSIONS FOR THE RECORD 

ACLI, statement ...................................................................................................... 145 

CFE, statement ........................................................................................................ 151 

cfed, statement ......................................................................................................... 154 

Custodia, statement ................................................................................................. 158 

ESOP, statement ..................................................................................................... 162 

ICI, statement .......................................................................................................... 170 

Kevin Wiggins, statement ....................................................................................... 181 

NAGDCA, statement ............................................................................................... 183 

Putnam Funds, statement ...................................................................................... 191 

Savings Coalition, statement .................................................................................. 201 

Scorse, statement ..................................................................................................... 209 

Susan Crase, statement .......................................................................................... 211 


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(1) 

TAX REFORM AND 

TAX-FAVORED RETIREMENT ACCOUNTS 

TUESDAY, APRIL 17, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:02 a.m., in Room 

1100, Longworth House Office Building, Hon. Dave Camp [Chairman of the Committee] presiding. 

[The advisory announcing the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

Tuesday, April 17, 2012 

FC–24 

Chairman Camp Announces a Hearing on 

Tax Reform and Tax-Favored Retirement Accounts 

Congressman Dave Camp (R–MI), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing on possible reforms 

to certain tax-favored retirement savings plans that might be considered as part of 

comprehensive tax reform. This tax reform hearing—scheduled to occur on tax filing 

day—will examine one source of complexity for individuals and employers by reviewing employer-sponsored defined contribution plans as well as Individual Retirement 

Accounts (‘‘IRAs’’). The hearing will take place on Tuesday, April 17, 2012, in 

Room 1100 of the Longworth House Office Building, beginning at 10:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witness only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

Financial planners and advisors have long identified the major components of retirement security as Social Security, employer-sponsored plans, and personal savings. Financed by payroll taxes paid by covered workers and their employers, Social 

Security provides monthly cash benefits to retired or disabled workers and their 

family members and to the family members of deceased workers. Social Security is 

outside the scope of this hearing. 

Outside of Social Security, many employers offer employees the option of participating in employer-sponsored retirement and pension plans, which generally receive 

favorable Federal income tax treatment. Employer-sponsored plans provide for either a defined benefit (which generally provides retired employees with an annuity) 

or a defined contribution (‘‘DC’’). Defined benefit pension plans represent an important source of retirement security, but raise policy questions that are outside the 

scope of this hearing. DC plans receive contributions from either employees or employers or both. Employees usually own their own accounts, and control the investment of account assets, thus bearing the risks and rewards of asset performance. 

In general, contributions to DC plans are deductible to the employer, excluded from 

the employee’s income, grow tax-free, and are taxed upon distribution. DC plans 

also generally may offer Roth-style accounts; contributions to such accounts are 

made on an after-tax basis but earnings and distributions are tax-free. 

Individuals also may be eligible to save through IRAs, which are similarly taxadvantaged, although with much lower contribution limits. Traditional IRAs are 

taxed similarly to 401(k) accounts. Contributions are deductible from income, earnings are not taxed currently, and distributions are taxed. Individuals participating 

in employer-sponsored plans cannot contribute to a traditional IRA if they exceed 

certain income levels. Contributions to Roth IRAs, on the other hand, are made on 

an aftertax basis, but earnings and distributions are excluded from income. Contributions to non-deductible IRAs are included in income, grow tax-free and are 

taxed at distribution less the amount of previously taxed contributions. 

There are several types of DC plans, the most common of which are: 401(k) plans 

for private employers, 403(b) plans for non-profits and public schools, and 457(b) 

plans for State and local governments. In addition to the types of IRAs discussed 


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above, some employers may offer IRAs through the workplace, including payroll deduction IRAs, SIMPLE IRAs and SEP IRAs. The proliferation of tax-favored retirement accounts has occurred as specific needs have led Congress to create new types 

of plans with specific rules. Some commentators, however, have questioned whether 

the large number of plans with different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. 

In addition, many commentators have offered ideas for increasing participation in 

retirement plans and better targeting the incentives. These ideas range from simplification and consolidation of existing plans and accounts to changing the default 

rules governing whether an employee participates to additional incentives such as 

the Savers Credit. 

In announcing this hearing, Chairman Camp said, ‘‘Retirement security is one 

of the most important long-term policy priorities we face as a Nation. While 

many argue that the existing menu of tax-favored retirement plans provides choice and flexibility for families and employers alike, others have 

questioned whether the ad hoc development of retirement savings incentives has led to undue complexity and inefficiency that reduce the effectiveness of these incentives. The general principles of tax reform apply to 

retirement security as well: American families trying to save should have 

options that are simple, fair, and economically efficient.’’ 

FOCUS OF THE HEARING: 

The hearing will consider the current menu of options for retirement savings— 

both with respect to employer-based defined contribution plans and with respect to 

IRAs. The hearing will explore whether, as part of comprehensive tax reform, various reform options could achieve the three goals of simplification, efficiency, and 

increasing retirement and financial security for American families. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record must follow the appropriate link on the hearing page 

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you would like to submit, and click on the link entitled, ‘‘Click here 

to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close 

of business on Tuesday, May 1, 2012. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–3625 or (202) 225–2610. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 


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The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TDD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://www.waysandmeans.house.gov

f 

. 

Chairman CAMP. Good morning. We meet today to continue our 

dialogue about what I hope will result in a bipartisan path forward 

to reform our Federal income tax system. In recent weeks much of 

the discussion about tax reform has centered on the corporate side, 

especially after Japan lowered its corporate rate on April 1st, leaving America with the dubious distinction of having the highest corporate tax rate in the industrialized world. It is simply unacceptable that American employers face such an undue burden at a time 

when we desperately need them to get the economy growing and 

get almost 13 million unemployed people back to work. But as tax 

filing day reminds us, only comprehensive tax reform ensures that 

we address the needs of American families and all job creators, regardless of how they are structured, and as such we must consider 

the individual side of the Tax Code if we are to transform today’s 

broken Code from one that impedes to one that improves prospects 

for job creation. 

Last year the IRS processed 142 million tax returns. They also 

received 10.5 million extension forms, at least in part due to the 

complex, costly, and time-consuming nature of the Tax Code. With 

nearly 4,500 changes in the last decade, 579 of them in 2010 alone, 

the Code is far too complex, and this complexity has led to everincreasing costs of complying with the Federal Tax Code. 

According to the National Taxpayer Advocate, in 2008, taxpayers 

spent $163 billion complying with the individual and corporate income tax rules. American families are not only spending more 

money complying with the Tax Code, they are also spending more 

time. Navigating through the tangled web of tax rules has resulted 

in taxpayers spending over 6 billion hours annually to comply with 

the Code. Whether it is the compliance and administrative burdens, the impact of temporary and expiring tax provisions, or the 

effect of convoluted rules on financial planning decisions, today’s 

Tax Code is not just hampering employers, but it is hampering the 

ability of individuals and families to plan their finances with reasonable certainty. 

Turning to the topic of today’s hearing, tax incentives for retirement saving, it quickly becomes clear why we are taking the time 

to lay the foundation for comprehensive tax reform by gathering 

input from experts. As many Americans work to meet the tax filing 

deadline, today’s testimony reinforces the wide popularity of these 

savings vehicles. The overwhelming majority of American workers 

with access to a workplace retirement plan are participating in 

that plan. According to the Bureau of Labor Statistics, 78 percent 

of full-time workers have access to a workplace retirement plan, 

and 84 percent of those workers participate in the plan, meaning 


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66 percent of all full-time workers participate. The plans benefit 

taxpayers of all income levels and from all walks of life. In 2010, over 70 percent of workers earning $30,000 to $50,000 

participated in an employer-sponsored retirement plan if such a 

plan was available to them, according to data from the Employee 

Benefit Research Institute. Similarly, IRS data indicates that 38 

percent of those participating in defined contribution plans make 

less than $50,000 a year, while almost three-quarters make less 

than $100,000 annually. 

The proliferation of tax-favored retirement accounts has occurred 

as specific needs have led Congress to create new types of plans 

with different rules. Some, however, have questioned whether the 

large number of plans with different rules and eligibility criteria 

leads to confusion, reducing effectiveness of the incentives and increasing retirement savings. 

In addition, many commentators have offered ideas for increasing participation in retirement plans and better targeting the incentives. These ideas range from simplification and consolidation of 

existing plans and accounts to changing the default rules governing 

whether an employee participates, to additional incentives such as 

the saver’s credit. As the Committee continues its work toward 

comprehensive tax reform, it is important to keep in mind that 

these savings vehicles affect average people who depend on these 

resources for their retirement, and we must ensure that we do not 

inadvertently take steps that result in unintended consequences 

that could threaten the retirement security of ordinary families. 

As this Committee considers tax reform, I believe there are three 

important principles to keep in mind when evaluating tax-favored 

retirement vehicles: one, simplification; two, increased participation, particularly by low- and middle-income taxpayers; and three, 

whether the tax benefits are effectively and properly targeted. 

Regarding the first of these principles, in August 2010 the President’s Economic Recovery Advisory Board, also known as the 

Volcker Commission, presented options for simplifying savings and 

retirement incentives in their report on tax reform options. These 

options are worthy of consideration and discussion. We also have 

an expert panel of witnesses before us today that will evaluate how 

existing tax rules measure up to these criteria. 

I would like to emphasize that today’s hearing isn’t about drawing conclusions, but it is about making sure that as Congress approaches comprehensive tax reform, that we do so well armed with 

information. Washington has spent too much time in previous 

years acting first and asking later. That has proven to be the 

wrong approach. America’s families and job creators deserve better 

than a trial-and-error approach to crafting policy. This is our opportunity to gather input and get the facts, and I look forward to 

the discussion. 

And I will now yield to the Ranking Member, Mr. Levin, for the 

purpose of an opening statement. 

Mr. LEVIN. Thank you, Mr. Chairman. Welcome. Thank you for 

coming. 

Today’s hearing is this Committee’s initial examination of what 

tax reform might mean for a very specific set of tax provisions, 

those designed to promote retirement savings. Tax-preferred retireVerDate Mar 15 2010 10:29 Apr 02, 2013 Jkt 079935 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\79935\79935.XXX 79935

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ment savings have benefited tens of millions of American families. 

The estimates of exactly how many vary, but most find that 40 to 

50 percent of all workers are covered by an employer-sponsored retirement plan, some 60 to 70 million people. Employer-sponsored 

plans, including defined contribution and defined benefit plans, private and public sector, hold assets of $9.3 trillion, held that amount 

as of the end of last year, and an additional 49 million households 

hold $4.7 trillion in IRAs. 

The tax-preferred retirement system is voluntary. Employers are 

not required to offer retirement plans, but I think we will hear 

today that employers basically understand the current system and 

that it works for them in terms of allowing them to offer retirement 

benefits to their workers. I note that most of this Committee agrees 

with that. 

Mr. Gerlach and Mr. Neal have introduced a resolution essentially in support of our current system. It has been cosponsored by 

115 Members, including 26 Members of this Committee, reflecting, 

I think, bipartisan agreement that these provisions are vital to encouraging retirement savings. 

That is not to say the current system cannot be improved. Of 

course it can be. Today I believe we will hear about several ways 

to do that, including proposals to expand enrollment in 401(k)s and 

IRAs, and to expand the saver’s credit. But what should be clear 

is that the basic structure of our current system should be preserved, and that this structure should not be repealed to pay for 

tax reform. Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue. 

I think one of our witnesses, Mr. Hardock, summed this up very 

nicely in his—in your written testimony, and I quote, ‘‘The retirement savings tax expenditures should not be reduced or tinkered 

with to pay for other initiatives, whether inside or outside of tax 

reform process. Those funds are the primary retirement nest egg 

of millions of American families. They should not be taxed in order 

to finance more government spending, deficit reduction or to offset 

other tax initiatives, including lower marginal tax rates.’’ 

Finally, I want to just note that while today’s hearing is focused 

on defined contribution plans, our retirement security policy in this 

country has traditionally been a three-legged stool. Personal savings constitute just one of those legs. The other two legs, defined 

pension benefit pensions and Social Security, are indeed also vital 

components of ensuring Americans’ retirement security. 

So thank you again, and all of us look forward to your testimony. 

Chairman CAMP. Thank you, Ranking Member Levin. 

Next it is my pleasure to welcome the excellent panel of witnesses seated before us today. Today’s witnesses have extensive experience studying or working with tax-favored retirement accounts, 

and their experience will be helpful as we take a look at how the 

complexities in this part of the Tax Code affect individuals and employers. 

First I would like to welcome and introduce Dr. Jack VanDerhei, 

the research director at the Employee Benefit Research Institute in 

Washington, D.C. Dr. VanDerhei has been with the Employee BenVerDate Mar 15 2010 10:29 Apr 02, 2013 Jkt 079935 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\79935\79935.XXX 79935

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efit Research Institute since 1988 and has published more than 100 

papers on employee benefits. 

Second we will hear from Ms. Judy Miller, the chief of actuarial 

issues and director of retirement policy at the American Society of 

Pension Professionals and Actuaries. Ms. Miller has specialized in 

employer-sponsored retirement programs for nearly 40 years. 

Third we will welcome Mr. Bill Sweetnam, a principal at the 

Groom Law Group in Washington, D.C. Mr. Sweetnam specialized 

in retirement security at Groom and served as benefits tax counsel 

at the George W. Bush Treasury Department. 

Fourth we will hear from Mr. David John, a senior research fellow in retirement security and financial institutions at The Heritage Foundation. Mr. John has published and testified extensively 

on the improvement of retirement security plans. 

Finally, we welcome Mr. Randy Hardock, a partner at Davis & 

Harman LLP in Washington, D.C. Mr. Hardock is an ERISA and 

regulatory compliance specialist who maintains a practice focused 

on advising employers and institutions on retirement and savings 

issues. Mr. Hardock is testifying today on behalf of the American 

Benefits Council. 

Thank you all again for your time today. The Committee has received each of your written statements, and they will be made a 

part of the formal hearing record. Each of you will be recognized 

for 5 minutes for your oral remarks and, Mr. VanDerhei, we will 

begin with you, and you are recognized for 5 minutes. 

STATEMENT OF JACK VANDERHEI, PH.D., RESEARCH DIRECTOR, EMPLOYEE BENEFIT RESEARCH INSTITUTE, WASHINGTON, D.C. 

Mr. VANDERHEI. Thank you. Chairman Camp, Ranking Member Levin, and Members of the Committee, thank you for the opportunity to speak with you today on the issues involved in tax reform and tax-favored retirement accounts. I am Jack VanDerhei, 

research director of the Employee Benefit Research Institute. EBRI 

is a nonpartisan institute that has been conducting original research on retirement and health benefits for the past 34 years. 

EBRI does not take policy positions and does not lobby. 

My testimony today draws on extensive research conducted by 

EBRI over the last 13 years with its Retirement Security Projection 

Model as well as annual analysis of the behavior of tens of millions 

of individual participants from tens of thousands of 401(k) plans 

dating back in some cases as far as 1996. 

Measuring retirement income adequacy is an extremely important and complex topic, and EBRI started to provide this type of 

measurement in the late nineties. Figure 1 of my written testimony 

shows that when we modeled the baby boomers and Gen X-ers earlier this year, 43 to 44 percent of the households were projected to 

be at risk of not having adequate retirement income for basic retirement expenses plus uninsured healthcare costs. Even though 

this number is quite large, the good news is that this is 5 to 8 percentage points lower than what we found in 2003. 

It would be my pleasure to explain in more detail later why 

American households are better off today than they were 9 years 

ago, even after the financial and real estate market crises in 2008 


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and 2009, but the short answer is the extremely positive impact 

from automatic enrollment in 401(k) plans. 

It is difficult to imagine any voluntary strategy more effective at 

dealing with retirement income adequacy than increasing the likelihood of eligibility in a qualified retirement plan. Figure 5 of my 

written testimony shows the importance of defined benefit plans for 

retirement income adequacy, and figure 6 shows a similar analysis 

for 401(k) plans. We see that the number of future years that workers are eligible for participation in a defined contribution plan 

makes a tremendous difference in their at-risk ratings. Gen X-ers, 

for example, with no future years of eligibility, are simulated to 

run short of money 61 percent of the time, whereas those with 20 

or more years of future eligibility would experience the situation 

only 18 percent of the time. 

Knowing the percentage of households that will be at risk for inadequate retirement income is important for public policy analysis; 

however, equally important is knowing just how large the accumulated deficits are likely to be. The aggregate deficit number is estimated to be $4.3 trillion for all baby boomers and Gen X-ers. 

While trillion-dollar deficits are useful in focusing attention on 

this problem, they do little to help policymakers understand exactly 

where these deficits are coming from. For example, figure 3 of my 

written testimony provides information on the retirement savings 

shortfalls for Gen X-ers. The average deficit decreases substantially 

with additional years of future eligibility in a defined contribution 

plan, and Gen X-ers fortunate enough to have at least 20 years of 

future eligibility find their average deficits reduced more than 70 

percent of the average deficits for those with no future years of eligibility. 

EBRI research has shown repeatedly that the additional type of 

401(k) plan under current tax incentives has the potential to generate a sum that, when combined with Social Security benefits, 

would replace a sizable portion of the employee’s preretirement income for those with continuous coverage. Our research has also 

shown that the automatic enrollment type of 401(k) plan, when 

combined with automatic escalation provisions, appears to have the 

potential to produce even larger retirement accumulations for most 

of those covered by such plans. 

Recently, however, there have been proposals to modify the existing tax incentives for defined contribution plans by either capping 

annual contributions or changing the before-tax nature of employee 

and employer contributions in exchange for a government matching 

contribution. 

Last September the Senate Finance Committee held a hearing 

that focused to a large extent on the second type of proposal. EBRI 

presented preliminary evidence at that time of the possible impact 

of such a proposal on future 401(k) accumulations. In recent 

months results from two new surveys have allowed EBRI to model 

these effects even more accurately, and last month we published 

our new results showing the projected changes in 401(k) balance at 

retirement age due to expected modifications of plan sponsors and 

participants in reaction to that proposal. Figure 11 of my written 

testimony shows a 22 percent reduction in 401(k) balances at retirement for young workers in the lowest income quartile, those 


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most at risk for insufficient retirement income. Results are even 

more dramatic for small plans. Figure 12 shows the average reduction for low-income employees in these plans is 36 and 40 percent. 

In conclusion, given that the financial fate of future generations 

of retirees appears to be so strongly tied to whether they are eligible to participate in employer-sponsored retirement plans, the logic 

of modifying either completely or marginally the incentive structure of employees or employers for defined contribution plans at 

this time needs to be thoroughly examined. The potential decrease 

of retirement income resulting from either employer modifications 

to existing retirement plans or employees reducing future contributions to these plans needs to be analyzed carefully when considering the overall impact of such proposals. 

Thank you, and I look forward to your questions. 

Chairman CAMP. Thank you very much. 

[The prepared statement of Mr. VanDerhei follows:] 


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dkrause on DSKHT7XVN1PROD with HEARING79935A.001

House Committee on Ways and Means 

Hearing on: 

h x Reform and Ta ·Favored Retirement Accounts 

10:00 a.m. Apri l 11, 2012 

1100 Longwor1h House OffICe Building 

Testimony by 

Jack VanOerhei, Ph.O. 

Research Director 

Employee Benefit Research Institute (EBRI) 

wv.w.ebri.org 

ebn.org 

mployee Benefit 

T-I 72 

The 'Iiew$ exprened in this SIaIemen! ~'" solely !tIosIt of Jad< nDemei nd should no! be anribu!ed to !he 

E~ Bene~t Research In.~1Ute (EBRI). the EBRI Education and Research FUnd, any of~. p.rograms. o/fioers, 

trustees. sponsors, or otllerstall. Tile Employee Benefit ResearchlnstitlJte i. a nonprofit. nonpartisan. education and 

research oroaflizalion established "' Washington, DC. in t 978. EBRI does root I8ke policy positions. nor does ~ lobby. 

ac:tvoc;Ite spe<:ilic policy re<:ommendations, or reoe<ve federal lurojing 

EBRI ffOO f3"' SL NW 1IlIIOO Washington, DC 20005 (202) 659~670 www .• brl.org 

1 
11 


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Tax Reform and Tax-Favored Retirement 

Accounts 

Jaek VanCerk"i. Re arch Director, Emplovee 8enefit Researcl. Institute 

Contents 

I Introduction ............................................................................................................................................ 2 

What i. th ~ . i,eof Americans' ,etlre"",n! <avinp gap? ..................................................................................... ,2 

, Impact ofta. f"""red .eliremen! acc .... ntson ,eli,em",,' income adequacy ., 4 The value of la.·favored re lirement accounts undercurrent!ax provislons: the case of 4011kJ plans .............. 3 

.. , 

.. , 

.. , 

Avera,e account bala",,,, .......................................................................................................................... 4 

Simulation .u~. for voluntary e nrollment 401(k) plan • ......................................................... 5 

Th~ · ",ntrove .. \'" ove, automatic enrollment d~" a. nK ret irement . .... ings .......................... . , 4.4 Summary .............................................................................................................................................. 7 

5 Chanti ng tax inc nt~ ........................................................................................................................................ 7 

" R~",lts From the 2011 Retirement Confide nce SU'"""'Y ............................................................................. 7 

6 The Potentia l Impact of Ta. Reform 0<> Retireme nt Security .............................................................................. 8 

6.1 20/20Cap •. ,. . ..... 8 

6.2 Modifyin, the eAi.tin, tax Irntment of w<>rke, and employer 401(k) conlrib.Jtion •............................... 9 

6.2.1 

6.2.2 

New Survey Analy.i •... 

Caveats for This Research ... 

. ................................................................................... 10 

.. , ..... 12 

7 Futurework ........................................................................................................................................................ 13 

, Conclusion • ........................ . ......................................... .................................................................... 13 

9 Refe rer.ces ......................................................................................................................................................... 14 

Appendi. A: Stief Description of R5PM .. . ................ 16 

II Appendi. S: Srlef Chtonolosr of ItSPM .................................................................................................... 17 

12 Append •• C: Impact of the financial and I,.." " in, market cr"i. In 2008 and 2009 on tir~ ment reitdln-es • . 19 

13 Endnotes ........................................................................................................................................................ 20 

ESR! testimony for House Committee On Ways and Means, April 11, 2012 Page I 
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1 Introduction 

Mr. Chairman and members of the commillee, thank you for your invitation to testify today on tax 

relorm and tax.l avored retirement accounts. I ilm Jack VanOerhei, research dire<:tor of the Employee 

Benefit Research Instit ute. EBRI is a nonpartisan research institute that has been focusing on retirement 

and health benefits for the past 34 years. EBRI does not take policy positions and does not lobby. 

The testimony draws on the e~tensive researel. conducted by EBRI on these topics over the last 13 years 

with its Retirement Security Projection Model- as well as annual analysis 01 tens of millions of individual 

401(k) participants dating bilck in some cases as far as 1996. 

Today's testimony wi ll deal w ith the following questions: 

What is the size of American's retirement savings gap? 

• What is the impact of tax favored retirement accounts on retirement income adequacy? 

What is th(> value of tax·favored retirement a"ounts under current tax incentives (with 

particular emphasis on 401(k) plans)? 

How might workers react to changing 13~ incentives? 

• What is the potential impact 01 two recent tax reform propoSills on retirement security? 

2 What Is the size of Americans' retirement savings sap? 

The concept of measuring retirement security - or retirement income adequacy- is an el<l.remely 

Important topic. EBRllaunched a major project to provide this type of measurement in the late 199(}<; 

lor several states that were concerned whether their residents would have sufficient income when they 

reached retirement age. Alter conducting studies lor Oregon, KanSils and MasSilchusells, we expanded 

the simulation model to a fu ll·blown national model in 2003, and In 2010 updated it to incorporate 

several significant changes, including th(> impacts 01 defined benefit plan freezes. automatic enrollment 

provisions for 401(k) plans and the recent crises in the financial and housing markets.' 

When we modeled the Baby Boomers and Gen Xers in 2012 (Figure 1) between 43.3-44.3 percent 01 the 

Simulated life paths for retired households were projected to have inadequate retirement income for 

basic retirement expenses plus uninsured health care costs. This is S-S percentage points LOWER than 

what we found in our 2003 analysis. 

While the passage of time allowed more funds to be saved, the Improvement over the last nine years is 

largely due to the lact Ihat in 2003 very few 401(k) sponsors used automatic enrollment (AE) provisions 

and the participation ral es among the lower income employees (those most likely to be OIl risk) was 

quite low. With the adoption 01 AE In Ihe past few years. the participation rates have often increased to 

villues in e~cess of SO percent. 

While we found no significant trends by age demographic. Figure 2 shows that the lower-Income 

households are much more likely 10 be at risk lor insufficient reliremenllncome (even though we model 

our basic retirement expenses as a function of the household's expected retiremenl income). The 2012 

baseline ratings lor Early Boomers ranges from a projection that 87 percent of the simulaled lilepaths 

for retired lowest·income households are at risk to only 13 percent for the simulated lifepaths for 

retired highest income households. Similar trends are evidenced for both the Late Boomers and Gen 

Xers. 

Knowing the percentage of households that will be at risk lor Inadequate retirement income is 

important for public policy analysis: however. equally important is kl>Owing just how large the 

accumulated deficits are likely to be. The aggregate deficit number with the current Social Se<;urity 

retirement benefits and the assumption that net housing equity is utili1ed "as needed" is estimated to 

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be $4.3 trillion for all Baby Boomers and Gen Xers.' While trillion dollar deficits are useful in focusing 

attention on this problem, they do little to Ilelp policy makers understand e~actly where these deficits 

are coming from' For example, Figure 3 provides information on the average individual retirement 

in.come deficits by the number of future years eligible for coverage in a defined contribution retirement 

plan for Gen Xers. These Retirement Savings Shortfalls (RSS) are present values at retirement age and 

represent the additional amount each individual in that group would ne('d to have accumulated at age 

6S to eliminate their expected defiCits in retirement (which could be a relatively short period or could 

last decades). The values for those assumed to have no future years of eligibility is approximately 

$7g,ooo per Individual. The number decreases substantially for those with 1-9 years of future eligibility 

to $55,000 and even further to $39,000 for those with 10-19 years of future eligibility. Gen Xers 

fortunate enough to have at least twenty years of future eligibility find their average deficits reduced to 

only $23,000. 

Figure 4 provides similar Information for the impact of luture eligibility for defined conllibution plans for 

Gen Xers although this time the analysis also controls for relative levels of pre-retirement income. For 

those in the lowest income quartile, the average delicit declines from approximately $106,000 for tOOse 

with no years of future eligibility to approximately $66,000 for those with twenty or more years. A 

similar reduction is found for the higher income quartiles. 

3 Impact of ta~ favored retirement accounts on retirement Income adequacy 

Previous research by EBRI has demonstrated that one of the most Important factors contributing to 

retirement income adequacy for the Boomers and Gen Xers Is eligibility to participate in employmentbased retirement plans, VanDerhei (August 2011) provides information on how the relative value 01 the 

defined benefit accruals impact retirement income adequacy. Figure 5 categorizes any positive value lor 

a defined benefit accrual into quartiles for each income group. The largest reduction in at-risk ratings 

between the highest and lowest income-specific defined benefit value quartiles takes place lor the 

lowest-income quartile. For these house ooids, the aHisk ratings drop 36 percentage points, from 82 

percent to 46 percent. Hou5eholds in the second income quartile drop 2S percentage points (from an atrisk rating 01 58 percent for those in the lowest defined benefit value quartile to 33 percent for those in 

the highest defined benefit value quartile) while those In the third and highest income quartile drop 24 

and 21 percentage points, respectively. 

Figure 6 provides similar information for eligibility in defined contribution plans for Gen Xers in 2012. In 

this case we see that tile number of future years the workers are eligible for participation in a defined 

contribution plan makes a lIemendous difference In their at-risk ratings. For example, Gen Xers with no 

fu ture years of eligibility are simulated to run short of money 60.7 percent of the time. whereas those 

with twenty or more years of future eligibility would only experience this situation 18.2 percent of the 

time. 

4 The value of tax-fallOred retirement accounts under current ta. provisions: the case of 401(k) 

plans 

Given the phenomenal growth 01 defined contribution plans (especially those with a 401(k) feature) in 

the private sector in the last three decades, it appears that this form of employer-provided retirement 

plan will provide a substantial percentage of non-Social Security retirement wealth for Baby Boomers 

and Gen Xers. Unfortunately. tile ·succenN of these plans are sometimes measured by metrics that are 

not at all relevant to tile potential for defined contribution plans to provide a significant portion of a 

worker's pre-retirement in.come. For example, some analysts will merely report the average balance in 

defined conllibution plans (most commonly the 40l(k) subset of this universe) and attempt to a~sess 

the value of these plans by determining the amount of annual income that this lump sum amount could 

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be converted to at retirement age. Of course, this concept does not adjust for the fact tllat the vast 

majority of 401(k) participants are years, if not decades, away from retirement age. Moreover, even if 

one does look at the average balances for workers near retirement age, it Is obviouslV not correct to 

look onlV at the 401(k) balance with the employee's current employer.' 

4.1 Average account balan-ces 

In an attempt to provide meaningful statistics on the 401{k) system, eBRI entered into a collaborative 

effort with the Investment Company Institute (ICI) in 1996 known 3S the EBRI/ICI Participant·Directed 

Retirement Plan Data Collection Project. A$ of De<:ember 31, 2010,' the database ir>(:luded participantlevel Information about: 

• 23.4 million 401(k) plan participants, in 

• 64.455 employer-sponsored 401{k) plans, holding 

$ 1.414 trillion in assets. 

Since the in-ception of the project, average balances Ilave been displayed as a fun.ction of botllthe 

participant's age and tenure with the current employer to al low a more meaningful assessment of the 

a(Cumulation potential of these plans. VanOerhei, Holden, Alonso and Bass (2011) computed an overall 

average account balance at year-end 2010 of $60,329; however, the average value for participants in 

their 60's was much more representative of what a participant would have available for retirement. 

Even looking at participants in this age cohort may be misleading unless one controls for tenure with the 

current emplover. For e~ample, participants in their 60's with no more than two years of tenure had an 

average account balance at the end of 2010 01 $26,649.' The longest tenured participants in their 60's 

had lJeen with the current employer for at least 30 years and had an average account balance of 

$202,329. 

While the $202,329 value is considerably larger than the often·reported overall balance of S60,329, it is 

still not a fair representation of wllat a full·career's participation in a 401{k) plan might produce in terms 

01 income replacement in retirement for several reasons: 

• Some of the participants in their 60's may still plan to work several additional years before they 

retire. 

even though a partkipant has at least thirty years of tenure with the current employer, it does 

not mean not the 401(k) plan has been in place for the entire period. Moreover, there is nO 

guarantee that the employee who is participating in 2010 has done so the entire time they were 

eligible. 

Many olthe participants In their 6O·s have already started to withdrawal money from their 

account balances. Figure 7 sllows the average account balance for similarly long·tenured 

participants who were 55·64 in 2010. However, in this case only participants with a positive 

value for the sum of employee and employer contributions in 2010 were included. The year-end 

2010 average aCCOunt balance for this group was $255,075. Projections were also performed 

based on 2010 asset allocation and contribution behavior as well as subsequent market 

performance. The estimated year-end 2011 average account balance for this group was 

$272,681 and the value for the end of first quarter 2012 was $292,258. 

Since 1999, average balances are also computed for a 'consistent sample" of participants to control for 

the downward bias thaI would otherwise exist from IRA rollovers when 401(k) participants change jobs.' 

VanDerhel, Holden and Alonso (2010) report on the average account balances among 401{k) 

participants present from year-end 1999 through year-end 2009 and find the overall average Increases 

Irom $67,420 at year-end 1999 to $131,438 al year-end 2009, an increase of 9S.00Ii.' 

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4.2 Simul~tion results for wolunt~rv enrollment 401(k) plans 

Ewen with these empirical technlQues,lt is difficult to obtain a t.ue value of the 401(k) system's potential 

to generate significant 401(k) accumulations over an entire wo.~inB ca.eer when many of todav's 

retirees only had access to ~ 401(k) pl~n for ~ portion of their career.' In ~n attempt to cont.ol for these 

problems, E8RI and lei produced ~ joint publication in 2002'G with simulation results showing that under 

a continuous coverage situation, 401(k) participants could expect to replace sOm(!place between 51 and 

69 percent (depending on income quartile) of their pre-retirem(!nt income assuming the purchase of a 

(nominal) annuity at age 65. The lower savings rate for low-income participang is somewhat 

ameliorated by their Social Secu.ity payments representing a relatively large measure 01 what their prereti.ement Income had been. When Social Security benefits (using the current statutory formulae) are 

added in, the median combined .eplacement rates in the l im yea. of retirement are 103 pe.cent 10. the 

lowen income Quartile and between 83 and 86 percent 10. the highest three income Quartiles." 

4_3 The · controversy" over automatic enrollment decreasing retirement savings 

In an article that appeared in the Wall Street Journal last July, Anne Tergesen" sugg~ted that the 

automatic enrollment (AE) provision for 401(k) plans, a plan design eXPi'nded and clarified in the 

Pension Protection Act of 2006 (PPA), and designed to broaden participation in these programs, was 

actually suppressing retirement savings. What that article fai led to mention is that automatic enrollment 

is actually increasing savings for many more-especially the lowest-income 401(k) participants. 

E8RI has be(on publishing studies on the likely impact of AE for seven yea.s. In a joint 2005 study with 

1(1, II we looked at the potential change in 401(k)/IRA" accumulations as a result of changing traditional 

voluntary enrollment (VEI401(k) plans to AE plans. Although we had the advantage of using a database 

of tens of millions 01401(k) participants (going back in some cases to 1996), data was unavailable with 

respect to how workers would react to AE provisions, and thus simulated the likely response based on 

the results 01 academic studies." What we found was that the ove.al l expected improvement in 

reti.ement accumulations-especially fo. the lower-income Quartlles-were nothing less than 

spectacular. 

One point that had previously been made clear in the academic literature was that some workers 

defaulted into a 401(k) AE plan (without automatic escalation provisions) would continue to contribute 

at the defaulted contribution rate that the plan sponsor had chosen (typically in the range of 3 percent 

of compensation). Traditionally, and in the absence of these AE prOviSions, many workers have chosen 

to start contributing at a 6 percent rate (largely in response to the matching contribution incentive 

provided by the employer). However, some participants in AE plans - who otherwise might have 

volunta.ily chosen to participate at a higher cont.ibution level--instead might simply allow thei. savings 

to Slarl- and .emain - at the default rate. As a result, they we.e likely contributing at a lower .ate than 

if they been working for a plan sponso. offerinB a VE 401(k) plan ANO had made a positive election to 

partidpate. 

This anchoring effect can be seen by looking at the top-income Quartile In the 200S !Ilidy, where the 

median .eplacement rate for the top-income Quartile decreased by 4 percenuBe poinu for the scenario 

with a 3 percent contribution rate and default investment in a money mar~et fund,'" However, it would 

appear that this was more than offset by the increase in partidpation for the lower-income Quartiles 

due to auto-enrollment. resultinS in substantial intreases in their retirement actumulations (for the 

same scenario as mentioned above, the third-income quartile's median replacement rate increased 2 

percentage points, the second-income quartile increased 7 percentage points, and the lowest-income 

quartile increased 14 percentage points). In sum, while some workers saved less than they might 

otherwise, more workers saved. 

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A year after this study was released, Congress passed the Pension Prote<;tion Act of 2006, or PPA, whiCh 

eased some of the adminiWative barriel1 to providing AE and for the first time outlined safe harbor 

provisions for automatic escalation. Although It was too roon to know how plan sponsors would 

respond to this new clarity, EBRI published a study in 2007" that showed how automatic escalationthe systematic increase of deferral rates over time - would render even mOre favorable results for AE 

designs under a number of different scenarios. 

In 2008, EBRI included all the new PPA provisions in a study" that compared potential accumulations 

under AE and VE for several different age groups. Again, we found certain (high·income) groups were 

likely to do bener under VE than AE, but overall, the AE results dominated." Note that the AE design 

itself in no way precludes these high·income groups from increasing their initial default rates. 

By 2009, many of the 401(k) sponsol1 who previously had VE plans had shllted to AE plans and EBRI was 

able to track the changes in plan proYisions for hundreds of the largest401(k) plans. This inlormation 

was used in an April 2010 EBRllssue Briel'" to show, once again, the significant impact 01 moYing to AE 

plans: for those currently ages 25-29, the difference in the median accumulations at normal retirement 

age would be ap .. ro~imately 2.39 times final salarv in an AE plan relative to a VE plan. 

tater that year, VanDerhei and llKas (2010) focused on how to improve plan design and worker 

education to optimize the results under AE plans with automatic escalation of contributions. While it is 

difficult to determine a precise "target" for retirement saYings, we tried to demonstrate these designs' 

ability to prodllCe what, by most financial planning standards, appeal1to be quite generous: an 80 

percent real irn;ome replacement ra te in retirement, when 401(k) accumulations are combined with 

SOCial Security. Figure 8 demonWates that if the most pessimistic" combination of plan design and 

worker behavioral assumptions were used in the AE plans studied, 45.7 percent of the lowest·income 

quartile would otltain this threshold," and In view of the way in which SOCial Security benefits are 

designed, an even lower percentage of the highest-income quartile (27 percent) would reach the gO 

percent threshold. 

The study found that with the all-optimistic assumptions. the percentage of 10wesHncome quartile 

workers achieving the 80 percent threshold increased to 79.2 percent. while that of the highest-income 

quartile workers increased to 64 percent. 

Surprisingly. the Wall Street Journal article reported only the most pessimistic set of assumptions, and 

did not cite any of the other 15 combinations of assumptions in the study. The article also reported only 

results under the threShold of a real replacement rate of 80 percent. while Figure 9 shows that even 

decreasing the thresh.old to a 70 percent real replacement ra te would increase the .,ercentage of 

· slKcessful" retirement events by 19 percentage points for the lowest-income quartile and 12 

percentage points for the highest-income quartile under the all-pessimistic set of assumptiOns. 

The other statistic attributed to EBRI in the article dealt with the percentage of AE-eligible workers whO 

would be ex.,ected to have larger tenure-speCific worker contribution rates had they been VE-eligible 

Instead. The simulation results we provided showed that appro imately 60 percent of the AE-eligible 

workers would immediately be better off in an AE plan than in a VE plan, and that over time (as 

automatic escalation provisions took effect for some of the workers) that would increase to gS percent. 

The Wall Street Journal article did not report the positive impact of auto-en/ollment 401(k) plans on 

many workers who began to sa~e for retirement due to AE. As with anv change. some people will not 

have the most desirable results; but if the focus 01 auto-enrollment is to increase participation among 

lower-Income participants (and, as a result. their retirementlinancial preparedness). objective analysis 

suggests auto-enrollment does indeed achieve that goal. 

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4.4 SlImmary 

To sllmmarize, it appears from both empirical analvsis and simulation results based on tens of millions 

of individual participant observations (dating all the way bad to 1996 in many cases), that the 

traditional (VE) type of 401(k) plan under the current set of tax incentives has the potential to generate 

a Slim that. combined with Social SeCllrity benefits, wOllld .eplace a sizeable portion of the employee's 

preretire~nt income for those fortllnate enollgh to hall(! (ontinUOIIS coverage during tl\(!ir working 

(iI.eers. Morwver, the AE type of 401(k) plan when (ombined with automatic escalation provisions 

appears to have the potential to produce even larger retirement accumulations for many of those 

covered by such a plan during a significant portion of their wor~ing careers. 

5 Changing tax Incentives 

5. 1 Results From the lOU Retirement Confidence Survey 

VanDerhei (March, 2011) provides an analvsis of two new questions from the 21" wave of the 

Retirement Confidence Survey (RCS)n showing how workers" would likely react if they were no longer 

allowed to deduct retirement savings plan contributions from taxable income. 

Although analySis based on finanCial economics suggests that higher·income employees would be the 

most likely to be negatively affected by a proposal to cut or el iminate the deductibility of 401(k) 

contributiom (at least to the point they are constrained with respect to the annual funds available 10 

contribute to a 40l(k) plan)," behavioral ('<onomles has shown that the reactlon of employees In 

situations similar to this can be at odds with what might be predicted by an objective focused strictly on 

optimizing a particulir finan.cial strategy. In an il1emptto better understand potential employee 

behavior with respect to a proposed elimination of deductions for 401(k) contributions. the 2011 RCS 

in.cluded two new Questions. The Ilrst asked respondents how important is being able to deduct their 

retirement savings plan contributions from their ta.able income in encouraging them to save for 

retirement. When confined to full·time workers (n=591), the weighted results were as follows:" 

Not at all important .. 

Not too important .. 

................. 4.3% 

",, 5.0% 

Somewhat important ................................................................................................. 27.8% 

Very important .. . ..... 61.5% 

If one were to look at this from a Strictly financial perspective. one would assume that the lower·income 

individuals (those most likely to pay no or low marginal tax rates and therefore have a smaller financial 

incentive to deduct retirement savings contributions from ta. able income) would be least likely to rate 

this as · very important." However, those in the lowest household Income category ($15,000 to less than 

525,(00) actually have the largest percentage of respondents classifying the tax deductibility of 

contributions as very important (76.2 percent). 

The second Question asked of those currently saving fo. retirement was "Suppose you were no longer 

allowed to deduct retirement savings plan contributions from your ta. able income. What do yOIl think 

you (and your spouse) would be most likely to do?" When confined to full·time workers (n=46O), and 

eliminating those who refused to answer or responded that they did not know, approximately 1 in 4 full· 

time workers (25.6 percent) indicated that they would reduce (in some cases completely) their 

contributions if the ability to deduct them was eliminated. The lowest·income category ($15,000 to less 

than $2S,000) has the largest negative reaction to this proposal, with 56.7 percent indicating a savings 

reduction. 

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A 5imilar oc~urrence take5 place when the percentage ofth05e 5t~ting they wOuld reduce the amOunt 

they are saving or stop 5aving altogether is display<:'d by the amount they currently have In 5avings and 

Invenments, not including the value of their primary residence or the value of defined benefit plans. 

There is a significant increase in the self-reported propensity to reduce savings for those in the lowest 

savings categories. For example, of the full-time workers who are currently saving lor retirement who 

report that they currently have less than $1,000, 71 .3 percent indicate they would reduce the amount 

saved. This value de<lines to 38.8 percent for those with savings 01 $1,000 to less than $10,000. 

6 The Potential Impact of Tax Reform on Retirement Security 

Prior to estimating the potential reductions in accumulations resulting from reduced 401(k) 

contributions, a set of baseline results firn needs to be run to determine the likely values if the various 

tax reform options are not Imposed on the current 401(k) system. The model used in this article is based 

on the 401(k) voluntary enrollment modules from the EBRI Retirement Security Projection Model" 

(RSPM) and is similar in many respects to the one used in Holden and VanDerhei (2002) in that it looks 

only at current401(k) participants and does not al1empt to include eligible nonparticip;Jnts" or workers 

who are currently not eligible! " However, unlike the 2002 model, this analysis assumes n.o job turnover, 

withdrawals, or loan defaults.>!I 

Using the 401(k) voluntary enrollment modules Irom RSPM, VanOerhei (November 2011) shows that the 

median real-replacement ra tes at age 61 from 401(k) balances exclusively for p;Jrtitipants currently ages 

2S-29 by income quartiles.JO The values vary from a low of 53 percent for the lowest-income quartile to 

a high of 17 percent for the highest·income quartile.)! The 5imulated rates of return are explained in 

more detail in VanDerhei and Copeland (2010), but they are based on a stocha5tit prOCe55 with a mean 

equity return of 8.9 percent and a mean fixed·income return 01 6.3 percent (expressed in nominal 

terms). 

6. 1 20/20 caps 

In December 2010, the National Commission on Fiscal ResponsibTlity and Reform released t heir longawaited document on federal debt reduction, "The Moment olTruth." Although their guiding principles 

and values (pages 13-14) specifically mention the need to keep America sound over the long run by 

implementing Npolicies today to ensure that future generations have retirement security, affordable 

health care. and financial freedom: the document puts forth an example that would modify retirement 

plans by capping annual "tax-preferred contributions to [thellower of $20,0001:1 or 20% of income· 

(page 31). This is often referred to as the "20/20 cap." 

Even if one were to ignore the potential interaction of the proposed limitations with the present values 

of ac~ruals under defined benefit plans and/or the existing tax preferences available to some IRA 

contributions. this alternative formulation of capping tax·preferred contributions would substantially 

reduce the current limits ~yailable under qualified defined contribution plans. Currently, the 

combination of employ<:'e and employer tontribution5 i5 the lesser of a dollar limit of at least $50,000 

per yearll and a percentage limit of 100 percent of an employee's compensation.14 

VanDerhei (July, 2011) provides preliminary evidence of the impact of these "20/20 ClipS" on projected 

retirement accumulations. If the 20/20 (aps are aS5umed to be impo5ed starting in 2012, the annual 

percentage reductions in 401(k) account balances at SOCial Security normal retirement ase are display<:'d 

in figure 10 by age and age-spe.:ific income quartiles for all <101(k) participants with salaries In excess of 

$10,000 and tenure of at least two years. 

Two poinl5 stand out immediately: 

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• With the exception of the earliest age cohort" (those currently 26-35), the average reduction tor 

any Income quartile decreases for older age cohorts. This is due to the fact that those closest to 

retirement age wil l have fewer years of fUlllre contributions subject to potential reduction as a 

result of the 20/20 caps . 

• Within each of the four age cohorts, the highest·income quartile experiences the largest average 

pe«entage reduction from the 20/20 caps. This reaches a maximum value of 15.1 percent for the 

highest·;ncome quartile for those currently ages 36-45 and failS to 8.6 percent for the highest· 

income quartile for those currently ages 56-65. 

The finding that the highest·income quartile within each age cohort experiences the largest average 

percentage reduction is no surprise. given the increased li ~elihood that workers in this cohort either 

currently exceed the $20,000 (indexed) limit when their contributions are combined with employer 

contributions Or are predicted to do so in the future. However, for each age cohort other than the 

oldest one, the lowest·income quartile has the second·highest average percentage reduchons. 

Although this may be due to several considerations,· it Is almon always a result of their current or 

expected future contributions exceeding 20 percent of compensation when combined with employer 

contributions. Phrased another way, the 20/20 cap would, as expected, most affect the highest· 

income workers, but it also would cause a significant reduction in retirement accumulations for the 

10wesHncome workers. 

6.2 Modifying the ulstlng tax treatment of worker and employer40l(k) contributions 

In september 2011, the U.S. senate Finance Committee held a hearing on "Tax Reform Options: 

Promoting Retirement security'- One of the primary topics during the hearing was an assessment of the 

potential benefits and consequences that may result from a proposal to modify the federal tax 

treatment 01401(k) plan contributions in exchange for a flaHate governmenl match. Gale (2011) 

updaled a 2006 analysis by Gale, Gruber, and Orszag and analyzed a plan thaI would change Ihe 

treatment 01 retirement saving in Ihree ways:" 

"First, unlike the current system, workers' and firms' contributions to employer·based 401(k) 

aC{l)unts would no longer be excluded from iflCome subjf!(t to taxation, contributions to IRAs 

would no longer be tax·deductible, and any employer contributions to a 401(k) plan would be 

treated as taxable income to the employee ijust as current wages are). second, all qualified 

employer and employee contributions would be eligible for a flat-rate refundable tax credit, 

given 10 the employee. Third, the credit would be deposited directly inlo the retirement saving 

account, as opposed 10 Ihe current deduction, which simply results in a lower tax paymentlhan 

otherwise." 

Regarding the proposed tax credit, Gale (2011) reports estimates from the Tax Pol icy Center for both an 

18 percent credit and it 30 percent credit. The paper includes a distributional analysis of the winners and 

losers under the two versions of the proposal; however, the underlyins analysis holds relirement saving 

contributions constant lor both employers and participants (page 6). Gale mentions that the proposal 

wcould conceivably affect incentives for firms to offer 401(k)s or pensions" (page 7) but concludes that 

this seems unli~ely . He also dismisses as likely overstated the concern that the tax credit/matches called 

for in the proposal may discourage employer matches to 401(k) plans, but offers no supporting data for 

this assumption 

These two papers provide an interesting analysis of a proposal with profound public-poticy implications. 

The assumptions based on responses {or lack thereof), both from individual workers and the plan 

sponsors themselves, will likely be the focus of serious debate. Moreover, public policy consideration of 

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this proposal will undoubtedly be subject to a cost-benefit analySiS beyond the assumption that 

retirement savings contributions will remain constant on the part of participants and/or plan sponsors. 

On a cautionary note. it is admittedly very difficult to determine how those workers not currently 

covered and/or particiP<lting in a defined contribution plan would react to this set of incentives, and 

EBRI will continue to work with actual participant data to better assess some of the behavioral 

tendencies of this sroup. Until this type of information Is available, it will be quite difficult to fully assess 

the "benef,t" portion of the cost-benefit analysis suggested above. EBRI did provide an analysis of some 

of the likely "costs" in terms of reduced retirement tJenefits for those currently In the 401(k) system at a 

September 2011 Senate Finance Committee hearing. However. no information on plan spollsor reactioll 

to the proposal was available at that time. eonsequemly, the 2011 ESRI alia lysis presented there was 

based Oil several alternative scellarios.'" Moreover. the information used to model potelltTal 401(k) 

participant reaclioll to the proposal was limited to "all 31lalysis of two Ilew questkms from the 21st 

wave of the Retirement COllfidellce Survey (ReS) reflectillg how workers indicated they would likely 

react If they were no 10nSer allowed to defer retirement savillSs plan contribuliolls from taxable 

income."'" 

6.2.1 New Survey Analysis 

6. 2.1.1 Pit'" Sponsors 

In re.:ent months, two surveys have provided additional information on potential responses from plan 

sponsors with respect to this type of proposed modification of the 401(k) system. A survey cOllducted 

on tJehalf of The ~rinclP<lI Fillancial Group (2011) determined that if workers' ability to deduct allY 

amoullt of the 401(k) cOlltribution Irom ta~able income was elimillated, 65 percent olthe plan sponsors 

responding to the survey would have less desire to continue offerillS their 401(k) pia II.'" 

A separate survey by AliianceBernsteill (2011) provided plall SPOIlSOrs with the following questioll:" 

Suppose U.S.leSislation were enacted such that employees were no 10llger allowed to deduct 

retiremellt savings plall contributions Irom their federal taxable income. In addition, suppose 

that the employee had to pay federal income tax on anything an employer contributed to the 

employee's retirement savings account in the year it was contributed. In exchange lor this 

modification of the currellt tax incentives, assume the U.S. Sovernment would match 18% of 

whatever was contributed to a retirement savinSs plan. What do you tJelieve would be the most 

likely change to your plan? 

Responses were obtained from 1,018 plan sponsors grouped into six size categories based on total 

retirement plan assets. 

6.2.1.2 Participonts 

With respect to potential worker reactions to this proposal, a new set of questions concerninS 

participant behavior in response to the specific federal ta~ modifications proposed In Gale ~2011) was 

included in the 2012 RCS. Specifically. workers currently contributing to a workplace retirement plan 

were asked: 

1. Suppose you were no longer allowed to deduct your retirement savings plan contributions for 

federal income tax purposes and that anythinS your employer contributed to your retirement 

savillgs this year on your behalf was also treated as part of your taxable income. Suppose the 

government matched Ig% of contributions so that for every $100 you or your employer 

contributed to your retirement savings plan this year, the Bovernment would contribute $18. 

What do you think you would be most likely to do?" 

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a. Stop contributing altOgether 

b. Reduce the amount you contribute 

c. Continue to contribute what you do now 

d. Increase the amount you contribute 

Follow·up questions were asked 01 those who indicated they would either irw;rease or decrease the 

amount they currently contribute: 

2. By about how much do you think you would reduce your contribution? Would you: 

a. Reduce it by about a quarter 

b. Cut it in half, or 

c. Reduce it by about three·quarters 

3. By about how much do you think you would increase your contribution? Would you increase it 

by about 

a. A quarter 

b. Half 

c. Three-quarters, or 

d. Double it 

6.2.1.3 ImPQct on 40J(kJ 801!Jnces ot Retirement Age 

VanDerhel (March 2012) utilizes the defined contribution participant responses to the RCS questions 

above, as well as the plan spon:;or responses to the AllianceBernstein survey, to parameterize the 

voluntary enrollment module of RSPM in order to estimate the likely impact of the proposed federal-tax 

modifications on projected 401(k) balances at retirement age, assuming the modifications took effect 

immediately. 

6.2.1.3. 1 Age and Salary 

Figure 11 shows the baseline average percentage reductions in 401(k) account balances at SOcial 

~urity normal retirement age due to expected mOdifications of plan sponsors and partkipants in 

reaction to the proposal to modify the federal tax treatment of employer and worker contributions for 

401(k) plans In exchange for an 18 percent match from the federal government, by age and age-specific 

salary quartiles." The average percentage reductions for the youngest cohort (those currently 26-35) 

are largest for those In the lowest-income Cjuartlle (22.2 percent)."The reductions for the youngest 

cohort decrease to n.o percent for t hose in the second-income quartile and reach a minimum of 6.1 

percent for those in the third-income quartile. The reductions increase to 10.8 percent for those in the 

highest-income Cjuartile. 

Measuring the impact on older cohorts (those over age lS) is :;omewhat problematic in that the values 

are influenced by plan-sponsor and participan t reactions to the tax proposal as well as the distribution 

of tenure w ith the current employer w ithin each age group. For example, if a 401(k) participant in the 

oldest cohort (those currently S6-65) has recently changed jobs and has a relatively low account balance 

in his or her current 401(k) plan, any reported decrease in contributions would have a much larger 

impact than it would on the same individual (with the s.ame wrvey response) had that worker not 

recently changed jobs and had a significantly larger 401(k) balance. Therefore, the analysis in VanDerhei 

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(MarCh 2012) filte~ out anyone over age 3S whose tenure with their current employer is less than their 

current age m inus ]0."' 

The average· percentage reductions for the - Iong·tenure" cohort currently ages 36- 45 are again largest 

for those in the lowest·income Quartile p4.9 percent). The reductions for thiS age cohort decrease to 

7.2 percent for those in the second-income quartile and then increase to 10.0 percent for those in the 

third·income quartile. The reductions increase to 17.1 percent for thrue In the highest-income quartile. 

The average·percentage redudions for the - Iong·tenure" cohort currently ages 46-55 are largest for 

those in the lowest-in.c:ome quartile (21.1 percent). The reductions for thiS age cohort decrease to 9.9 

percent for those In the second-income quartile and then increase to 11.6 percent for those in the thirdIncome quartile. The reductions increase to 14.1 percent for those in the highest-income quartile. 

AnalySiS of the Oldest cohort (those currently 56- 65) show a marked decrease in the average percentage 

reductions for the "Iong-tenure- cohort in the lowest-income quartile (12.7 percent), although it should 

be noted that the average reduction will be most muted by previOUS account balances for 401(k) 

participants in this age group. Moreover, the lowest·income Quartile no longer has the largest reduction, 

as the reduction tor the second-income quartile is slightly larger at 13.3 percent. The reductions for this 

age cohort decrease to 11.4 percent for those In the third· Income quartile and then decrease to 8.7 

percent lor those In the highest·income Quartile. 

6.2.1.3.2 Plan Size 

An interesting tinding of the Alliance8ernstein survey of plan sponwrs with respect to potential federal 

tax modifications is the imi><lct of plan size on the expe.;ted plan sponsor response. The reawns to 

expect an increased sensitivity by smal ler plans to federal taK modifications have previously been 

documented by others." However, Figure 12 shows the average percentage reductions in 401(k) 

account balances at Social Security normal retirement age due to expe.;ted modifications in response to 

the proposal to modify the lederaltax treatment of employer and worker contributions for 401(k) plans 

in exchange for an 18 percent match from the federal government, by plan size and age-specific salary 

Quartiles for workers currently ages 26-35."' For all tour Income Quartiles, the average percentage 

reduction for plan sponsors In the two smallest plan size categories (less than $1 million and Sl~S10 

million in assets) are more than 1.S times the value of the average percentage reduction for plans 

sponsors in any ol the larger-size categories. 

6.2.2 Caveats for This Research 

6.2.2.1 PIon Size 

Given the much larger simulated account l:Ialance reductions for smal ler plans shown in Figure 12. it is 

important to note that the plan·size distril:lution used in this simulation model is l:Iased on those found 

in the E8RI/lnvestment Company Institute (ICI) 401(k) datal:lase, not the universe of 401(k) plans. 

Evidence of the magnitude of possible statistical bias in this regard can be found in VanOerhei, Holden, 

Alonso and Sass (2011). The third panel of Figure <I (page 8) in that publication shows the distribution of 

plans In the ESRI/lel 401(k) database In 2010 vs. 2008 Department of Labor (DOL) Form 5500 for al l 

401(k) plans and suggests an under-representation of small plans l or the E6RI/ICi 401(k) database." The 

plan-size variable WilS specified in terms of participants instead 01 assets, l:Iut a similar distril:lution 

would be e'pected in the latler case. If this is indeed the case. the RSPM estimates for overall average 

benefit reductions presented here would be expected to be smaller than those that would l:Ie evidenced 

by the fuIl401(k) universe. 

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6.2.2.2 Au tomotk Enrollment 

The previous results assumed none olthe 401(k) particip<lnts were automatically enrolled in these 

retirement plans; instead, they presumed that workers' rate of contribution after the first year were 

driven primarily by age and ino;ome characteristics rather than tenure with the current employer, as they 

might be in auto-enrollment plans with an automatic escalation of worker contributions. 

The exdusion 01 auto-enrollment plans in this analysis was necessary given the current modeling 

assumption of no job change. It would be very difficult to provide an accurate analysis of the average 

percentage reductions in 401(k) balance under auto"enrollment if the plans induded an automatic 

escalation provision. For example, if a participant's contribution rate had already be<!n escalated to 8 

percent of compensation at one employer, and upon job change was automatically enrolled into 

another 401(k) plan, would they "remember" their current rate of deferral and start deferring In the 

new plan at that rate, or would their contribution rate drop to the default rate of the new plan? 

Undoubtedly many 401(k) participants in this automatic enrollment situation follow the latter approach. 

As additional information becomes available on workers' behavioral responses to auto-enrol lment, ESRI 

will update this analysis to provide a more robust model. 

7 Future work 

In addition to the expanSion of the model used for the two analyses above to indude 401(k) plans with 

automatic enrollment, ESRI plans to continue to conduct research in this area as public policy evolves. 

The potential reaction of employees not currently participating in 401(k) plans will be extremely difficult 

to model for new incentive structures. For example, does the current experience under 401(k) plans 

allow researchers to eKtrapolate behaviors to this population with respect to: 

Initial participation choices. 

Dedsions to opt out once participation has begun. 

• Contribution behavior. 

• Asset allocation. 

• Cash outs at time of job change. 

Many of ESRI's previous simulatlon proje<:ts (see Appendix S for a brief chronology) will be directly 

appl icable to such additional research and we will be happy to work with the Committef! on Ways and 

Means to provide cost/benefit assessments of these type proposals in the future. 

8 Conclusions 

ESRI has documented a significant reduction in the percentage 01 simulated lilepaths for retired 

households "at riSk" for inadequate retirement income between 2003 and 2012. based in large part on 

the advent of auto-enrollment in 401(k) plans; however. for Gen Xer households in the two lowestndexed~ pre' retirement income quartiles, the at-risk percentages, while much smaller (they were 85 

percent for the lowest income quartile and 65 percent for the second lowest income quartile in 2003) 

are still extremely high (78 percent for the lowest Income quartile and 46 percent for the second lowest 

income quartile in 2012). Of course, when one limits the analysis to those who are simulated to be 

saving in the future, the numbers improve substantially: among Gen Xer households without any future 

eligibility lor participation In a defined contribution plan, the at-risk percentage is 60.7 percent, but it 

drops allthe way to 19.2 percent lor those with 20 or more years 01 future eligibility.5O 

Given that the financial fate 01 future generations of retirees appears to be so strongly tied to whether 

they are eligible 10 participate In employer-sponsored retirement plans," the logic of modifying (either 

completely or marginally) the Incentive structure 01 employees and/or employers for defined 

EBRI testimony for House Committee on Ways and Means. April 17,2012 Page ]3 
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contribution plans at this time needs to be thoroughly examined. EBRI studies" have documented that 

defined contribution plans (and the IRA rollovers they produce) are the component of retirement 

security that appears to be generating the mo~t non-Social Security retirement wealth lor Baby Boomers 

and Gen Xers. However, the potential increase of at-risk percentages re~ulting from (1) employer 

modifications to e.isting plan~, and (2) a substantial portion of low· income households decreasing or 

eliminating future contributions to savings plans as a reaction to the e.clusion of employee 

contributions for retirement savings plans from taxable income, needs to be analyzed carefully when 

considering the overall impact of such proposals. 

9 References 

AliianceBernstein. Nlnside the M inds 01 Plan Sponsors· Research. 2011. 

Choi, James J., David laibson, Brigitte C. Madrian, and Andrew Metrick, "Saving For Retirement on the 

Path of least Resistance: originally prepared for Ta. Policy and the Economy 2001, updated 

draft: July 19, 2004; 

__ "For Better or For Worse: Default Eff~ts and 401(k) Savings Behavior: Pension Research Council 

Working Paper, PRC WP 2002·2 (Philadelphia, PA: Pension Research CounCil, The Wharton 

s.chool, University of Pennsylvania, November 9, 2001). 

Copeland, Craig. and Jack VanDerhei. "The Declining Role of Private Defined Benefit Pension Plans: Who 

Is Affecte<;i, and How." In Robert L. Clark and Olivia Mitchell, eds., Reorienrina Retirement Risk 

Monoaement. Oxford University Press for the Pension Research Council, 2010: 122·136. 

Gale, W illiam G. Te~t mony. U.S. Congress. Senate Committee on Finance. To .. Reform Options; 

Promotina Rerirefflf!nt SeClJrity, 15 Sept. 2011. online at 

http://finance.senale.gQv/imQ/media/ doc!TgstimQny'li2Qof%ZQWilliam!!i2QGale.pdf 

Gale, William G .• Jonathan Gruber, and Peter R. Orszag. "Improving Opportunities and Incentives lor 

Savings by Middle· and lower·lncome Households." The Hamilton Project, DisclJssion Poper 

2006-02. The Brookings Institution, 2006. 

Helman. Ruth, Craig Copeland, and Jack VanDerhei. ""The 2011 Retirement Confidence Survey: 

Confidence Drops to Record lows, Reflecting Nthe New Normal". March 2011, EBRllssue Brief 

~35S 

Holden, Sarah, and Jack VanDerhei. NCan 401(k) Accumulations Generate Significant Income for Future 

Retirf!{!sl" EBRlls5ue Brief, no. 251 (Employee Benefit Research Institute. November 2002). 

__ . "The Influence of Automatic Enrollment. Cotch-Up, rmd IRA Contributions on 401(k) Accumulations 

lit Retirement. ~ EBRIIs5lIe Brief. nil. 283 (Employee Benefit Research InsHtute. JulV 2005). 

Miller, Judy A. Testimony Submitted on behalf of the American Society of Pension Prolessionals and 

Actuaries. U.S. Congress. Senate Finance Committee. TII~ Reform Options: Promoting Refirement 

Security. 15 Sept. 2011. 

M itchell, Olivia 5., Stephen P. Utkus, and Tongxuan Yang. ""Turning Workers into Savers? Incentives. 

Principal Financial Group. " New Data from The Principal Reveals Power of Employer Match." News 

Room: News Release Archive, November 30, 2010. www.principal.com/ about/ news12010lris· 

match·stats11301O.ht m 

Tergesen, Anne. "401(k) law SuppreSSes Saving for Retirement." Wall Street Journal, July 7. 2011. 

EBRI testimony for House Committee on Ways and Means. April 17< 2012 Page 14 
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VanDerhei, Jack. " Modifying the Federal Ta. Treatment of 401(k) Plan Contributions: Projected Impact 

on Participant Account Balances," March 2012, EBRI Notes 

_ _ . "h. Reform Options: Promoting Retirement Security." E8Rlissue 8rief, no. 364 (Employee 

Benefit Research Institute, November 2011). 

__ . Testimony. U.S. Congress. Senate Finance Committee. h. Reform Options: Promoting Retirement 

Security (T-170). 15 Sept. 2011. 

__ . "The Importance of Defined Benefit Plans for Retirement Income Adequacy." ESRI Notes, no. 8 

(Employee Benefit Research Institute, August 2011): 7-16. 

__ . "capping Tax-Preferred Retirement Contributiom: Preliminary Evidence of the Impact of the 

National Commission on Fiscal Responsibility and Reform Recommendations." E8RI NOles, no. 7 

(Employee Bene!it Research Institute, July 2011): 2-6. 

__ . "Retirement Income Adequacy: Alternative Thresholds and the Importance of Future Eligibility in 

Defined Contribution Retirement Plans." ESRI Notes, no. 4 (Employee Benefit Research Institute, 

April 2011): 10-19. 

__ . "A Post·Crisis Assessment of Retirement Income Adequacy for Baby Boomers and Gen Xers." ESRI 

Issue 8rief, no. 1S4 (Employee Benefit Research Institute, February 2011). 

__ . Testimony. U.S. Congress. Senate Health, Education. labor and Pensions Committee. The Wobbly 

Stool: Retirement (in/security in America /T-166). 7 0\;1. 2010. 

__ . "Retirement Savings Shortfalls lor Todays Workers." E8RI Nates, no. 10 (Employee Benefit 

Research Institute, October 2010): 2-9. 

__ . "Retirement Income Adequacy for Todays Workers: How Certain, How Much Will It Cost, and 

How Does Eligibility lor Panicip;ltion in a Defined Contribution Plan Help?" EBRI Notes, no. 9 

(Employee Benelit Research Institute, Sept. 2010): 13-20. 

__ . "The Impact of AutomatiC EnrOllment in 401(k) Plans on Future Retirement Ac(llmulations: A 

Simulation Study Based on Plan Design Modifications of large Plan Sponsors." E8Rlissue 8rief, 

no. 341 (Emp oy~ Benefit Research Institute, April 2010). 

__ . "Falling Stocks: What Will Happen to Retirees' Incomes? The Worker Perspective," Presentation 

for The Economic Crisis of 2008: What Will Happen to Retirees' Incomes? 2009 APPAM Fall 

Conference (November 2009). 

___ Testimony. Joint DOl/SEC Publit HearinK on TarKet Dates Funds. How Would Target-Dote Funds 

Likely Impact Future401(k) Contributions? (T·16O). June 2009. 

__ . " Retirement Income Adequacy After PPA and FAS 158: Part One-Plan Sponsors' Reactions': 

E8R/lssue 8rief, no. 307 (Employee Benefit Research Institute, July 2001). 

__ . "Measuring Retirement Income Adequacy: Caltulatins Realistic Income Replacement Rates." EBRI 

Issue Brief, no. 297 (Employee Benefit Research Institute, September 2006). 

__ . "Oefined Benefit Plan Freeles: Who's Affected, How Much, and Replacing lost Accruals." fBRI 

Issue 8rief, no. 291 (Employee Benefit Research Institute, March 2006). 

__ . Testimony. U.S. Consress. Senate Spe<:ial Committee on AginS. Do We Have a Crisis in Americo? 

Results From the fBRI-fRF Retirement Security Projection Model, 27 Jan 2004 (T-141). 

EBRltestimony for House Committee on Ways and Means. April 17.2012 Page] 5 
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VanDerhei, Jack, and Craig Copeland, "The Impact of Deferring Retirement Age on Retirement Income 

Adequacy.M fBRllssue Brie!, no. 358 (Employee Benefit Research Institute, June 2011). 

_ _ . "The ESRI Retirement Readiness Rating"" Re tirement Income Preparation and Future 

Prospects." fBRlls$Ue Brief, no. 344 (Employee Benefit Research Inst itute, July 2010). 

__ . ""The Impact of PPA on Retirement Income for 401(k) Participants." fSRllssue Sriet, 1>0. 318. 

(Employee Benefit Research Institute, June 2008) .• 

__ . "ERISA At 30: The Dedine of Private·Sector Defined Benefit Promises and Annuity Payments: 

What Will It Mean?" fBRllssue Briet, no. 269 (Employee Benefit Research Institute, May 20(4). 

__ . "can America Afford Tomorrow's Retirees: Results From the ESRI·ERF Retirement Security 

Projection Model.·· fB Rllssue Briet, no. 263 (Employee Benefit Research Institute, November 

2(03). 

__ . "Kansas Future Retirement Income Assessment Project." A project of the ESRI Education and 

Research Fund and the Milbank Memorial Fund, July 11>, 2002. 

__ . "Mas$ilchusetts Future Retirement Income Assessment Project." A project of tlte ESRI EdlKation 

and Research Fund and the Milbank Memorial Fund, December 1, 2002. 

__ . "Oregon Future Retirement Income Assessment Project.M A project of the ESRI Education and 

Research Fund and the Milbank Memorial Fund, 2001a. 

__ . "A Behavioral Model lor Predicting Employee Contributions to 401(k) Plans." North American 

Actuarial Journal (2001). 

VanDerhel, Jack, Sarah Holden, and Luis Alonso. "401(k) Plan Asset Allocation, Account Balances, and 

Loan Activity in 2010: fSRllssue Briet, no. 366 (Employee Benefit Research Institute, December 

2011). 

VanDerhei, Jack, Sarah Holden, Luis Alonso and Steven Bass. '401(k) Plan Asset Allocation. Account 

Balances, and Loan Activity in 2010: fBRllssue Brief, no. 366 (Employee Benefit Research 

Institute, December 2011). 

VanDerhei, Jack, and Lori LuCils. "The Impact 01 Auto-enrOllment and Automatic Contribution Escalation 

on Retirement Income Adequacy.M fBR/lssue Briet, no. 349 (EmpJoyee Benefit Research 

Institute, November 2010); and DClIA Reseorch Report (November 2010). 

10 Appendi~ A: Brief Description of RSPM" 

One of the basic objectives of RSPM is to simulate t he percentage of the population that will be "at riskM 

01 having retirement income that is inadequate to cover basic expenses and pay lor uninsured health 

care costs lor the remainder of their lives once they retire." However, tlte EBRI Retirement Readiness 

Rating'" also provides Information on the distribution of the ~ely number of years before those at risk 

Hrun short of money," as well as the percentage of compensation they would need in terms of additional 

savings to have a SO, 70, or9O percent probability of retirernent income adequacy. 

Appendi x C describes how households (whose heads are currently ages 36-62) are tracked through 

retirement age, and how their retirement income/wealth is simulated for the following components: 

• Social Security. 

Defined contribution balances. 

IRA balances. 

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• Defined benefit annuities and/or lumlHum distributions. 

Net housing equity." 

A household is considered to run Short of money in this model if aggregate resources in retirement are 

not sufficient to meet aggregate minimum retirement expenditures, which are defined as a combination 

of deterministic expenses Irom the Consumer Expenditure Survey (as a function 01 Income), and some 

health insurance and out·ol·pocket health·related expenses, plus stochastic expenses Irom nursing 

home and home health care expenses (ilt least until the point they are picked up by Medicaid). This 

version of the model is constructed to simulate "basic" retirement income adequacy; however, 

alternative versions of the model allow similar analysis for repillcement rates, standard-ol·living 

Cilkulations, and other ad hoc thresholds, 

The version of the model used lor the analysis in this testimony assumes all workers retire at age 65 and 

immediately begin to withdraw money from their individual accounts (defined contribution and tilsh 

balan<:e plans, as well as IRAs) whenever the sum of their basic expenses lind uninsured medical 

expenses exceed the afteHax" annual income from Social Security and defined benefit plans (if any). If 

there is suffiCient money to pay expenses without tapping into the tax-qualified individual accounts," 

the excess is assumed to be Invested In a non-tax-advantaged account where the Investment income is 

taxed as ordinary income." The Individual accounts are tracked until the point at which they are 

depleted; if the Social Security and defined benefit payments are not sufficient to pay basic expenses, 

the entity is designated as having "run short 01 money" at that time. 

11 Appendix 8: 8rief Chronology of RSPM 

The original version of RSPM was used to analyze the future economic well-being of the retired 

population at the state level. EBRI and the Milbank Memorial Fund, working with the governor of 

Oregon, set out in the late 1990s to see if this situation could be addressed for Oregon. The analysis" 

focused primarily on Simulated retirement wealth with a comparison to ad hoc thresholds for 

retirement expenditures, but the results made it clear that major decisions lie ahead if the state's 

population was to have adequate resources in retirement. 

Subsequent to the release of the Oregon study, it was decided thllt the approach could be applied to 

other states as well. Kansas and Massachusetts were chosen as the next states for analysis. Results of 

the kansis study were presented to the state's Long-Term Care Services Task Force on July 11, 2002,00 

and the results of the Massachusetts study were presented on Dec_ t 2002" With the assistance of the 

Kansas Insuran<:e Department. EBRI was able to create Retirement Readiness Ratings based on a full 

stochastiC decumulation model that took into account the household'S longevity risk, post-retirement 

investment risk, and exposure to potentially catastrophic nursing-home and home-health-care risks. This 

was followed by the expansion of R5PM and the Retirement Readiness Ratings to a national model and 

the presentation of the lirst micro-simulation retirement-income-adequacy model built in part from 

administrative 401(k) data at the ESRI December 2003 policy forum."" The basic model was then 

modified for testimony for the Senllte Special Committee on Aging in 2004 to quantify the beneficial 

impact of a mandatory contribution of 5 percent of compensation." 

The l im major modification of the model was presented at the ESRI May 2004 policy forum. In an 

analysis to determine the impact of i nnuitizing defined contribution ind IRA balances at retirement age, 

VanOerhei and Copeland, 2004, were able to demonstrate t hat for a household seeking a 7S percent 

probability of retirement income adequacy, the additional savings that would otherwise need to be set 

aside each year until retirement to achieve this objective would decrease by a median amount of 30 

percent. Additional refinements were introduced in 200S to evaluate t he impact of purcha$in8 longterm care insurance on retirement income adequacy." 

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The model was next used in March of 2006 to evaluate the impact of defined benefit free~es on 

participants by simulating the minimum employer-contribution rate that would be needed to financially 

indemnify the employees for the reduction In their expected retirement Income under various rate-ofreturn assumptlons_" Later that year, an updated version of the model was developed to enhance the 

EBRl lnteractive Ballpark EStimate- worksheet by providing Monte Carlo simulations of the necessary 

replacement rates needed for specific probabilities of retirement_income adequacy under alternativeris~ -management treatments." 

RSPM was significantly enhanced for the May 200g E6RI policy forum by allowing automatic enrollment 

of 401(k) participants with the potential for automatic escalation of contributions to be included."' 

Additional modifications were added in 2009 for a Pension Re5-earch Council pre5-entation that involved 

a winners/I05-ers analysis of defined benefit free~es and the enhanced employer contributions to 

defined contribution planS provided at the time the defined benefit plan was frOlen." 

A new subroutine was added to the model to allow simulations of various styles of target·date funds for 

a comparison with participant-directed investments in 2009." In April 2010. the model was completety 

re-parameterized with 401(k) plan-design parameten for sponsors that have adopted automaticemail men! provisions.1I) A completely updated version of the national model was produced for the May 

2010 EBRI policy forum and used in the July 2010 Issue Briej." 

The new model was used to analYle how eligibility for participation In a defined contribution plan 

impacts retirement income adequacy in September 2010.'1 It was also used to compute retirement 

savings shortfallS for Baby Boomers and Generation Xers in OCtOber 2010.'l 

In OCtober 2010 testimony before the Senate Health, Education. Labor and Pensions Committee on "The 

Wobbly Stool: Retirement (In)5-ecurity in America: the model was u5-ed to analyze the relative 

importance of employer-provided retirement benefits and Social Security." 

In February 2011. the model was used to analyze the Impact of the 200g-2009 crisis in the financial and 

real estate markets on retirement income adequacy." 

An April 2011 article introduced a new method of analYling the results from the RSPM."lnstead of 

simply computing an overall percentage oflhe simulated life paths in a particular cohort that wil l not 

have suffiCient retirement income to pay for the Simulated expen~s, the new method computed the 

percentage of households that would meet that requirement more than a specified percentage of times 

in the simulation. 

As explored in the June 2011lswe Brief, the RSPM allowed retirement-income adequacy to be asses~d 

at retirement ages later than 65." 

In a July 2011 Notes article" , it provided preliminary evidence of the impact of the ~20/20 caps· 

proposed by the National Commission on Fiscal Responsibility and Reform on proje(ted retirement 

accumulat on~. 

The August 2011 Notes article" evaluated the importance of defined benefit plans for hou~eholds, 

assuming they retire at age 65, while demonstrating the impact of defined benefit plans in achievinS 

retirement income adequacy for Baby Boomers and Gen Xers. 

finally_ the September 201 1 Senate finance e~timonv'" analyzed the potential impact of various types 

of tax-reform option~ on retirement income adequacy. This wa~ expanded in the November 2011 EBRI 

Issue Brief" and a new set of survey results were added to the model in the March 2012 Notes article.1I2 

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12 Appendi. C, Impact 01 the financial and housing market crisis In 2008 and 2009 on retirement 

readiness 

The analysis in VanDerhei (February 2011) was designed to answer two questions; 

1. What percentage of u.s. households became "at risk" of Insufficient retirementlncorne as a 

result of the financial market and real estate market crisis in 200s and 20097 

2. Of those who are at ris~, what additional savings do they need to ma~e each year until 

retirement age to make up for their losses from the crisis? 

As one would expect. the answer to the first question depends to a large extent on the site ofti>e 

account balance ti>e household had in defined contribution plans and/or IRAs as well as their relative 

exposure to fluctuations in the housing market. The resulting percentages of households that would not 

have ~n " at risk" without the 2008/'1 crisis that ended up " at risk" vary from a low of 3.8 percent to a 

high of 14.3 percent. 

The answer to the second question also depends on the site of account balances and eXpOsure to the 

equity market; however, it is a more complicated question Involving both the proximity of the 

household to retirement age (the closer to retirement age, the fewer vea~ of additional saving~ 

available), the relative level of preretirement Income, and the deSired probability of adequate 

retirement Income. 

Looking at all households that would need to save an additional amount (over and above the savings 

already factored into the baseline model), the median percentage of additional compensation for Early 

Boome~ desiring a 50 percent probability of retirement income adequacy would be 3.0 percent of 

compensation each year until retirement age to account for the finanCial and housing market crisis in 

2008 and 2009. Similar values are 0.'1 percent for Late Soomers and 0.3 percent for Gen Xers. A '10 

percent probability of retirement income adequacy would require an even larger increase: The median 

percentage 01 additional compensation for Early Soomers desiring a 90 percent probabilitv of 

retirement income adequacy would be 4.3 percent, to account for the financial and housing market 

crisis in 200s and 2009. 

Looking only at those households that had expo~ure to the market crisis in 2008 and 2009 from all three 

fronts (defined contribution plans, IRAs, and net housing equity) ~hows a median percentage for Early 

Boomers of 5.6 percent for a SO percent probability and 6.7 percent for a '10 percent probability of 

retirement income adequacy. Younger cohorts experience a Similar increase, going from the all· 

household analySiS to the more select group. 

ESRI testimony for House Committee on Ways and Means. April 17.2012 Page 19 
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13 Endnote. 

1 A bfiel deJ,Cription of the EBRI Retirement Security Projection Model- IRSPMI is provided in Appendi~A lollowed 

bv a chronology ol~. development and utili.ation in Appendi. B. See Appendi. (lor additional detail on the 

impact 01 the 2008·2009 crise. in the fin;mcial and real estate market. on retirement income adequacy. 

2 This number is somewhat smaller than the $4.6 trill"", rePOrted in VanDerhei (October 20101: however. the 

baseline assumpt"",s used in the 2010 analvsiS did not allow lor the utilization of nel hoUSing equity to ensure 

retiremenllncome adequ;Ky. When Ihe 2012 analysis is repeated wilh the same assumptions as used in 2010, the 

agg'''Satedeficil increasM 10 $4.8 tril lion. 

3 Unfortunately one 01 the most significant components of Retirement Savings Shortfalls ComM Irom an e . posure 

that faces most retiree" however, very lew olthem choose to actively treatthls risk . VanOerhei (October 20101 

pro"';de.a fim-orde. appr""imation olthe impact of the stocha.ticnatureo! the nu,,11lIl home and home health 

ca.e e.pense, on the RSS value, bV age cohort, gender and mar~al "at ..... Addillllthe nursing home and home 

hea~h ca.e expense ~ the average ind ividual RSS for married household, by $25,317. SOngle maiM 

experience an average ~ 01 $32.433 while single females have an ~ of $46.425. A precise evaluation 

of the impact would involve a comparison of the val..es supplemented with the premia required to fully insure the 

financial consequence of nursing home and home health ca.e expenses. For an example 01 this comparison with a 

diff ... ent output metric, see VanOe.hei (20051. 

4 For e.ample. an employee age 60 may have very recently changed jobs and rolled over" substantialacoount 

balance from his previous employe r to an IRA. 

S Year·end 2011 dala I, currenlly beillll ana lVle<:f and Ihe annual updale wil l be avai lable laler in tile year. 

6 This valUi! increased 1<> $37.560 lor participant. in their 60", with 2·S yea" <>1 lenure and $53,108 for those with 

5·10 ye ... 01 tenure. Participant. in their 6O".with 10-20yea" 01 tenure ~d an average account b.l.nce 01 

$89,956 and those with 20-30 yea" had an .... er.ge account balance of $159.654. 

7 EBRI i~ current!v in Ihe prO<M~ of integrat ing year·end 2010 account balances of 4(l1(k) partici,,"nt~ wilh their 

2010 IRAJccount balances. PreHminary findings suggest the need for ana!vling the combined IRA and 401(k) 

balances when attempting toasse .. any form of comprehensive retirement income adequacy. Forexample. 

VanDe.he< (April 2012) analyzed the median ratios of combined 4(ll(k) and IRA balances as a multiple of 401(kl 

b.l.nce by age and tenure forind"'idual. with bath 401Ikland IRA balaflU!'5 at the end 01 2010. Forindividu.l, in 

Iheir 60"., a median ratio 011.23 wa, lound lor Individual, with at least thlrtv ye'" of tenure with Ihe CUrrent 

employer. Thl' number Increa,ed to 8.53 for those wilh no more Ihan two ~a" of tenure wilh the current 

employer. 

8 Year·end 2010d.ata i,currenlly being me.ged wilh Ihe con.i,tent ,ample. 

9The proposed regulalions lor401(kl plans were published in November 1981 and much of the growth in these 

plans tool< place in the ne.t few ~a". 

10 Holden and VanOerhel (20021. 

1Ilt.hauld be ""led thatlhi. combination i, in es,ence adding a nominal annuitylorthe40l(k) accumulation. 

wilh a real an""il'; Irom s.otial Securily. Given Ihe larger replacement rate, for the lowest Income quartile under 

s.otlal Securily. the disparity In favor of the lower Inoome would Increase as the retlreM g.ow older. 

12 Tergesen (2011). 

13 Holden and VanOerhei (2005). 

14 IRA rollove .. thaI originated from 4011k) plan, a.e induded in the projected accumulat;"n,. 

15 Choi.laibson. Madrian. and Metrick 12001) and (hoi. laibson. Madrian. and Metric!< (2004). 

EBRI testimony ror House Committee on Ways and Means. April \7.2012 
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16 figure 1 of Holden and VanDerhei (2005). 

17 VanOerhei (Se$>lember 2007). 

18 VanDerhei ar.d Copeland (2008). 

19 figures6 and 7 ofVanDemel and Copeland (2008) 

20 VanDerhei (April 2010) 

21 The I~I raIn are experienced by employees who do nOI "remember" lhelr previouscontribUllon raIn when 

Ihey change jobs, have a Slochaslic O!)loOUI of the aulGmatit escalation, and participate In plans Ihat limit the 

autGmatit contri butions to 6 percent 01 CGmpensation and ,ncrease the contributions by 1 percent per year (the 

-all·pessimistic" assumption scenario). In contrast, the highest ratn are experienced by employees who do 

"remember" their previous contribution rates when lhey change joDs, do nol optoOUt olthe aUIGmalic ~Ia ion, 

and partidpale in plans that aUow the aUIGmaUc conlributions to increa ... to 15 peftent 01 compensation and 

Increa ... the conhibutions by 2 percent per \'Nr (the - ali-optimistic" ~sumption stenarlo). 

22l1esultsare limited to empJoyee-s currenlly ag ... 25-29 and a .. umed to have 3!-40years of eligibility 

23 These findings are part of the 21st annuailletirement Confidence s.,,,"ey (IICS), a survey that gauges the views 

and aUkudes of O<"~in8·age and retired Amelicans regarding retiremenl. their preparations for retirement, their 

confidence with regard to various aspects 01 retirement, and related issues. The survey was conducted in January 

201lthrough 20·minute telephone interviews with 1,258 individual. (1,004 workers and 254 retir ..... ) age 2S and 

ofder In the United Statn. Random digit dialing was used to obtain a reprnentative cross .""tlon of the U.S. 

population. To lurther Increase representation, a cell phone supplement was added to the sample. Starting with 

the 2001 wave of the RCS, a ll data are weighted by age, se .. ar.d educalion 10 refl""t the attual proportions in the 

adult population. Dala fO<" waves of the RCS condVCIed before 2001 have been weighted loallow 10<" consistent 

comparisons; consequently. some data in the 2011 IICS may dille< slightly with data published in previous wavesol 

the lies. Oala presented in lables in thfs 'epon ma1 not total to 100 due to rounding and/or mi .. ina categories. In 

thl"OtY, the weighled sample 011,258 yields a ".ti"kill p<""lsion of plus or minus 3 percentage points (with 95 

percent certainty) olwhat the rnUllSwould be II all Americans .ge 25 and ofder were surveyed with complete 

accuracy. There are other possib~ ""Urt~ 01 err.,.. in all surveys. however, that may be more se<ious than 

th ..... ellcal cakulations of sampling e<rO<". Thl'Sl' indude refusals to be InteNiewed and other I.,..ms 01 

nonresponse, the elletts of qu ... tion wording .nd q<>estlon order, and str""nlng. While attempts are m~e to 

minimize these factors, It 1$ imi>OSSible to quanlily the errors that may relull from Ihem. The RCS waS cosponsO<"ed by the Employee Benefit Research Instit ule (ESRI). a private. nonprofit. nonpart isan public polity 

research O<"ganization, and Mathew Greenwald &Associates, Inc.. a Washington. DC, based market research firm. 

The 2011 lIesdala collettion was funded by grants from more than twe dolen public and private organilalions, 

with staff time donated by EBIII and Gret'nwald. Res materials and. liS! of undefWfiters maybe accessed at the 

EBRI Web site: www.ebrI.O<"g/rts. For mO<"edetail, see Helman, Copeland. and vanOerhe! (March 2011. online al 

www.ebrl.org/survevs/rcs/2011j). 

24 In the Res, retiree refers to indivOluals who are retired or who are age 65 or older and not employed Iullt;me. 

Worker refers to all individuals who are not defined as retirees, regardless of employmenl status. 

25 Actually, the constraint. W<)uJei need to be compared to the 402(g) limit as well as any plan·specific conSirainl. 

on I •• contributions(primarily lor the Highly Compensated Employees). 

261.4 percent responded that Ihey did nOI know. 

n s.ee Hofden and VanOemei (2005). 

28 s.ee vanOerhel and Copeland (2008). 

29 The full Slothastlc nature of the model will be Included In future analysis. 

EBRI testimony for House Committee on Ways and Means, Apri) 17,2012 Page 21 
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30 It IS Impo"ant to note that the annu itl,ed ",cumulations In this a"aiyslsare from 401(k) contri butions 

e. dusively Md do not include projeded Soc.ial s«urity retirement benef~s. This is in contrast toot her {SRI 

research (e.g .. V.nOerhei and l!K3S. 2010) th31 indudes ooth components. However. in the pceviousanaiysis, all 

worke<s were simulated and job change waS allowed. 

31 These estimates compare quite f<IVorably to thGS-e in Holden and VanOerhel (2002) when the difference 

between nominal and real re~acement rates are considered. However, this isto be e. pected given the 

aswmptions listed above (especially the lack of job turnover and therefore the suppression of uosnouts plior tG 

retirement). 

32 Presumably. the $20,000 figu re would be inde. ed for inflation in the future similar tG current treatment of IRC 

Sec. 4IS(c) limits. 

33 Employees age SO or over may be allowed tG contribute up to an additional $5.500 per year. 

34 5e<:. 41S(c) of the Interna! Revenue Code. 

3S The reason that the youngest age col>ort does nGt follow this trend Is due to their relatively lower current 

wages than Glder cohorts altt< adjuSling lor hisloric age/wage profiles. 

36 Although additional analysk nee-d. to be performed boefore a."".ing relative importance of these fact .... , it 

appearsth.tth!s re.ult Is cause<! by at least two factors. First, t~ definition of Income quartile In RSPM Is 

determlr.ed In a mantler similar to the average indexed monthly earnings computation for Social Secunty with t~ 

following modifICations: (a) All e.rned income is included up to the age Gf retirement (i.e .. t~re is nG ma. imum 

t ••• ble wage base con",.int.nd the Cilkul.tion termin.I .... t retirement .ge); (b) In"ead of inde.i", forch'nge, 

in .ver.ge national wage" the model inde ... , b.,ed on aswmed .ft .... ·t •• r.te 01 return based on .sset allocation. 

that are a functiGn of the Ind ividual', age in each year; and (e) Percentile di<lributions are established tlased on 

population statistics for each age cohort. Therefore, it Is poS$lble that an indivmual whGS-e preretirement Income 

ranks In t~ lowest qua"lle over their rem"lning work hislory may indeed end up wilh an Income thai would rank 

higher than ~ oottGm quarter in one or more specific years. Second, the Impact of the 2()percen lim~ation lor 

the IGwesl·incomt! qu~rtile may fall disproportionately on the part-lime wGricers. FGr e.am~e,. worker who 

enters the work force part time whose spouse already has a full-time jGb mav be In a better s~uatjon tG attempt tG 

ma. imize retirement contributions on his/her Income. Although ESRI is in t~ process Of ttempting tG modellhe 

impact on part·timers on a Iong~ud 1 tla.is. the current analysi. fi ltered out any 401(k) p.rtkipants with annu.1 

income of Ie .. tha" $10,OOO.s well •• those with Ie .. th.n two ve~rs 01 tenure. 

37 Gale (2011)_ 

38 The a"alysis f ... the Senate finance Committee hearing modeled the followi", «enarios: 

Employer contributions "re modified in such ~ manner Ihat the tot,,1 match (employer piuS government 

match~ remains CGnstant. 

All plan 'JIO(lsor, drop the ~an match, ami all em~oV"'" receive a 30 pen:ent match from the 

government. 

All plan sponsors drop the ~an m"tch, lInd "II em~oV"'" receive an 18 percenl match from t~ 

government. 

In I"ter EBRlanalysis (V.nOethel, November 1011~, the following scenarios were lIdded: 

No plan sponsors drop t~ pl.n match. and . 1I employees rKeive an 18 percent m.tch Irom the 

government. 

NG ~an SJlO(lsors drop the plan match, ~nd all employees receive a 30 pen:ent match from the 

government. 

39 V"nDerhe' (September 2011). The 2011 RCS qvestiGns were fielded in January 2011"nd therefore did rIOt ask 

401(k) pa"icipanlS about Ihe specific provisions used In the September 2011 Gale proposal. 

EBRI testimony for House Committee on Ways and Means, Apri) 17,2012 Page 22 
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40 Thh su~ was condUrled online within the United States by Harris Interactive commfssloned by the Princlpal 

Financial Group from May 17-June 17. 2011. It surveyed 798 em~oyee·benelit decision makers lor companies 

w~h three to 1.000 employees that do offer delined contribution retirement plans. These decision makers were 

selected Irom .. Principal Financi,,1 Groupdientlist, and their data were not weighted. 

41 A similar question was .. sked with the 30 percent government match provisiom suggested In Gale, Gruber. and 

Ors138 (2006). 

42 A similar question wa, asked lot a 30 pe"ent g"""rnment ma"h. However, loIlow-up information lot those 

indkatl"ll an In(tease Ot de<:rease In contributions Is not available. 

43 The ba,eline rewl" in Figure, II and 12 were simulated assuming the midpoint value lor each u tegorv in the 

AllianceBernstein survey. Sensitivity analysis 01 this assumption i, shown in figure, 3 and 4 olVanDerhei (M .. "h 

2012) lor the minimum red<KIlon In account balances, and In Figures 5 and 60fthe same publication fOt the 

ma. imum reduction In account b"lances. The average pe"entage ted<KIions in .. ccount value in Figure 3 varylrom 

3.1 to 19.7 percent (depending om Income quarti le) for 401(k) participants currently 2&-35 under the minimum 

reduction scenario. Figure 5 shows that they .ary lrom 8.8 to 24.4 percent (depending on income quartile) for 

401(k) participarm currently 2&-35 under the maximum reduction Kenario 

44 Under Ihe baseline assumption,. the average percenlage reduction in employee contributions lot this group In 

,esponseto the proposal is 14.3 percent. Account balances will also be reduced dve 10 the plan·sponsor reliction. 

45 For e .. mp~,,, 4O-ye;or-oid participant would need to have " tenure of at least 10years with the current 

employer to be Included In Ihl, "nalysi,. A1lernatfve speciliution, of minimum lenure were used with essentl,,11y 

the same results. 

46 See pages Io-n of Mille.(IOn) for an e.ample. 

47 Given the much larger simu lated accounl balance reductions lor sma ller plans ,hown in figure 12, it is 

important to note thaI the plan .. i,e dimibul"'" use<! in Ihi •• imulation mod~ I. based on !ho,e lound in the 

EBRVlnvestmenl Company Institute (lCI) 401(k) database, nollhe universe 01 401(k) plan •. Evidence ollhe 

magn itude of possible statistical bias in this regard can be found In VanOerhei, Holden, Alonso and Bass (201 1). 

The Ihird panel of Figure 4 (page 8) in that publiution shows the distribution of plan. In the EBRI/IO 401(k) 

database In 2010 vs. 2008 Departme nl of Labor (DOl) Form SSOO lor all 401(k) plans and ,uUests an underrepresentation 01 small pjans for Ihe EBRI/ICI 401(k) database. The ~an $ile var l~ble was specified in terms of 

participants instead 01 a,sets, bul a slmil~r distribution would be e.pe<:ted In the I~uercase. If thlsh Indeed the 

c~se, the R5PM estimates for """rail average benefit reduction, presented here would be t . pe<:ted to be smaller 

than Ihose Ihal would be evidenced by the IUIl40I(k) universe. 

48 The EBRI/ICI Participant-Directed Retirement Plan Data Collection Projecl (the EBRI/ICI401(k) d~tabase) Is the 

largest. mosl repre,entative repository of infOtmation .. bout individual 401(k) plan participanl accounts. See 

VanDerhei. Holden. Aionsoar>d Sass (2011). 

49 See endnote 17 of VanDe.hel and Copeland (July 20101 for mote detail. 

SO VanOerhei (September 2010) also demonstrate. Ihat eligibility lor a defined cOf1lribution re!iremef1l plan has a 

significanl positi"" imp.ct on redudngthe add itional compensation most fam ilie. need 10 ",hie"" Ihe ee.ired 

level of retiremenllncome <tdeQuacy. 

51 See VanDerl!ei (August 2011) for evidence ol the impOrtance of participating in a defined benefit plan. 

52 VanDerhel and Copeland 12002a). 

53 Thl. malerial lirsl appeared in VanDerhei and Copeland (July 2010). 

54 The nominal cost ollhese e .penditures increases with compooenHpecilic inflatiom aswmptions. See the 

appendi.lor more detail •. 

S5 Net housing equity h inlroduced inlO the mod~ In three different mechanisms (e.plained below). 

EBRltestimony for House Committee on Ways ~nd Means, April 17. 201 2 Page 23 
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~ I~ lax tables from 2009 are used to compule Ihe la. owed on Ihe amounts received from defined benefil plans 

and Social Secur~y (with the percentage of Social Security !)eneflts subject to Federallr.come Tax proxled as a 

lu""loo of the various retirement Income components) as well as the individual K«Iunt withdrawals. 

57 Roth IRA and 401(k) accounts a.e not u",d in tllis ve ... ion of the model but will be ;nc","perated Into a 

forthcomi"ll EBRI publication. 

sa Capita l,ains treatment is not usO<! In th;s "" ... 100 of tile model. 

59 VanDerhei and Copeland (2001). 

60 VanDerhe; .nd Copeland (July 20(m . 

61 VanDe.he; and Copeland (Oe«mber 2002). 

62 VanDerhe;.nd Copeland (2003) 

63 Vano..rhei (January 2(04). 

64 VanDerhei (2005). 

65 VanD('rhel (March 20(6). 

66 VanDe.lle; (Se!>tembe, 2006) 

67 VanDerhel.nd Copeland (2008). 

68 Copeland and VanDerhei (2010). 

69 VanDerhe; (2009). 

70 VanD('rhei (April 2(10). 

71 VanDe.he; and Copeland (2010). 

12 VanD('rhei (Se!>lem!)er 2010). 

73 VanDerhei (October 2010<1). 

74 VanD('rl\ei (October 20IOb). 

75 VanDe.he; (Feb.uary 2011). 

76 VanDerl\ei (April 2011). 

77 VanDerhei and Copeland (June 2011). 

78 VanDerhei (July 2011). 

79 VanDerhei (Aug"" 2(11). 

80 VanDerhei (Septembe. 2011). 

81 VanDerhel (November 2(11) 

82 VanDe.he; (March 2(12). 

EBRI testimony for House Committee on Ways and Means. Apri) 17.2012 Page 24 
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! 

-

o " 0 

!!&' 

o • 

• • • • 

Figure 5 

Impact of Income and Relative Value of Defined Benefit Accrual 

at Retirement Age on At·Risk* Probabilities 

Percentage of population ·at ri!li<· lor inadequate retirement income, by age-specific remaining 

care« income Quartile, and Income-specific defined benefit value Quartile' (baseline assumption) 

.. 

'r--------------------------------------------------------------

.. 

.. 

---

·M_:EBRliER _"'1anWyio_1O F _Se<::urilyf'fojo<:lioo 

-

... ·.I ... __ 1107140_ 

__ .,.,..._IIC __ .. 

-

__ 

• • poodiIurH -.." ... C<ImtIinaIion ... __ • __ Ihe eo.........- E--,"_ s..-.ey l'" 1I.fdOn '" _I 00'I<I """'" _ .. .....,.,. OO'I<Iout.of

_""_. pIuo_"".,..,....1rom,....;"g1'lomo 00'I<I __ .,... __ la<_uotitlhepointlhoy .... Tho ,"""",

,_wil""";O' ... _Se<:\riyl_ ....... _"'onool .... ____ •. IRAo_ .... .,

".... 

__ 1rom ___ (_ ... __ ....... I ... ..... bm ... ... 

Iuo'np-..... --.I. Thio_"'1hemooot __ 0<IequI00J: _ . _live ............... mooot __ a>

ureploDomont ....... _-IMniI.OO'I<I _0Id ___ . 
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79935A.032dkrause on DSKHT7XVN1PROD with HEARING

$300.000.00 

$290,000.00 $280,000.00 

5270,000.00 

$260,000.00 $250,000.00 

5240,000.00 

$230,000.00 

Figure 7 

Average account balances for 401(k) participants 55-64 with at least 

thirty years of tenure 

Sources: 2010Account Balances: TablJlations from EBRI/ICI Particip;:mt-Oirecte<l Retirement Plan Data CoHection Projed; 2011 and 

2012 Account Balances: EBRI estimates. The analysis is based on all participants with account balances at the end of 2010and 

positive values for the sum of employee ar"KI for that year. 
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79935A.034dkrause on DSKHT7XVN1PROD with HEARING

Figure 9 

CDFs" of the Two Extreme Combinations of Design Variables and 

Employee Response Assumptions for Employees Currently Ages 25-29 and 

Assumed 31-40 Years of Eligibility, High- vs. Low-salary Quartiles 

90" I -----=..... . !III! 

-I 

Comblnood Rut 

Source: EBRIIERF Retifeme nt SectJrity Projection Model. versions l 0081Dal-10081Da16 . 

• Cumulative dislrixJ\ioo func60ns. 

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, • 

, 

• " ii 

£ 

0 

, 

• 

Figure 10 

Average Percentage Reductions in 401(k) Account Balances at 

Social Security NRA* by Imposing 20/20 Limits in 2012, 

by Age and Age·specific Salary Quartiles ". 

, .. ,,. 

". 

.. 

" 

.. 

,. 

"' 26-35 ,..., 

... " ". 

So<JfC40: EBRI Retiremef,t Security ProjecIion _ Vemon 11062101. 

5ala"l 

Quartile 

,.., 

N8; (hOi ..... only modeit tt.. 01 tt.. e><p&Cled in 401(k) conuibutionl for empIoy_ who are not eutomaucally _ b)

imposing tt.. Mw lim." and does not &I1emp11O as$4U modilical""'" GIl tt.. 1>'1<1 01 eithe, IN plan spon$O! "'" IN empIoyMl asl .......... 10 be 

eligible fOf P"'<1icipa1ion in the plan. The ........ ted ,alM 01 return a,a IN ........ a. in VanDorhal and Copatand (July 2010). This oeraion oI the analysis 

. .......... _I no job ''''''''_, wilhc!lawait Of to.on cIolaulls The fu •• toeIl • • lic of tt.. model wiJ be incIucIed ;n lulu, ....... lysiI . retOrameni age. 

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<Of HI 

t" 0-

"I 'J. tg" <.£ 

Income GrouD 

Figure 11 

Simulated Impact of Proposal to Modify the Federal Tax Treatment 

of Employer and Employee Contributions for 401(k) Plans In Exchange 

for an 18% Match From the Federal Government, by Age and 

Age-specific Salary Quartiles: Midpoint estimates 

"" 

'" 

"" 

'" '" 

" " 

Assumption for this run: Employer increases Or decreases 10 contributions are 

represented by the midpoint 01 the range denoted on the Ali ianceBernstein survey 

Soure.: AuIhoI'I calclJlaIions based otl results Ifom EBRI RetirM'IIKII Sacooty Projection Model Version 1471 . a"'; responses Ie AlI",ncellemsteie 

120111111d Employee Researc/\ Instin"" I"'; Matllew Greenwald & Associales. Inc.. 2012 Retiremenl Confidence SuNeJ'. 

Note: ThiI SlIT'Jlalion mode" otlly tI>e finIInciai Wnpa<:I 01 tile e.<pec\8CI reduc1ion in 401 1"1 ao::oont balances kx who a re not .... rom..tica

eruoled b"/ modifying tile beh.vior of plan 8<Id pa<1k:io&nts • .-.:I _ Ie aa_ behavioral modifl(.lltionl on tI>e P8<I 01 eligib

r"IOI"IP"rticipant$. ThfI _ted rIlleS oIMlum .... the .. "'" ... in VanDe ..... a"'; Copela"'; (JL>Iy 20101. TN.""rsion 01 tile Inalys4 aS$Ul"rles no jo

turnover. wilildrawal. or deflUlts n. lull _ .. lie natuM 01 I"" model be included in .IUlU", enalysis. Res.ulta lor part;c;panll eu«en1Iy 

_!Non 35 .re limited Ie as ei<plained in II>e le><"l. P1an oponsor IIId panicipanl ,eactionl Ie II>e pr_1 are explained 

II>e \ext increnel or de<:nI ..... lo conlributionl a'e rep ..... mood by the """,,,"m 01 the range <jeno1ed otl the AH"nce8emOiein IUrvot)'. 
f 


79935A.037dkrause on DSKHT7XVN1PROD with HEARING

!-, .=1 

0:: 

p: 

-p 

Figure 12 

Simulated Impact of Proposal to Modify the Federal Tax Treatment of 

Employer and Employee Contributions for 401(k) Plans In Exchange for 

an 18% Match From the Federal Government for Employees Currently 26-35

by Plan Size and Age-specific Salary Quartiles: Midpoint Estimates 

Assumption for this run: Employer increases or decreases to contributions are 

represented by the midpoint ol the range denoted on the A1lianceBernstein survey 

,,. E;l 1 ,1=============

Sou...,.: A"tnol's calc.lalions bHad "" results Irom EBRI Retirement s.ea..ity P'ojection MoOt! Versooe 1.72. Ind ,_oes to AllilnceS&mstein (20

and Employee Benefit R ...... rch Insbtute .nd M.thew G"",nwaid & Associ.tes. Inc .. 2012 Retirement Confidence Survey. 

Note: rhOs mutltion models ""Iy tile financial imPKI 01 tile expected reduclion in ac:count balance, lor employees who .re IIOt lulO1N1tQIIy 

e rtfO/le(j by modifying Ifle bahavior 01 pI.n iopOnoo", and partrcipanls . nd doe. nol olt&mpllO .ose .. belloviorol modilicoliono "" tile PO" 01 eligible 

nonpallicip.nlS. Tfle $imulated Illes of ",tum "" tIIe .. me AS ,n Va nDoornei Ind CopoIAnd (July 2010). no .. .. ...."., 01 In. .nllylis '01""'*. no job I

_

a_Is or ;,an del"""'. The lui slr>Cl;aslic nalu", 01 tile model will be 0rcIuded in • Mu", .nalysis. Plan iopOnOOl and participanl 'NCtionl 10 Ifl

_I .'" .. plained in tile te)(1. Employe< increases or deere .... 10 conlfilMions .r. represented by tile mOclp0;,1I 01 tile '""9" denoted "" tile 

survey. 
47 

Chairman CAMP. Ms. Miller, you are recognized for 5 minutes. 

STATEMENT OF JUDY A. MILLER, CHIEF OF ACTUARIAL 

ISSUES AND DIRECTOR OF RETIREMENT POLICY, AMERICAN 

SOCIETY OF PENSION PROFESSIONALS AND ACTUARIES, 

ARLINGTON, VIRGINIA 

Ms. MILLER. Thank you, Chairman Camp, Ranking Member 

Levin, and Members of the Committee. I am Judy Miller, chief of 

actuarial issues and director of retirement policy for the American 

Society of Pension Professionals and Actuaries. ASPPA’s more than 

8,000 members work with retirement plans of employers of all 

types, but our primary focus is plans for small business. 

Two key features distinguish retirement savings tax incentives 

from other incentives in the Code: The deferral nature of the incentive and the nondiscrimination rules that make employer-sponsored 

plans very efficient at delivering benefits across the income spectrum. 

First, unlike other tax incentives, incentives for retirement savings are deferrals, they are not permanent exclusions. When employer-paid health benefits are excluded from income or mortgage 

interest is deducted, those amounts will never be taxed. With the 

traditional retirement savings account, no income taxes are paid on 

contributions when they are added to the account, but those same 

contributions are included in taxable income when the amounts are 

paid from the plan. In other words, every single dollar that is exempt from tax now will be subject to income tax in the future. 

Since most of those retirement years are outside the government’s 

5- or 10-year budget window, looking at the so-called tax expenditure for defined contribution retirement plans on a short-term cash 

basis greatly overstates the cost of this incentive. In fact, new estimates by former JCT staff show that a better measure of the expenditure for defined contribution plans is more than 50 percent 

less than the JCT cash-basis estimate over a 5-year period. So as 

you consider these issues, let us not forget that this is a deferral. 

The amount of revenue you might think you are raising if you cut 

retirement savings incentives today is not real revenue gain. It is 

a bookkeeping fiction. 

The second distinguishing feature is the nondiscrimination rules 

that make sure incentives for retirement plans don’t discriminate 

in favor of the highly paid. The result is this tax incentive is more 

progressive than the current progressive Tax Code. Households 

making less than $100,000 pay 26 percent of all income taxes, but 

they get over 60 percent of the tax benefit of this incentive for defined contribution plans, and this analysis actually understates the 

benefits for these households because it doesn’t recognize that a 

good part of a small business owner’s so-called tax savings is actually transferred to workers in the form of contributions. Let me explain. 

A small business owner usually considers a plan when the businesses finally become profitable. The owner has shown how setting 

up a retirement plan can save enough money on their personal income taxes to pay most of the cost of contributions, like matching 

contributions that are going to be required for employees by nonVerDate Mar 15 2010 10:29 Apr 02, 2013 Jkt 079935 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\79935\79935.XXX 79935

dkrause on DSKHT7XVN1PROD with HEARING
48 

discrimination rules. It is a beautiful thing really. Deferred income 

taxes for the owner become current contributions for the workers. 

Data clearly shows the key to promoting retirement security is 

workplace savings. Over 70 percent of workers earning from $30- 

to $50,000 do participate in a plan at work, but less than 5 percent 

go save on an IRA on their own. Bureau of Labor Statistics data 

show 78 percent of full-time workers have access to a workplace retirement plan, with 84 percent participating. 

Almost 80 percent coverage is a success story. More needs to be 

done, but the Committee should build on the success of the system. 

We support the auto IRA proposal in Mr. Neal’s bill, for example, 

as a way to expand workplace savings by building on the current 

structure. 

Recent tax reform proposals include dramatic cuts in maximum 

contribution limits, a cap on the value of the current year’s exclusion for households making over a certain dollar amount, or conversion of the current year’s income exclusion to a credit. All of these 

proposals would reduce the incentive for small business owners to 

sponsor a workplace retirement plan and would be a big step in the 

wrong direction. 

I have over 20 years experience actually selling plans to small 

business owners. With rare exceptions, the current year’s tax savings was a critical factor and often the only factor supporting their 

decision to put in a plan. Now, it is not that small business owners 

are selfish. Quite the contrary. But in real life they aren’t sitting 

on lots of cash. Savings generated from the retirement plan tax incentives provides cash to help make contributions required by the 

nondiscrimination rules. Reducing the incentive literally reduces 

the cash the small business owner has to work with. Now, there 

is not a doubt in my mind that reduced incentives would mean 

fewer plans and less contributions toward workers’ retirement. 

One of the questions posed for this hearing is whether or not 

there are too many types of plans. The simple answer is no. A proposal to combine all defined contribution plans into a single type 

of plan might look like simplification on paper, but in practice combining 401(k), 403(b), and 457(b)s into a single plan would disrupt 

savings for employees of State and local governments and other 

nonprofits. And believe me, when you are talking to an employer 

about setting up a plan, options and flexibility are not the enemy, 

and one size definitely does not fit all. 

Now, that is not to say simplification isn’t needed. For example, 

we support the Small Business Pension Promotion Act sponsored 

by Representatives Gerlach, Kind and others, and would be pleased 

to work with the Committee on these and other simplifications. 

In summary, the road to improved retirement security for working Americans is expanded workplace savings. Reducing incentives 

for small business owners to sponsor retirement plans is the opposite of what needs to be done. 

I would be pleased to discuss these issues further with the Committee or to answer any questions that you may have. Thank you 

very much. 

Chairman CAMP. Thank you very much. 

[The prepared statement of Ms. Miller follows:] 


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dkrause on DSKHT7XVN1PROD with HEARING79935A.038

'" ASPPA' .OU1~G '01 "fllC. 'S UUIUE.! 

Testimony Submitted by Judy A. Miller 

on behalf of the 

American Society of Pension Professionals and Actuaries 

Committee on Ways and Means Hearing on 

Tax Reform and Tax-favored Accounts 

April 17. 2012 

Thank you Chainnan Camp. Ranking M~rnbcr Levin and members oflllc Commiltcc for 

the opponunit)' 10 speak wilh you aboullhc current lax incentives for emplo)'cr·sponsorcd 

retirement plans - how Ihey a rc working 10 promote rclircmcm security. and how the Commincc 

might streamline 1hc lall' and regulations 10 make them work belter. I am Judy MillC'T, Chiefof 

ACluari~1 Issues and Director ofRclircmcnll'olicy for the American Society of I'cnsion 

Professionals and Actuaries ("ASI'I'A"). ASI'I'A is a n3lional org:lIlizmion of more than 8,000 

retirement plan professionals who provide eonsul!ing and administrnti\'e services for qualified 

n'tirement plans covering millions of Am<,ricau workers. ASPPA mcmbers an' rctirem<'l1l 

professionals of all diseiplirn:s including consultants, administrmors, actuarics, aCcoulllants, and 

attorneys. ASl'l'A is p311icularly fO(:used on the issues faced by small- to medium-sized 

employers. ASI'PA 's membership is diverse but united by 3 common dedication to the employer_ 

based retiremciU plan system. 

I also am speaking on behalf of the Council of Independent 401 (k) Rceordkeepcrs 

(C IKR), as well as ASI'PA's siSler organizations, the Natiollal Tax Sheltered Accounts 

Association (NTSAA), the National Association of Plan Advisors (N;\ PA) and the ASPPA 

Collegc ofl'cllsion Actuaries, CIKR is a lIaliollal organizalioll of 401(k) plall service providers. 

ClKR members are uniquc in that they are primarily in the business of providing retiremcnt plan 

services as oompar<,d to fmancial services companies Who primarily are in the business of selling 

in\,estmeiUs. As a consequence, the independent members ofCIKR olTer plan sponsors and 

pal1ieipants a wide variety of investment oplion~ from various financial services companies 

without an inherent eonnict <>F interest. By focusing their businesses on enicicnt retirement plan 

operations and innovative pia II spollsor and pal1ieipant services, ClKR members are a significant 

and impol1ant segment of the retirement plan service provider marketplace. Collecti\'ely, the 

members ofCIKR provide services for over 70,000 retirement plans covering 3 million 

p.'111ieipants with approximately $130 billion in retiremem asscts. NTSAA's members share a 

strong interest ill the 40J(b) and 457(b) marketplace. NAPA is an organization of advisors 

serving employer·sponsored rctirenlel1\ plans. ACOPA rep.-.:senlS enrolled actuaries who arc 

eredemialed members of ASP]>A. 
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The goals of simplification. dlicieney. and increasing retirement and financial seenrity 

for American families are goals we share with the Commiuee. The primary meSMge! want to 

convcy today is thalthc CUrTCnll3X incentives arc working very efficiently to promote retirement 

se<;:urity for millions of working Americans. The nlost imponam factor in detennining whether 

or not taxpayers across the income spe<:tnlm Sowe for retirement is whether or not there is a 

workplace retirement plan. Ifinereasing retirement and financ ial security is the goal, increasing 

the availability of workplace savings is the way to get there. and modifications to the current 

inecntives should be evaluated based on whether or not the changes will encourage more 

businesses 10 sponsor retirement plans for their employees. 

In ERISA. Congress decided 10 dirc<:t tax incentives for employer-sponsored plans 

toward coveragc of substantially full-time employees. Nearly 80% offnlltime civilian workers 

now have access to workpl3ee savings, so the incentives have been erfl-etive in providing 

coverage for the targeted group. The incentives are also very e fficient at providing coverage to 

all income groups. This eflicicncy is derived in large part from two features that set the 

retirement savin gs incentives apart from other individualta:< incentives: 

• The retirement savings incentive is income d<:j<:rr<ll. not a pcnnanent exclusion. 

Every dollar that is excluded from income this year will be includl-d in income in 

a future year. Unfortunately. that is not reflected in the cash basis measurement 

of the retirement saving.~ "tax exp<:nditure". In fact, the CllrTcnt methodology 

overstates thc tnle cost by ovcr 50%. 

• Nondisc rimination rules for emp!oyer-spollsored plnlls assure the plans do Ilot 

discriminate in favor of highly compensated employees, and limit the amount of 

comp<:nsation that can be included in detennining benefits and testing for 

nondiscrimination. As a result, this tax incentive is more progressi\'e thM the 

current progressive tax code. 

The hearing notice rnised the question as to whether the "large number of plans with 

different rulc~ and eligibility criteria Icad$ to confusion. reducing the cffcdi\'cncss of the 

incentin:s in increasing retirement savings:' The answer is a resounding "No". 

• [fan individual has a workplace plan, he or she is not asked to choose bet"'ccn a 

40 I(k) or SIMPLE, or a 401 (k) Or 403(h) arr,mgcmenL EmplOyL-cs are simply 

asked if they want to enroll in the plan being offered by the employer - or are 

automatically enrolled_ Consolidating alltypcs of dcl1ned contribution plans into 

one type of plan would not be simplification. [t would disrupt savings. and force 

state and local governments nnd nonprofits to modify the ir retirement savings 

plans and procedures. 

, 
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dkrause on DSKHT7XVN1PROD with HEARING79935A.040

• Small employers lhal do not sponsor a retiremenl plan consislently point to 

business concerns as the main reason they do nOI sponsor a plan ', not "confnsion'· 

about available options_ Flexibility in plan design gives practitioners the tools to 

design arrangements thm are attracti ve to mon:: employers than a "cookie cutter' 

approach. Less ncxibllity would rcducc covcragc, 1'101 cnhance il. 

The discussion of simplification needs to be expanded beyond consolidation or otherwise 

limiting employer-sponsored plan design options. There are legislative and regulatory changes 

thm could smooth the way for more small employers tD adopl plans, and case compliance 

concerns. but consolidation and loss Df nexibility in plan design are 1'101 on that lisl. Improved 

retirement security, and meaningful simplifkation. will be accomplished through thoughtful 

modifications 10 the exisling structure. without wasting resources on cosmetic overhauls thaI 

produce mOre change than gain. 

' &.., for~x"mple : 

The Prindpal F;II3""ial Group Ht!li"·,.,,ml H,·",Jine<s Sur,·,·), 1011. slidu 19.30. "'-a;lablo at 

hup·/I",,,,,, pritlCipal C(lo!l;!OOU!lnc" !fd!)!," u'PCUIs!101IMjn;mI"Dl.p;a.diocss-sunlOlac . pd( 

SI"tement}QrIM recorJoftl.., M",. h 7.}0I}.,*",Jle:"i, ... d,,1 Commjttee.m A)!jn)! /fc<I,jnr.: "Opl""/otnitie,' 

for S.tI'in~~: : RcmOl·int; Ob"ttcles for Smt,1I 8", itteJ' •... from Michael Kiky (""nder of rill. "'-ailable ot 

http;//",,,",, asrN orgldocy,nenl_)'Jult/N[slGACa012IKilc) OlOZsfr "PS 

EBRI SnI<J1/ ";"11'/0)"'" Relirement Sun..,)' f200J) a"~ilable at 

bttp'/IdlC;,Qrg!pd UsuTwuJscW:ZOO3!Q3:;crsQ psi f 
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dkrause on DSKHT7XVN1PROD with HEARING79935A.041

Background 

The eurrent system ofta" incentives has been vel)' successful at accumulating assets to 

improve the retirement security of millions of American households, Seyenty pereent ofU,S, 

households now havc an IRA or an employer-sponsored retirement plan. At the end of2010. 

private employer-sponsored defined contribution plans held about $4.5 trillion in assets, priyate 

employer-sponsored defined benefit plans held 52.2 trillion and state and local retirement plans 

held 53.0 trillion, There was anothcr 54.7 trillion held in IRA accounts. Although IRAs include 

contributions made by individuals to the IRA on their own behalf. a substantial portion of IRA 

assets are allributable to rolloyers from employer-sponsored plans and direct employer 

contributions. Of the 49 million households that own JRAs. 55% rcpon that their IRA accounts 

include a rollover from another retirement plan, and 9 million of the IRAs are employersponsored retirement savings arrangements such as SEPs and SIMPLE IRA plans.! 

The paSt 20 years has seen a gradual shill in employer-sponsored arrangemen!s from 

dcfined bencfit plans to defincd contribution plans. The number ofpanicipants (acti\'e. retired 

and deferred vested) reported as cO\'ered by defmed benefit plans has been fairly stable - about 

40 million in 1986. and 42 million in 2006. but an increasing proportion of those arc retired 

participants. Over the same period. the reported number of participants in defined contribution 

plans increased from 37 million to 80 million. In 2009. about 61 million aCI;I'C workers 

par1icipated in employer-sponsored retirement plans,J 

Data shows that 401(k) and similar plans (such as 403(b) and 457(b) arrangements) have 

been vcI)' successful in geuing workers to save for retiremem. In ERISA. Congress decided to 

target tax incentivcs toward substantially full-time workers, and the incentives have workcd well. 

Comrul)' to the common assertion that only half of working Americans are covered by a 

retirement plan, Bureau of Labor Statistics (BLS) data shows that 78 percent of all full time 

workers have access to a workplace reliremem plan. wilh 84 percent of those workers 

participating. The success of saving through an emplo}'er-sponsored plan extends to low to 

moderate income workers. The chart below. based on data prepared by the Employee Benefit 

Research Institute (El3RI) updated to 2010. shows that over 70% of workers eaming from 

$30.000 to $50.000 par1icipated in employer-sponsored plans when 11 plan was available. 

whereas less Ihan 5% of those without an employer plan contributed 10 an IRA. 

l 1011 Imv./m.", Comp<lnY I',w/ flook: A R,',·; ", of Tn",J. oml AdMty ;n /Iw I", ... tnl "/ COnlJl<In), IndUS/I)'. 

Im"'l""'nt Company In')lilute , ",-.itabte 31 bUn-l/je; oQ!/Nfl2OII fasl!>!!!>!; Nf. 

't"lJR! Du,,,/xx>I; "" t'mpl","ee 8<neflts. Emplu)-cc lkncfit Rcs<arth tn.titutc. a"ailable at 

Imp;lltbri Qrglnu licaliQnsltw~ sI?h~dalal>ook. 

, 
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dkrause on DSKHT7XVN1PROD with HEARING79935A.042

-

Fig ure I 

Effectiveness of 401{k) Plans 

" .. '_,.4by .............. ,..., ·"" .... _ 'M .... 

Sou",.: Employee 8.",efit Rese.",h In,titute (EBRI) (lOIO) estimate using 2008 Panel of SIPP (Co.ered by .n 

Employer PI.n) and EBRI .sUmate (Not Covered by an EmploY"r Plan -IRA only) 

Current Tax Incentives 

Wha l a r"(' Ihe in ~enli \'Cs ? 

Employer cOnlribUliolis madc 10 qualified reliremcnI p(ans 3Jl: deductible 10 thc employer 

when made. Income tax on investment earnings on those contributions is defcrred until amounts 

are distributed from the plan. When a distribulion is made to a plan participant. aU amOUnlS are 

subjctt to ordinary income tax. Employer contributions made on a participant's behalf are not 

subject to FICA. In addition. individuals wilh adjusted gross income ("AGI"') oflcss than 

$27.750. and married couples wilh AGI of less than $55,500. may qualify for a Saver's Credit 

ranging from 10% to 50% of the first S2.000 the individual contributes to an IRA or employersponsored defined cOlllribution plan. 

Limits arc placed on eOlllributions to defined cOlllribulion plans. and on benefits payable 

from defined benefit plans; 

• Cer1ain defincd contribution plans pemlit employces ,o contribute on their own behalf 

by electing to ha\"e a certain dollar an10ulll or percentage of compensation withheld 

from pay and deposited 10 lhe plan. These "elective deferrals" are excludable from 

income for income tax purposes. bUI FICA is paid on Ihe amounts by bolh the 

employer and the employee. For 20 12. the maximum elective deferral to a 40 I (k) or 

similar plan is S 17.000. Employees age 50 or over can also make a "calch-up 

cOlllribution" of up to S5,500. Elective deferrals \0 a SIMPLE plan arc limited 10 

$11.500. plus a $2.500 catch· up contribution for those agc 50 or o\"cr. 

, 
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• If the employer also contributcs to a dcfined contribution plan (such as a 401(k) plan). 

the maximum contribution for any cmployee is $50.000. This limit includes any 

elective deferrols othcr than catch-up contributions. This means a p.lrticipant that is 

agc 50 or ovcr. and who makcs thc full $5.500 catch-up cOlllribmion. would have a 

total limit of $55.500. 

• The mIDOimum annual benefit payable from a defint"<l benefil plan cannOI excet'<llhc 

lesscr of the average ofthrce year's payor $200.000. Ifretiremelll is before age 62. 

the dollar limit is reduced. Employers can deduct the amount required to fund 

promised bencfits. 

• Annual IRA contributions are limited to $5.000. plus "catch-up" contributions of 

SI.OOO for those age 50 or over. 

Compensation in excess of S250.000 cannot be considered in calculating contributions or 

in applying nondiscrimination rules under either defined benefit or defined contribution plans. 

For example. if a business owner makes S400.000. and the plan provides a dollar for dollar 

match on the first 3% of pay the participant elects to contributc to the plan. the mmeh for the 

owner is 3% of$250.000, not 3% of S400.000. 

The Iligher contribution limits for qualified retirement plans - botll defined contribution 

and defincd benefit plans - come with cOI'crage and non-discrimination requiremcnts. For 

example. a small business owner with scI'eral employees cannOI simply put in a defined 

contribution plan and only contribute $50.000 to his or her account. Other employees who have 

attained age 21 and completed I year of service with at least 1000 hours of work must be taken 

into consideration. and the employer muSI be able to demonstrate that benefits provided under 

tile plan do not discriminate in favor of "Highly Compensated Employees" (··HCEs"). wllich 

would include the owner. 

Safe harbors arc available. For eX;lmpic. if all employees covered by a 401 (k) plan are 

provided witll a contriblllion of3% of pay that is fully vested. the HCE can make the maximum 

elcctive defcrrol, regardless of how much other cmployt'Cs choose to contribute on their own 

bellalf. 

Age can also be considered when detennining tile amount of contributions Ihm can be 

made on a participant's bellalf. A larger contribution (as a pereentage of pay) can be made for 

older employees because the contribution will have less time to earn investment income before 

tile worker reaches retirement age (usua lly age 65). 

Uo ... tlo rt'lircme nl _~'l\' in s lal incenlins tlilTn fmm olher incenl ins? 

Unlike many tax incentives. the income tax incentives for retirement savings arc not 

permanent dt'<luctions or exclusions from income. Taxes arc de/erred as long as the savings 

remains in tile plan. but tax mUSI be paid in later years when distributions are made from the 

plan. Furthermore. the distributions are subject to tax at ordinary income tax rates. even though 

lower capital gains and dividends rales may have applied if tile investments Ilad been made 

outside of the plan. 

The tax incentives for qualified employer-sponsored retirement plans also come with 

stringent non-discrimination niles. These mles. coupled with the limit 011 compens3lion that call 

6 
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be considert'd under these arrangements. are designed to insure that qualified employersponsored retiremcm plans do not diserimin3le in favor of HCEs. Non-diserimin3lion rules do 

not apply to other foons oftax-favort'd retiremcnt savings. For example: 

• IRAs share the incentive of tax deferral. However. if a small business owner 

makes a personal contribution to an IRA. there is no corresponding oblig3lionto 

contribute to other employees- IRAs. However. under the current rules. the 

contribution limit for IRAs is set low enough (and the limit for employersponsored plans high enough) to make a qualified retirement plan auraetive to a 

business owner who can alTord it. 

• Annuities purchased outside of a qualified plan shaTC the benefit of"inside 

buildup" - the deferral of income tax on investment earnings until distributed from 

the arrangement - but have nu limil On ~"OlIlrib"ljon$ or benefil$. 1I11l1 no nOli' 

discrimill(lfiol! rcqllirellll!/tIs. This means the allraction of a qualified retiremenl 

plan for a small business owner is heavily dependent on the interaction of nondisc rimination n,les and Ihe contribution limits for a qualified retiremenl plan. 

[Note that 31 the end of201 O. there was S 1.6 trillion in annuity reserves held 

olilsMe of retirement plans:] 

Itow dOCII lax deferral work to ineent cO"erage? 

The tax incentive for a small employer to sponsor a qualified retiremcnt plan is a critical 

componem to the establishmem ofa 401 {k). defined benefit or other qualified retiremem plan. 

The tax savings for the company's owner (or owners) can gcncrate all or part of the cash flow 

needed to pay required comributions for other employees. which substamially reduces the cost of 

the plan to the owner (and lransfcrs much of the apparcnttax benefit to cowred employees). 

Consider the following sitnation: 

ABC Company has been in operation for 5 years. The owner has some 

retirement savings in an IRA. but has never taken time to think about retiremenL 

The business has other employees earning from 535.000 to 570.000. The owner 

lakes compensation of 5 10.000 per month during the year. then takes a year-end 

bonus of the amount of company profits. The owner pays individual inconH: \axes 

on the full amount of the profits at a marginal rate of28%. 

The owner meets with a retirement plan consultant. The owncr is older 

than most of the other workers. so the consultant recommends a safe harbor 

40 I (k) plan with an additional ··cross-tested"" ~ntribution. Thanks to the 

nondiscrimination rules that apply to qualified retirement plans. putting 550.000 

of the profits into the 401(k) plan for Ihe owner means the owncr must contribute 

at least 5% of pay for the employees. However. tax savings on the $50.000 will 

substantially cover that 5% contribution. and thc tax credit for the c05t of sening 

up and opeT'dting a new plan helps defray any startup and initial operating costs . 

• R"li'cwleni As.CIS Tmoi $/7.5 T,illim, ill fi>u"h QUU""' 1010. In,. .. ,mcn' Comp""y lIIS1iMC (Apr. IJ. 2011 ). 

,,·ailable.1 h'Ip'''''' .... w kj QrglmmoonVncwsll\" 10 g4. 

7 
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Setting up the plan becomes a simple question of"Oo you wanl to give that 

money to your employees? Or add it to the check you are sending to IRS?" 

The current ta ~ incenti,·cs transform what would han heen a bonus to the business 

owner, subject to ineomc tucs, into a retirement savings contribution for the owner "lid 

lIr e employee!>, Not only will the employees l'C(;eive an employer contribution of 5% of pay. 

most will also make additional oo1Uributions on their own behalf. This incentive for the business 

owner to contribllle for other employees resuits in a distribution of tax benefit that is more 

progressiw! Ihan the eUITeHI income lax structure. Just how progressive is illustrated in Figure 6 

(on page 13), showing the share of this lax benefit going 10 households earning under $50.000 is 

almost/ollr limes Ihe share of income taxes paid by these households. 

The tax incentives are also used 10 encourage employees 10 join 40 I (k) plans and similar 

plans. Edlleational materials encouraging participants to enroll in. and contribute 10. plans 

typically show the worker how tax savings will help them sa\'e more than they could through 

another savings arrangement. For example. materials will show how contributing $ 1 00 to your 

40 1(k) account will only cost $85 (or 572 for higher income workers). As shown in the chart 

below, over 800/. of workers in all income categories find this incentive somewh31 or very 

important. 

Figure 2 

Importance of Beln, Able to Deduct Rellrement Contributions 

FromTauble Income 

r-~~-----------------------------

: f=1==='~=i==i=i r_-IJ-------_t --- --_t~-- ---_Ir 

.. r--It_--rl --- --~t_--_Ir_-- ---~1_ 

.. I----._-I. ----t ~ r--fll ---

su ...... ,. sn ...... 'o in ...... ,. $~""" . $+0_'0 $"_'. $u'o"""" <$U_ <$n...... <SSO""" <S60""" <SIS""" <SIOO_ """. 

SOwtc: Jad Vlln[)cr/v:i. Tlte Imf'l'C' uj.lfoJijJ'ing ,he f:xc/",ion ,>j£ml'lQJW ConlrihNliml£ji" Reliretn<:II' 

So"inKS 1'1",,£ from T,,;wbie /lICQWle: R"_,,,I,£ Fro", ,"" 2011 Re,iremem CQnjiJ"""" s.,n",)'. cbri.""i No!e. (M ... 2(1tt ). "".itabt~ a, hnp:llcbri orWpublkatj Il s! OOl G'jodc~ cCm fa OOIc~Dh!!&wnwm id 418S . 

The importance orthe tax deferral on retirement contributions was also born out in a 

rccentillvestment Company Institute (IC I) survey in which more than 80% ofhouscholds 
57 


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owning DC plan accounts said the immediate tax savings from lheir retirement plans were a 

big incentive to contributc.s 

True Cost Overstated 

Current budget rules require lhatthe cost of most tax ineentivcs be dctennincd on a cash 

now basis. Because the tax incentive for retirement savings is a deforml. not a pcmlanent 

exclusion. basing the cost on current cash now ana lysis - taxes not paid on contributions and 

investment earnings for the current year less taxes paid on current year distributions -

misrepresents thc true cost of the retirement savings inccntive;;. Using a present value method. 

which Ittognizes thaI ta.\e5 will eventually be paid on distributions. produces \lery difTerent 

estimates - more thlll1 50% lower than JeT or Treasllry estimates for II 5-yellr budget windoll'.~ 

The following chan illustrates the results. 

Figurt' .) 

Comllarison of Tn E~pcntliturt' F.:stimutes 

Joint Committee anti Trt'asury Annual Estimates Compart'd to the 

New Methodology· 

$1.0 , 

, 

~ $1)0 

, j $100 

= sw 

, 19.0 

~ Joinl Commiue<: _ T,..,asury - -New Melhodology Using I'resenl Val ... Anal)"si • 

• Tho ""W mclhodolog)"cS[inl3lCS the ta~ he""fil <:>rthe dcforraland insKk buildup. in pn:scnl 

"aluc lcrmi. The Joint COntntiu"" and T,.., .. uryc.tint31C. !Vly OIl oash·fio,,· aMly.is. 

, In'·.'l"",nl Coml"'ny InStitute. Amer;,",,:, Ct,mm;I"'Cni '" Rel; .... "",m $ecurif}': 1m".,,,,, Alall/"es arnJ AeI;<»I,' 

J""'I<II')' JOI] .,·.il.ble .1 bl1p;Jjw"'\\,kLorgipdfloor I Z relir i'« up¢lle pdf 

• Judy Xantoopoulos.nd 10.1.1)" Schmidt. Rel;rcmml S<!\';ngs ~",J Tux ExpcttJ;lOIre E>1;mlJlc. (IIp,il 2012) .• "ailable 

al hllr ·II""\\"\\·,a <rpa,\>I'l!/f> !ain·~lenm'la[.irsIRIIT2(l12 .• <rN , 
58 


dkrause on DSKHT7XVN1PROD with HEARING79935A.047

The danger in using lhe cash now measuremenl is not just that the current COSI is 

overstated. but the long-tenn impact of modifying the incentives is also hidden. Reducing the 

limits will generate revenue in the budget window. but will also lead to reduced revenue - and 

more demand for low income benefits such as Medicaid and Supplemcntal Sc>:urity Income 

("SS I")· in later years. 

Who Benefits 

Who i. (! rti i(! ati g? 

The Bureau of Labor Statistics ("BLS") found that 78 percent of all full time civilian 

workers had access to retirentent benefits at work. with 84 percent of those workers panicipating 

in these arrangcments. For privale sector workers. BLS found the access and panicipation rates 

are 73 percent and 80 percent respectively. Availability and takc up rates are substantially lower 

for pan-time workers. so ifpan time workers are included. BLS found that 68 percent of civilian 

workers had access to retirement plans. and 80 percent ofthosc aellmlly participate in the 

offering. For the private Sl'Ctor only. the access and participation ratcs for all workers arc 64 

percent and 76 percent respectivcly.7 However. ahemati"e research suggests these estimates are 

less than what is actua lly happening in the workplacc. 

A report from SSA shows thai 72 percent of all employees who worked at private 

companies in 2006 had the ability to participate in a retirement plan. and 80 percent ofthosc 

participated.' The SSA used data from a Census survey merged with W-2 tax records to correct 

for respondents' reponing errors. SSA found "among private-sector wage and salary workers. 

both employer otTe r rates and empIO)'ee participation rates in any type of pension plan 

considerably increase when W-2 n.'Cords are uscd. an indication of substantial reponing elTor." 9 

The SSA results indicate the BLS statistics on availability are likely undcrstated. 

Part-time workers are far less likely to have a retirement plan available at work. and less 

likely to participate in a plan when it is available. BLS data shows only 37% ofpart-timc private 

sc>:tor workers have a retiremcnt plan available at work. and 54% ofthosc panicipate in the plan. 

Similarly. employees thai work for smaller cmployers arc less likely to have a plan available. 

fiLS data shows 49 pereent of private sector employees who work for cmployers with lcss than 

100 employees have a plan available 3t work. Sixty-ninc percent of those workers do participate 

when a plan is otTered. though. Employer sUr\'eys indicate business concerns arc the primary 

driver of this low rate of sponsorship among smaller employers. 

1 Bureau or La lx>r Sta'iSlics. EmpJ",.,. /k"'fils Su"",... /(",i",..,m' fic""'fils. M,,,,;h lOl l: /(ClircwI<'m ""ncfil.<: 

u,:<'Itss. ""Hid"ul;"". "mI I"ke-"" r"' .... : NMion"I C""'INn. U';'''' S"""y .If", ... h :lOll .,.ailablc a, rllp:II""," ,bl<,go,·/"",.IchsfsrJ£I;'nrOOI7,lldf (hereinafter "ilLS SurwyM). 

Irena O ... hi. 11"" .. rd M_ lams. and Jute. Lich'cllSlcin. A.-sc_<f",c nl o! R"Ii",mcml'l"n Co"",.,ge by f';rm Si:e. 

V.illX W-l /(cCOf'd,. Social Secu.i,)' lIullolin (2011 ). a'-ailablc al 

rll p;llw''-'u:<!!.!t(wloolicy/dc>c''S!bI>71 r121)7! n2pS3.pdf. 

/d. at I (ooling "We f,nd ,ubstantial rcp"o1ing ~rror with «<",,01 to both olT". and participalion rales in a "'t;",nl<nl 

plan, Abou' 14 """'ent ofwo""c,,, ,,110 self.reponed oonpanicipation in 3 def,ned contribu'ion (t>C) plan hod 

com.ibuted as indicated by W·2 "",oro •. whereas 9 ""reem of""Orl<cn ..,If·repoo1 .. -d pao1icipalioo in a DC plan 

"hen W·2 record. indicated 00 com.ibu,ions.-). 

" 
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P3rticipation in employer-sponsored defined contribution plans is heavily weighted 

toward middle class Americans. As the chart below shows. 38% of pa rticipants in defined 

contribulion plans make less than $50.000 per year. Nearly three-quarters make less than 

$100.000. 

FigUN 4 

[ stimatcd Pril'ate Sector Actin Participants in 40 1(k) and 

I' rofit Sharing I'lans. Distributed by Adjusted Gross Income 

-W% 38% 

~ 35% 

• 30% , 

~ 15% 

, 

.= '0% ,-

~ 15% 

, 

.... " SSO.ooe s.~.tOO •• (It, Sloo.oo9 .... " SISO.WO uocltr SIOO.WO or ...,,, 

SIOt.oot 51501.Il0(l 5100.000 

Sour<c: Inlemal Re,,,nuc s.: .... ·icc (IRS) Slali .. ic. or Income Di"i,ion (SOl) 

There is reason for optimism thm coverage will increase Ol'er lime. The following chart 

shows that younger workers have shown dramatic gains in ownership of retirement savings 

accounts Ol'er the paSI dc.::ade. The increasing usc of automatic enrollment is also expecled 10 

increase take-up rates. (Most plans only automatically enroll new hires. so recognition of 

participation gains will occur gradually). 

u 
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Figure 5 

Younger Houtrbold ~ HiVe Had Hlgber ilnd Fasler owln~ Riltes ollRA or Oellned 

Contribution Plan Ownership 

Pff&II~ of U S /rousIthoids oommg IRAs Of ()( p>ans by r1«~ 1/1 wnICn /rousIt1lOid hNds_~ 

l10rlt /989-}O/O 

0\989 0199, olm 01998 0200l 0,00' 0,001 o, ooe 02010 

-

• 

• 

• 

~';J ~" : 

/ / n~ ol~9 / - JvyA : 

• 

• 

• 

• 

8o!n 

"-

1960 to 1%9 

Bornl9lO Iol919 

• 

• • 

'" " " " " '" " --::-----;,-J. ao as 

Age iltlme 01 ",my 

Holt I.goP kS lilt ""'II)<' 'lOt 01 lilt 1(l-_lWlIlcOIIOIr ~ lilt h~01t~ _ Trw 10 -_ lWlIloonolis "'~ dt!, ...... U\lfIg 

1I'It'll)<'0I11'Io_0I_ 

Soutf$lO _01 Ir6!I'iIl ~ BoiIld'iune!' 01 C_ 1rwKf< 1!89-1001 ¥Ill 1(1 ~ Kul""'kJnc1 

stwr_ rrockrlg ~JOOO_X110 

Source: 2011 In",suncent Company Factbook. Fig"'" 7.4. pogc 10) 

lIow i. Ihe lax hendil di.lrilJulcd? 

Distribution of the tax benefit is typkally analyzed by applying the marginal lax rate to 

conlribulion. allocatcd to an indiv duar ~ account multiplicd by Ihc marsinal tax rail'. to 

Because Ihe U.S. income lax system is progressive. the valuc oi !he lax incelllive on a dollar of 

retirement savings in thc year of deferral increases as the marginal lax rme increases. This 

progressive income lax struelure. coupled with Ihe assumplion Ihatthe more income a worker 

has. Ihe more he or she can afford 10 save. would lead one 10 expecllhe lax benefit for retirement 

savings would be more skewed Ihan Ihe incidence of income la~. However. Ihe nondiscrimin3lion rules Ih31 apply 10 employer-sponsored reliremenl plans. coupled wilh the limit on 

compensation that may be considered for purposes of delcnnining contribulion allocalions. leads 

10 a very difTcrent result. Thc distribution of the lax incentive for retirentent savings is more 

progre.uil"e than Ihe CUlT('nt progressive income lax SYSlem. As Ihe following chart shows. 

"For t ;<.amplt. 5<:<' Tabl" I oft"" Hamihon I'mj""t poper ··Impro,"ing OpjXInunilit. for Sa,"ings and In<cn,i,""s for 

Middle-.nd [,<>,,··In<Qmc Iiouscholds- by William Oale. Jonathan Orube. and Peter Ots'-"g. 

" 
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households with incomes of less than $50,000 pay only about 8% of all income taxes, but receive 

30"10 of the defined contribution plan tax incelllives. Households with less than $ 100.000 in AGI 

pay about 26% ofincomc taxes. but receive about 62% of the defined contribution plan tax 

incelllives. II 

Figure 6 

Estimated Distribution of Ft'del'9 l a~ E~ itu res for Dt'fined 

Contribulion Plans a nd Fedcl'9llneomt' Taxes I>a id by Adjusted 

Gross Ineomc for 2QIQ 

U..!<cS~.OOO 550,000 und.c 

5 100.000 

StOO.OOOund.. $ t50'OOOu ...... c S200.000oc .....,... 

$ 150.000 $100.000 

.Sha~ of .: .. in,.1<d Fe<J.",1 TMX F:~ "" di'D """ for PMriid pa nu 

.Shan' 01 F<"<I< .... t [n""me T u .. (.flc ••• <"<Ii '. ) P. id 

What this clearly shows is that. contrary to one common myth. the tax incellli\"es for 

retiremelll are not upside down at all. Thanks to the balance imposed by the current law 

contribution limits and stringe11l nondiscrimination rules. thesc tax ince11lives are right side IIP -

even bef ore properly col1siderillg other componelllS of /his incelllil"e. 

The standard methodology for measuring the benefit of the tax incentive (multiplying 

marginal rate times income deferred) shows that the tax ineentivcs for cmployer-sponsored 

retirement Silvings arc Illore progressive than the current income tax code. However, because of 

the unique nature of this tax inccllIivc. this methodology actually IInden lales how progressive 

the current tax incentives are: 

• First. as illustrated in ihe "'ABC Company" example on page 5. this measurement 

fails 10 consider that much. ifn01 all. of this apparem la'{ savings to 3 sm3ll business 

" f~';mu ~d Ik ~fi s ,,{Tux & pe""I;I<I,"e f;' ,;m,,,", fiN" Ik!i<",d (,,,,,,,b,,,;on Plan Pa";cipant> uml R"Ii,.,:"s ".;,,, 

AccOlm, lkl/ultCes. a,'ailabk: al !mp;II..-..-" lI-'PN! Q!lI/M~in· 

Mc Wg,,\]a[~i!]IIcS!i!J!9nvI201I!]lisf[)xl!x p TjIWsl'gk! 3-18-II,pdfa<Plj. 

" 
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owner is transferred to employees in the fonn of employer contributions. The 

standard methodology credits the small business owner contributing $50.000 on her 

own bi'halfwith 5 14.000 "tax savings" (2g% marginal ratc timcs $50.000). If pa)'roll 

for other covered employees is 5200.000. the nondiscrimination rules require the 

cmploycr to contribute at least 5% of pay. or $10.000. to the aceoums ofthcse other 

employees. Assuming for the sake of simplicity that the business tax rate is the same 

as the owner's rate of28%. the net cost of the 5 I 0.000 contribution is 57.200. The 

small business owner's net benefit for the currcnttax year is therefore only 56.800 

($14.000 - $7.200). Assume the average marginal rate for the other emplo)'ees is 

15%. The mtt times contribution method results in an apparent tax benefit of51.500 

( 15% of5 I 0.000). In fact the bi'nefit is the full 5 I 0.000. So. ahhough standard 

methodology would measure the tax incentive in the current year as 5 14.000 for the 

owner and 5 1.500 for the other employees. the true allocation is 56.800 for the owner 

and S 10.000 for employees. 

• Pan of the COSI of the retirement savings tax incentive is the deferral of income taxes 

on investment ineonte. However. if a small business owner elected not to set up a 

qualifit'd plan. and had simply paid income taxes instead of making retirement 

contributions for Ilerself and the other employees. slle could Ilave gained identical 

deferral of inconte tax on investment earnings by investing the 550,000 in an 

individual annuity. or benefitted from lower capital gains and dividend tax rates on 

investmellt income by purchasing investments outside of a retiremcnt savings vehicle. 

Therefore. tile cost of the qualified retirement plan tax incentive should only reflect 

the cost of excluding the deferral in the year the contribution is made. plus deferral of 

tax on investment income on contributions in exccss of an after-tax contribution 

amount. less the difference between ordinary income tax and capital gains and 

dividend taxes on in\'estment income. (Note that fortllis small business owner. the 

after-tax value of the employee contributions would be available for investment 

outside of the qualified retirement plan. not just the after-tax value of the $50.000 

contribution for the owner.) 

Anal)"ling the benefit for any given year during an accumulation period also fails to 

rttognil:e the deferraln3ture of the savings tax incentive. When 3n individual saving 

550.000 per year reaches retirement and distributions begin. the marginal income I3X 

rate ofthosc distributions will be substantial ly higher than for tllosc witll a history of 

lower contributions. (The fact tllat the amount of Social Security benefits includible 

in illcorne. if any. depends on the amount of other retirement income received during 

a year increases tile rate differential for retirees). As a result. this failure to consider 

taxes to be paid at a later date tends to overstate the relative benefits offered by the 

current system to those wllo make higller levels of contributions to tllesc plans. 

An analysis of the distribution of the 13.'1: incentives tllat considers these factors would 

show the current tax incentives for retirement savings are extremely efficient at distributing 

benefits to low- and moderate- income workers. 

" 
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Adequacy of Benefits 

The availability o f a defined contribution plan at work is a key dctenninant in the 

likelihood for having a scrure rctiremenl. Iknefits can be very meaningful 

Figure 7 

Medlan Replaa!ment Rate. for Part!clpants Rnchlnll Age 65 

ktwun20l0 and 203~. bv lna>me auartile at Age 65 

(pe,,,,ntolfio.ollNe.y< .. ...,,_ ooIorvl 

Social Se<:.nity 4011")Acwmulatlon- Social S..::urity and 

401(11) Accumulation-

.., 

_.. '"I'I ___ ....... ,~ ... _ .. _'""·1_· __ , ..... ""-- ·l_'_._ .. U~I/IC'''IOO_'_''';''-_ 

if there is consistent availabil ity of workplace savings. 

Fig ure 8 

M edian Replacement Rates for 401(k) Accumulations· for 

Participants Reaching Age 65 Between 2030 and 2039 

(percent of final five-year average salary) 

"' 

• ........ 

___ ~l ... _""_ ,,"-.a" .. ~, _ I"' __ 

.... _., __ _ ... _. 
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One of the challenges faced in analyzing the adequacy of retirement savings is that the 

usual method of measuring savings is based on average or median 401{k) aeeOU111S or IRA 

accounts. The result is often an understatement of individual's accumulations since many 

individuals have retiremc111 savings held in more than one accoun1. For example. [have on ly 

been employed by ASI'PA for a lillie over 4 years. and considering only my ASPI'A 401(k) 

balance would prese111 a very difTerc111 picture than considering my funds in an IRA. another 

401(k) plan and TSI'. Since it is not possible to consolidate accounts for everyone from 

everywhere. the adequacy of a life time of retireme111 savings through an employer-sponsored 

plan can be estimated by looking on ly al individuals nearing retirement age with long tenure 

with thcir CUITe111 employcr. As shown in the following table, subs13111ial aCCOU111 balances 

are accumulating for Ihese older active participants with long tenure in 401 (k) plans: 

Figure 9 

Avera,e ucount balance. for 401(k) participa nts 55·64 with a t lea.t 

thirty year. of tenure 

..... r-----------------------------------------------------------

u.~ . f---------------------------------------------

u.~ . f---------------------------------------------

~~~ . f-------------------------

~ ... 

"' ......... 

"""-JIlI· __ ' __ ·OIIJID_-n. ...... _ ..... Oou"-...,..,.,"'" ... >0" __ .... _ .... ......,.. .. _ ..... ____ .. ,,.. .... 01>0'0 .... 

__ 1o< "" .... 01_ .... _-....-1or .... _ . 

Note that these are not "tinar' balances - many of these individuals are still working, with 

additional contributions being made to these arrangements. Also. "tenure" is years of service 

with the employer. not years of participation in a 401(k) plan. Since 40!(k) plans did nOi 

become widely used until the early 199O's, employees with 30 years tenure with an employer 

today arc nO! likely to have had 30 years of participation in a 40 I (k) plan. 

" 
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Impact of Proposed Changes 

20·4J$20,000 Cap 

The Deficit Reduction Commission and the President's Economic Reeol'cry Advisory 

Board ("PERAIl") both floated the idea of reducing the eUlTent $50,000 maximum eontribntion 

for defined contribution plans to the lesser of 20% of payor $20,000. Reducing the maximum 

contribution from thc cUlTCnt $50,000 to $20,000 would mean the qualified retirement plan no 

longer makes financi al scnse for many smal l busincss Oll'ners. The result would be less access to 

retirement savings opportunities at work for rank and file employees. In a survey of "crosstested" plans conducted by the American SOI;icty of Pension I'rofessionals and Aetuarics 

(ASPPA ). 65% ofplnn sponsors indicated they were likely to terminate the cross-tested plan if 

the plan design were no longer available. A dramatic reduction in the limit would effectively 

make not only a cross-testcd plan, but most other qualified defiued contribution plans, 

unattractive to small business owners. 

Even if some plans survived. contribution rates, and so projected balances, would decline. 

Employer contributions arc often based on the level of contribution required to meet the 

nondiscrimination rules. Lower maximum contributions will mean nondiscrimination testing 

passes with a lower level of employer contributions, which means lower employer contributions 

for employees. Nonetheless. the reality for many small business retirement plans is that the 

reduced limits will mean the end of the plan, For many small businesses, even after reducing 

the level of employer contributions made on behalf of non-owner employccs. the redueL-d tax 

incentive due to the lower limits will simply not cTCflte enough cash flow to justify continuing the 

plan at all. 

The following chart shows the decline in projected accouut balances for participants in 

small plans (less than 100 participants). considering both changes in employee bl'havior and 

employer behavior, ineluding the tcnnination of pia liS. if the maximum contributions for dcfin~-d 

eontriblllion plans were reduced to the lesscr of20% of pay or $20,000. 

" 
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Figure 10 

20/ 20 analysis on small (less Ihan 100 particlpanl) plans, aher employer 

behaviora l modlficallons', by age and salary qua rtile 

_ -.-.. ..,1>1_ 

.. .. _ _-- -

.~, 

...... -

.~ ,------------------------------------------

.~ f-----

· Soo.w« .... ___ t .. R$PM._'I<**. .. ___ .. _n ......... ___ ...... ~. __ · ... .......,. ............... >1J/1O ..... _ ...... __ .. """"*-'_ 

Con .... ·rt current uclusion to re fu ndable c r",dit 

Another recurring proposal would conven the cUITCIll-year cOlllribmion exclusion from 

income into a unifOniltaX credit, How a proposal such as this affccts plan sponsors and 

panicipams depends. of course. on whal lhe level of credit is. and whether or nOI it is deposited 

10 a retirement savings account or directly offsets income lax liability. A rel:ent proposal from 

William Gale '1 offers both a 30 percem credit. which the paper says would be revenue neutral, 

and an eighteen percent credi\. This proposal purpons 10 create additional savings by providing 

more incentive for taxpaycrs below the 23 percelll and 15 percelll marginal lax brackets to save. 

There appear to be several basic flaws in this proposal: 

• Data shows the primary problem to be addressed in improving retirement security 

is increasing access /0 lrorkplace s"~·ing . not a lack of incentive for takc-np by 

panicipalllS with access. The proposal itself indicates thai Ihe Cllrrenttax incentive 

for many decision makers would be reduced undcr thc proposal. In olher words. 

thc "problem" being addressed by this proposal is not the problem. and Ihe 

"solution" will only make the situation WOI"SC. 

" William G. Gale. A l'ro/>OS<I/ If) Restructure R'''iremenl ."'wings 'I!CI:mj"". iN <I Weak ErolWmy ~'ilh Lrmg-Tcrm 

IkfICjls{Sep. 8. 2011). 

" 
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dkrause on DSKHT7XVN1PROD with HEARING79935A.056

• If tile credit is an offset from income tax liability. the size of the credit fora small 

business owner would detennine if setting up or maintaining the plan is still 

worthwhile. If the credit were deposited to a retirement account. in many cases 

the resulting drain on cash would nccessarily result in lower contributions for the 

small business owner and employees. or tenninatiol1 of the plan. 

• If tile proposal applies to all defined contribution plan comributions. not just 

elective deferrals. the administrative problems would be scvere. Somc employer 

contributions are not vested when contributed. so the incidence of taxable income 

would depend on the year of vesting. not the year of contribution. Consider an 

employee of modest income in a plan where employer contributions are fully 

vested after three years of service. and nOI vested before three years of service arc 

completed. The employee would have to have income tax withheld on two or 

three years of employer contributions in one year. which would place a financial 

burden on the worker. Note that this problem would apply to any proposal that 

includes employer contributions in taxable income. The problem would be 

exacerbated if the employer contribution also becomes subject to FICA. 

The following chart shows the dccline in projected account balances for participants 

considering both changes in employcc behavior and employer behavior. including the 

temlination of plans. if the CUTTent year's exclusion were modified to an 18% refundable credit. 

As expected. panieipants in smaller plans would suffer most. with the lowest income quanile 

showing the largest reduction for all plan sizes. 

" 
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Figure II 

Simulat&d Impact of Propos al to Modify the Federal Tax Treatment of 

Employer and Employee Contributions for 401(k) Plans In Exchange for 

an 18% Mstch From the Federsl Government for Employees Currently 26-35, 

by Plan SIze and Age·speclfl c Salary Quartlles: Midpoint Estimates 

___ - ..,. ........... .... _d. ~-"'-..... __ "" ........... .. _,_, 

--_ 

_ 

______ -. __ "' _____ __ &_ ....- .... 20"_~ __ .. ~ __ .. _ ..... _(2IIl l ) ....... 

::","':.-=::- _ ... __ ••• =::::--=-~=.::"::'.:.=:,:::: .. _ ..... ___ .. v __ ~ ...... "' .... .... -=.:::c.: __ ..... ...-_ .. -......::= ..... 

-... _.--

_ .. -..... -_-_ ........ --.. _ ..... -.. _-- ..... .- ..... _ ----- ..... --_ ...... . It • "-. 

Simplification 

Proposals to modify the retirement savings tax incentives have included proposals to 

"simplify" the system by consolidating various types of plans into a single plan, by restricting 

plan designs to a limitt'd number of safe harbor comribution formulas- in some cases a single 

safc harbor, or both. 'l1,e cffort is gencrally couched in statemcnts regarding how the large 

number of options is confusing to employees and employers. and discourages participation in tile 

systcm. 

For example. proponents of combining all defincd contribution plans into a single type of 

plan claim it would lead to higher participation rates, apparently based on a theory that 

employees don't join a plan at work because they an: confused about the difference between a 

401(k), a 40J(b) or a 457(b) arrangement. That theory makes no practical sense, since 

cmployees are not asked to choose betwecnthese types of arran gem ems. The employee is asked 

whcther or not thcy want to contribute to the plan thc cmployer has madc available - or the 

cmployee may e"en be automatically enrolled. Although combining 40 I (k). 40J(b) and 457(br s 

into a single type of plan might look like simplification on paper, in practice it would disrupt 

20 
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savings and require state and local governments, non profits, and possibly private plan sponsors, 

to modify their defined contribution arrangements. 

I spent over 20 years working with small businesses thm were considering whether or nO! 

to sct up a retirement plan, I can assure the Comm ittee that "complicated" testing docs nol 

discourage employers from establishing plans. and employers would be less likely to establish 

plans that include employer contributions if the employer had less fle~ibility in plan design. The 

truth is, it is that flexibility that creates sufficient tax savings for the small business owner to 

fund the contributions for cmployees, and thc availability of general nondiscrimination testing is 

key to this flexibility. 

There are. however. complexities thai discourage small business owners from taking 

advantage of the lax incentil'cs for mainlaining a plan, or incorporating features that would make 

the plan more effective as a savings vehicle for all employees. These complications are not 

rigidity in plan design. but the significanl red lape, fines and penalties thaI can accompany even 

the most basic oflhesc arrangements. 

Some complications arc statutory and some are regulatory. For example. multiple 

emplo)'er plans (M EPs) arc one approach Ihat is gaining favor in the markelplace. Howel'Cr, the 

growth is hindered by regulatory confusion that is a perf~'(:t example of how a business operating 

in good failh can be tripped up by conflicting regulations. The Internal Revenue Code clearly 

slates that a retirement plan operated by more than one unrelated employers is a multiple 

emplo)'er plan. ERISA doesn't clearly eontradietthis definition, butlhe ERISA definition 

applies to welfare plans as well as retirement plans, and guidance on welfare plans has 

eSlablished that the employers must have a relationship olher than joint sponsorship of the plan 

to participate in a "multiple employer plan", The sad thing is. if OOL doesn't conclude that 

MEP undcrthe Code is also a MEP under ERISA. it's Ihe small business owners that have in 

good faith joined these arr,mgements that could be faced with penalties for not filing an annual 

Fonn 5500. Mr. Kind and Mr. Reichart have a provision inlheir SAVE Act that addresses this 

concern, and if DOL does nottakc care ofi!. Congress will need to fix the problem. 

Another regulalory issue that may require a legislatil'e fi x is ele<:tmnic delivery of 

infonnation. ASPI'A has been a strong supporter of disclosure. We also think infomlation 

delivered in a thick Slack of paper is unlikely to be read. If a participant wa]1\S paper. they 

should be able to gel it. However, the dcfault delivery system should be the one Ihat provides the 

most useful fOml of infomlation to most pMicipants, and that is not a pilc of paper. We thank 

Mr. Neal for including default electronic disclosure in HR 4050. 

There are numerous othcr e.~amples of how the framework for operating a small qualified 

plan could be simplified, but here are a few sugge~tions: 

• Elim inate mandalory "interim amendments"l } which increase the COSt and burden of 

maintaining a plan without any corresponding benefit. The eurrent proccss is 

" Qu.olifled rc1i""u<nt plan' .... g<>1<:m<d by "fincn docum<nlS ,lui mu" nIO<1 ""n.in lnIuin:mrol< u ......... Ihc: In .. mol 

ROI'o.", Code '" .... i.I>in .. ,·fOl"<lted ,,,",us. R",'on ... PR>O<du", 200S~ ... """'ifood by R.,·, "n><, 2008-$4. "",,'ides 

""8gcml dat« tOr pw. doc"men" ,., be: ..,bmi,,,:d 10 IRS tOr ",,.iew as '0 a pw. -. q ... lificd ... ,.<. Indi' idually designed plan' 

.... 011 r,"'-Y""'''}''''''' and eddo<"m.nIS"""" ,i'-lO""l"In, o.ri~ ,t.:.e r,,', Of';,-)_o)-.;I ... plan. muS! 

.odop! omood'"""",,, ..-11o<,l<gi,I.'i,'o ond ..-gula,Of}' "han!!,,> !(, lhe q ... lif'<ation lnIui..-n"," •. t:.:.oopl.s pr<Wided b)' I .... Of 

<><I...- iUidaoO<. !hose "in'rnm .mrndn"","" mu" i""" .. Ill' be odop1cd by the: do< date (i""luding e"<n>ion') fOf filing Ihc: 

"",orne .. ~ ""u", tOr ,h ..... w,It } 'eat ,I>< """'l!" i. o«<CIi" •. Th<..- is ..., roonli .... ion of"'" du. 01 .... of'h ... lnIui..--d -interim 

amrnd mm'" • .-i,h ,he ~de f ... ",bmi"ion ofdoctt..,...",., IRS, 
70 


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incredibly complicated, with diffenmt amendment deadlines that vary based upon the 

type of amendment and the plan's fiscal year. This leads \0 mistakes being made by 

well meaning plan sponsors (who are voluntarily providing this bcncfit). Small plan 

sponsors in par1icular are shocked and surprised whcn asked to pay Ihousands of 

dollars in sanelions when an inadvene11l amendmenl mistake is uncovered during an 

IRS audil. Amendment deadlines co-ordinated with the plan's S or 6 year review 

cycle would be user Ii-iendly and eost-cllcelive. 

• Don'l penali~e small employers for allowing employees 10 Sian e011lributing 10 a 

401(k) plan immediately llpon employment. This could easily be accomplished by 

excluding cmployees the statute would ha\"e allowed to bc excluded from 

panicipation io the plan I. from the 3% minimum ··top he3vy .. l! contribulion 

requirement. 

• Make it less "daogerous" for small employers to use automatic enrollment by making 

it less expensive wheo the plan inad,"cnenlly fails to automatically enroll an 

employee. Small cmployers shy away from automatic enrollment. often because a 

miSlak~ can cost the employer 3% ofth~ employee's pay forthe year. in addilion to 

any matching contribution Ihe employer would have made iflhe employee had been 

enrolled and contributed Ihe default amount. It is reasonable to require the employer 

to make any matching contributions that would have been due if the employee had 

contributed the default amount. but to impose an additional cost because the cmployer 

voluntarily adopts automatic enrollment simply discouragcs adoption of automatic 

enrollment. 

• ElimillatC unncressary notices. such as the notice requirements for the 3% safe 

harbor. The safc harbor information is already providcd to panicipants in the 

Summary Plan Description. and since employees receive the contribution whether or 

not they contribute 10 the plan. il docs not cause panicipants to change their behavior. 

• Simplification should not be limited to defined contribution plans. Enactment of the 

proposal to eliminate reduction of assets by credit balances in applying the benefit 

restrictions of Code section 436 would not only make ,ense from a policy standpoint. 

but would dramatically simplify the operation of that provision. (This proposal is 

included in H.R. 3561 - The Small Business Pension Promotion Act, spoosored by 

Representatives Kind. Gerlach and Neal.) 

ASPPA looks forward to working with the Commillec to simplify the rules and regulations 

surrounding retiremcnt savings incentives. and to help American workers. especially small 

business owners and their employees. take advantage of workplace savings. 

" F.mplo}«. ,,110 ha,·. 0<>1 altai.oJ .s. 2t Of ,,110 ho," 0<>1 roonpl<led . y .... of .onpk»n .. n, "ilh .. tea" tOOO hours of 

"",'k" nu)' br •. ,dudro r""" pt.n p .... idpal.,.,. 

" A plan i, con.idem.l1Op I>< ... y if 0'· ... 60% or the a«ruod bmefil' .... ro< C). empk» __ ". Mony ..... tI bu,i..", pt ... an: lOp hca,·y and ... . ,",ul,. mu>! p""'i<!o .tl pan>:ipan" in • IkfifM:d """Iribul "", pt ... "i,h • "",,"ibu,"" of .. k.SI 3% compen ... "". 1'0<' IkfifM:d br, .. fi, .• 1>< ""Iuirm><nl i, a minimu,. "".rued "" .. fil <>f 2% of pay .,.,. Y'" of .... · ..... ,.i,h • 20% 

maximum. 51'<"",.1 ",k. "I'I'1y to pan>:,,,,,n" rov<r«l unlkf boIh I)"J'C' of pt, n" 
71 

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Auto-IRA 

ASPPA supports the auto·lRA proposal de\'eloped by the Retirement Security Projec1, 

and proposed in HR 4049 sponsored by Representative Neal (D-MA). The proposal docs not 

require employers to contribute to a retirement plan. or impose fiduciary responsibilities on 

btlsiness owners. II docs give employees an opportunity 10 eontribule to an IRA on their own 

behalflhrough payroll deduetion. Providing a payroll deduction arrangemenl will also make it 

more of a natural step for employers 10 consider sponsoring a SIMPLE or 401(k) plan when the 

business reaches the point Ihat, with the assistance of the tax incentives, it can support employer 

eomributions. 

Summary 

The current system is working very well for millions of working Americans. Expanding 

ami/ability of workplace savings is the key 10 improving retiremcnt security. There is no need 

for dramatic changes. butmeasurcs should definilely be considered to make it easier for 

employers, particularly small businesses. to offer a workplace savings plan to their employees. 

ASPPA looks forward to working wilh the Comminec 10 achieve meaningful simplification. and 

retirement security for American families. 

I would be pleased 10 discuss these issues further with the Commillcc or answer any 

questions that >·ou may have. 

" 
72 

Chairman CAMP. Mr. Sweetnam, you are recognized for 5 minutes. 

STATEMENT OF WILLIAM F. SWEETNAM, PRINCIPAL, 

GROOM LAW GROUP, WASHINGTON, D.C. 

Mr. SWEETNAM. Chairman Camp and Ranking Member Levin, 

thank you for the opportunity to testify at this hearing. I am a 

principal in the Groom Law Group, a law firm that focuses exclusively on employee benefits law. Prior to joining Groom, I was the 

benefits tax counsel at the Office of Tax Policy at the Department 

of Treasury from 2001 to 2005. I will testify today about the simplification proposals for retirement savings accounts that we developed at the Office of Tax Policy and that were included in the Bush 

administration’s budget proposals for fiscal years 2004 and 2005. 

Please note that I am speaking today on my own behalf and not 

speaking on behalf of the firm or any firm client in my testimony. 

One of the reasons to simplify, the Code currently provides various incentives for individual retirement savings, for employerbased retirement savings, and for other savings objectives, such as 

the payment of medical expenses or educational expenses. All these 

savings vehicles have different eligibility requirements, and the 

amount of the tax benefits could change based on the individual’s 

income status or his or her participation in other savings programs. 

Employer-provided retirement savings vehicles present their own 

level of complexity. Under the Internal Revenue Code, there are a 

number of retirement savings vehicles that employers can adopt, 

including 401(k) plans, 403(b) plans, and 457(b) plans. Some rules 

vary depending on the type of plan, and there are limitations on 

the type of entity that can adopt certain types of plans. 

Multiple nondiscrimination rules add complexity to the administration of these plans. While nondiscrimination rules are a means 

of making sure that lower-paid employees share in the benefits provided under these savings plans, some commentators argue that 

the level of complexity is excessive in relation to the benefits that 

lower-paid employees receive. 

The Administration’s 2004 budget proposal outlined a simplified 

system of retirement savings, with only three types of tax-favored 

vehicles: Lifetime savings accounts, LSAs; retirement savings accounts, RSAs; and employer retirement savings accounts, ERSAs. 

Lifetime savings accounts. Individuals would be able to contribute $5,000 on an after-tax basis to an LSA. Amounts contributed would grow on a tax-free basis. There would be no income limitations on who could contribute to an LSA. Distributions from 

these accounts could be made at any time regardless of the individual’s age and could be used for any reason by the account owner. 

Those individuals with limited means to save might be more willing to contribute to an LSA because they could access the money 

saved in the LSA in the event of an emergency, which is different 

than making contributions to a retirement-based system. 

Our next was retirement savings accounts, RSAs. Individuals 

could contribute $5,000 on an after-tax basis to an RSA, with account earnings growing on a tax-free basis. Like the LSA, no income limits would apply to contributions to an RSA. Qualified distributions, i.e., those made after an individual attained age 58 or 


dkrause on DSKHT7XVN1PROD with HEARING
73 

in the event of death or disability, would be tax free. All other distributions would be considered nonqualified distributions and 

would be included in income to the extent that the distribution exceeds basis. 

Finally, employer retirement savings accounts, ERSAs, would be 

available to all employees regardless of the type of employee entity. 

ERSAs generally would follow the existing rules for 401(k) plans, 

including the 401(k) contribution limit, the catch-up contribution 

limit for employees age 50 and above, and the availability of Roth 

contributions. The nondiscrimination testing rules would be simplified and would be eliminated if lower-paid employees had high 

savings rates under the plan. Although these simplification efforts 

did not advance in Congress, our efforts to review and recommend 

comprehensive changes to the current retirement savings system 

was, I believe, worthwhile. 

Any effort to advance tax reform will likely include a review of 

retirement savings initiatives. If one goal of tax reform is to simplify the current system, I would recommend that the Committee 

examine the work of the Office of Tax Policy during the Bush administration. 

Thank you for this opportunity to address the Committee. I will 

be happy to answer any of your questions. 

Chairman CAMP. Thank you, Mr. Sweetnam. 

[The prepared statement of Mr. Sweetnam follows:] 


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dkrause on DSKHT7XVN1PROD with HEARING79935A.061

) 

Statement or 

William F. Sweetnam 

"rindpal, Groom Law Group, Cha rtered 

B('fotl' tile 

Committee on Ways and Mcan ~ 

United Slates House ofRcl)fcscnhll;"cS 

AI)riI1 7. 20 12 

) / Chairman Camp and Ranking Member Levin -- thank you for the opportunity 10 

Icslifym Ihis hearillg. I am a principal ill the Groom Law Group. a law tim1 located ill 

Washi.(glon, DC Ih31 foc llscs exclusively on employee benefits law. Prior 10 joining the 

Groom yl ~oup, I was the Benefits Tax Counsel in Office of Tax Policy at the U.S. 

Department of the. Treasury from 2001 \02005. J will testify today about the 

simplification proposals for retirement savings accounts we developed in the Office of 

Tax Policy and thm were included in the Bush Administration's budget proposals for 

Fiscal Year 2004 and 290,5. Please note thm I am speaking today on my Oll"n behalf and 

am not speaking on behal(.o f[he finn or any firm clients in my testimony. 

The Joint Committee~ Taxation estimates that tax expenditure for pension 

contributions and earnings is over 100 billion and over 5871>illion for traditiona l and 

Roth lRAs. I Rctirenu.""nt savings is th'f'largcst ta'( expendilUr~ after the ta'( exclusion for 

employcr provided hcalth care. 

While sonte critics suggest that the current system - and ta.'( expendilllre .. do 

not resuh in adequate retirement replacement ratG it is important to note that other 

studies sholl' that these plans can and do provide adequate retirement replacement 

income. particularly when taking into account the income foml Social Sct:urity. ~ 

Reasons for Simplifica tion 

The lmcnl3l RC\'enue Code currently provides vaJious savillgs inccntives for 

individual retirement savings, for employer-based retirement savings a1id for other 

savings objectives. such as the payment ofmcdical e.'(pcnses or educatiQ.n expenses. All 

these different savings vehicles have diffcrent eligibility requirements and tne.amount of 

the tax benefit could change based on the individual's income status or his or her 

participation in other sal'ings programs. 

Indh'idllal Retirement Sal'ings Vehicles. For individual retirement savings, thc chhlCc 

is whethcr to makc a pre-ta.'( contribution to a traditional individual retirement account 

(IRA). make an after-ta.'( contribution 10 a traditional IRA or makc an after-Ia.'( 

, ESlim31~ "fFe<lcml Tax Expendilures for Fi""al Years 2011_20t5 pre(WCd for !he I[oy"" Commiuee <.>II 

11.',)$ and Means and Ihe s.:n3l~ Comonil1e. on Finance bJ' Ihe S1aff M ille )oil11 Committee on Tax31ion. 

Janualv t 7. 2{J 12. , ['ell":). [kJdy. Can 401(~) l'lans ['m"ide AdeX[uale RClin"lllem Res,,"rc,s? f'lIblk Fi"(JI1« R~"i~w M:m:h 

201240: 177-206. 
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cOlllribulioll 10 a ROIh IRA. '11C type of cOlllribution an individual is eligible 10 makc 

and thc amount orthe contributions is dependent on Ihe individllal"s modified adjustcd 

gross income and whether the individual is covered by an cmployer-sponsored retirement 

plan. Thc following chans (Iaken from IRS publications and websitcs) will illustrate the 

difficulty in knowing whether an individual is eligible to contribute to Ihe various types 

oflRAs. 

2011 IRA Ooo<Iuc_ Limlta • EIf""i 01 MOdi! ....... GI on Ooo<Iucu .... If y"" ..... COY. red by a ~_nl PI ... 01 w_ 

I ,-='",·~··;;·~;;c -=::::i''""''"''''~-=--I I"" • I'llIIiaI dodLlClion 

I 

filing joInlly or quallrylng I 590.000 0< Ie .. 

~ .. ) I 

.-- mafri ... lillng ... "",.I.Jy :: 

2011 000<I..et1on Limit· EIf""1 ol _If ....... GI on 000<1""'" w_ 11 You Af' NOT (o •• red by I R.tl,..,.,.nl Pll fl II 

// 

I If YOUf Filing S .. 1<nI hi ... IA"" YOUfl~~_""'GI Then You C.n T. k • ... 

I II<>gIo. hod 01_. Dr qwolifyl<>g ~~ ,- , IuI-.::tion up 10 !hot_ 

_wt ... 1 V oi ywr 5OlIlI~iltWlslo 1m 

I mottled flilng JoIntfy or ... "" .... ry with • ~~ 

I}IJI deduc:tion up 1o!hot_fIt 

""""'" who hi nOl c:o.effICI by _ plan at_ el \'Qut ~!itIIi!iIl!l i!Ill 

51611.000 or less 1uI~~UPIO!IIe _ morMd filing joIrotIy _ • """"'" who I. elywr~iIl!l lUll, 

."._ by • plan at_ _ltIanSI611.ooobul I • partiaI-- ..... 1han$119.ooo 

5119.0000< mole I no~>t 

1 married Hllng 'ltJ>II'aIIOry _.""""", who hi _ _ SIO,OOO I .L*tiIoI~, c:o.effICI by _ plan at_ 510,0000< more nododLlClIon. 

1I\'<K1 f;Ie _oteIy _ did noI L<;e _ your """"'" at env _ durin; t"eyellf. your IRA _ion Is 

_~ under the "SIfIgWl- r.IIttg statui, ( ~. 

2 

• 
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2011 o.dl>CUon Um~ - EIftoc~ 01 Modllied .... GI on ROIl> IRA Contribution 

ThI. ,_ show. _ ... 1'0'" cotltrlbutlo<> '0 ~ RoUt IRA Is 1f«'MI b1 1M .",.,.,.., of 1'0'" modIl/MI Mlju.r.d 

gro •• I",,_ (modlll.,;/ AGI/ • 

If 1'0" "" . . .... bioi """"l*Iu lion .... "D you, modlflt<l .... GI 10 .. THE" .. 

ond 1'0'" filing . .. w. 100 •• • 

.... ttIan S~69.000 yW can contIIOuIe up!O 55.000 

ma ....... rIling j<>Inlly or ($6.000 yW". _.wor~ .. qu.olilylng~ .. ) .xpIained <>nder _ MI>Ch Can be 

/: C~. 

.. _ I $16S.000 but .... 1fIan ...... ,"""",,nl you can <OnIrit>uNo .. 

$119.000 ,-.. ".pIH>t<I...-

~" C~_,t<lootd. 

~ , $119.00001"""". yW~~to R""' IRA . 

Z«o(-O-) yW can contnOu\e up to 55.000 

mam.d filing "po"llly . .... (56.000 If yW ... _ 50 or oIdeIJ .. 

you liv.d wilh )'OU' ._ at . . pIaonerl ...- _ Much Con be 

ony limo duri"ll_ yeor C_. 

""""than a<o(-O-) but .... 1hon ...... """""" you can contrbJte .. $10.000 '.'h C~ 

........ __ xplli ..... """"'" . 

$10.oooor"""" yW canOOl COtItnbute to. Rom (RA. 

lett Ihon 5107.000 yW can <:Of1tribu1e up to 55.000 , Inglo. (56.000 If 1"01' ... _ 5Ooroldel) .. _01 __ . 

~=...u:- - MuchC8n be or m.rrit<I filing .o-porailly .nd 

)'OU did noIliv. "'"" you, . _.t 

.ny limo dY,I"II_ yo, 

"_5107.ooobullesolhon 

$122.000 ==;...,~ " Cc:ntribut"" limit ,~ 

$122.000or ....... yW ~ COtIt_lOor IRA. 

'/ 

• 

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Employe r-Sponsored Retirement Savings Vehicles. Employer·sponsored retirement 

savings vehicles present their own level of complexity. T he first Ie"el of complexity is 

the choice ofrctirement s.wings ,·ehicle. Under the Internal Revenue Code, there arc a 

number oft3.'(-favored, defined contriblllion retirement savings vehicles that employers 

can adopt. including the following types of plans: 40 I (k) plans. 403(b) pla ns. 457(b) 

plans. SIMI' LE 401(k) and IRAs. thrift plans, and salal)' reduction simplified employee 

(lCnsions (SARSE/,s). 

401(k) plum. !'rivme cmployers may establish 401(k) plans, which allow participants 

10 choose to take compensation in Ihe form of cash or a contribution to a defin~-d contribution 

plan (elective deferral). Annu.11 deferrals under a 401(10:.) plan may not exceed $17.000 in 

2012. Particip.mts aged 50 or over may make additional"catch-up" deferrals of up to $5,500. 

ElcClil'e d('felT3Js arc fully vested immediately. 

401(k) plans are snbjcrl to an actual deferral perccntagc (AD!') lest. which generally 

measures and compares highly compensated and non-highly cOnlpensak'<l cmployees' 

electlve-dcferral rates. ifbrec 401(k)-plan "safe_harbor" designs based on Ihe employer 

matching contribution provided arc deemed 10 satisfy Ihe AD!' test automalically. "Catchup" contrihutions are 1'101 subject 10 Ihe ADP test. 

SIMPLE 401(k) 1'/ill1s wid fRA ~ ..... Employers with 100 or fewcr cmployees and no 

other retirement plan may establish a SJ}1!'Lf 401 (k) plan or IRA. Deferrals by SIMPLE 

participants may nol exc~d $11.500 in 20012. SIMPLE participants aged 50 or over may 

make addilional "catch-up" dcfelT3ls of up 2.500. All comnbutions arc immcdiately fully 

vested. In lieu ofthc AD!' lest. SII\'Il'LE plans flrc subject to special contribulion 

tcquirements. including a lower annual ciective Icferrallimit aT.d either a mmching 

comribution not excceding J pcrcelll ofcompcnsation or_a non-eleClive contribution of2 

percenl of compensation (lI'ilh certain special rules for SIMPLE IRAs). 

Thrift pl'lIIs. Entployers may eSlablish thrift plans under wl\ich participants may 

choose to makc after-I:lx cash contributions. Such after-tax comriootiollS. along lI'ilh any 

malching contributions Ihat an employer ele<:IS to make, are subjcct ~ thc,.actual cQntribulion 

percentage (ACP) test (without the availabilil), of an ACl' safe harbor} . .Emp,?yee 

contnbulions under II Ihrift plan arc nQt subjeclto Ihe $17.000 limilthat app'lies to employee 

prc-ta~ dcferrals. 

ROlil-In!(l/melll of colllribllliom. ]' articipants in 401(k). 403(b) and goverrirnemal 

457(b) plans can clect Roth treatment for Iheir c01llriblllions - i.e .. comriblllions arc made' on 

an after-tax basis and distributions are excludible from income. Roth contributiolls must be 

accounted for in II separate account. There arc no required minimum distributions during an 

employcr's lifetime. 

SaI(liY reduction simplified employe/! }J<!I/sions (SARSEI's). Employces can ciCCI 

to have contribulions made 10 a SARSEP or \0 rct:eive the amOUIlI in cash. The amoulllthe 

employee elects 10 havc contributed to the SA RSEP is nOt cum'lltly iududib!c In income and 

is limited to the dollar limil applicahle to employee deferrals in II 401(k) plan. SARSEl's are 

available only for entployers who had 25 or fewer cligiblc cmployees at alltimcs during thc 

4 
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prior la.~abl<, year and are subjetllO a spetial nondiS(:riminalion lesl. The rules pennining 

SARSEl's were repealed in 1996. bUI employee deferral tonlribulions can slill be made to 

SARSEl's Ihal were eSlablished prior 10 Janua ry I. 1997. 

40J(b) plans. Seclion 501(c)(3) organil.:uions and public schools may establish lax· 

sheltered annuily plans, also called 403(b) plans. In g ... neralthesc plans arc subj~'Cl o similar 

but slightly diffcrent rules than 401 (k) plans. Benefits may be prov;d~'tI through Ihe purchase 

of annuities Of contributions to a custodial account investoo in mutual funds. Comribut;on 

limits (including catch-ups). deferral limits. and minimum dimibution niles arc generally the 

samc. for 401(k) plans. However. certain employ~-.:s with IS y ... ars of scrvice may def ... r 

additional amounts under a complicated three-part fonnula. Cerlain 403(b) plans are subjeci 

10 nOndiscO inalion niles. 

6o?"er1ll1ll:lllaI4j7(b) plans. State and local governments may establish Seelion 

457(b) plans. In general. thesc plans are subject to similar bUI different rules Ihan401(k) 

plans. Partieip.lnt oonlributions and plan earnings gencrally are tax-deferred until 

wilhdrawaL J>arlicip.ll\l eleclive contributions may nol neeed the lesser of 100 perccnt of 

compensation or 51 7.000 in 2012. However. parlicipanls may make additional contributions 

of up 10 Iwice Ihe standard amoUnt in the laSllhrec years before nomml retiremem age. 

Parlicip.lnls aged 50 or o\'er nlay make additional "catth-up" contributions of up 10 $5.500. 

NOIllIi.lcr;m;'mlioll RlileO nd Empl")'er·S{JQI~<on:" Plan<. Multiple 

nondiS(:riminalion rules add complexily to the administration ofthesc plans. The 

nondiscrimimtion rules are a means ofmaliing sure thai lower-paid employees share in the 

benefils providcd under relirement savings p(ans. However. eommentalOrs have noted Ihal 

the benefit accruing 10 lower-paid wor~ers due to the nondiscrimination rules neoos 10 be 

v .. eighed againsllhe cOSlto wor~ers who do nOI havc a"401(k) plan due to the 

nondiS(:riminalion rules. The Offiec of Tax Policy during the l1 ush administralion 

recognizcd Ihat complexity in Ihe administralion of establishing and administering a 401(k) 

plan is cited as a primary reason that small businesses were relUCIW1ttO establish savings 

plans. so we loo~ed 10 eliminatc requirements that were overl~~ealed or redundant. 

Congress has changoo the nondiscriminalion rules scvcral limes o'·cr lhe years. 

For example. SIMPLE 401 (k) plans, introdu<;oo in 1996 and available tQ,cmployers wilh 

fewer than 100 elnplo)'~'('s. have Icss administrative burdens and more flexible rules Ihan 

Siandard 401(k) plans. Congress has also provid~'tI "safe harbor" plan designs " 'ocreby iflhe 

employers Ihat provide cerlain le\'cls of Illniching or nonelective contributions ars decmed 10 

satisfy the nondiscrimination test. 

Administra tion's Sa\'ings Proposals. 

The Bush Administration's 2004 budgel proposal Ollilined a simplified sySlem 

o flax-t:wored savings with only Ihree types fla~-fil\'ore d savings vehides: Lifelime 

Savings Accounts (LSAs). Retirement Savings Accounts (RSAs). and Employer 

Relirement Savings Accounls (ERSAs). In Ihe following year's budget proposal. the 

Administralion proposed similar simplification measures - modified to reflecl comments 

we received from retirement policy experls. 

, 
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Lifetime Savings Accounts. Individuals would be able to contribute $5000 on an aftertax basis \0 an LSA. Amoumseomributed would grow on a lax-free basis. There would 

be no income limitations on who could contribute to an LSA. 

Distributions from Ihese aeeOlJnIS could be made al an)' lime regardless oflhe 

individual's age and could be used for an)' reason b)' Ihe aeeounl holder. Survey data has 

shown that younger and lower-income households are less likely 10 eile relirement as Ihe 

"'primary reason tl13tthey save. Every three years. the Fedeml Reserve Board conducts the 

lS,urvey of Consumer Finance (SCFl. which asks households detailed questions aboul 

their balance sheets and incomes. The survey also asks households what they consider 

thcirl"most,.impon3m reason for saving, According to the most recem SCI' data (2007). 

37 perlenf of households headed by an individual aged 21 to 64 reponed that the most 

imponalll reaSon for savings was for retiremen\. Another 29 percelll of households 

reponed Ihe), were primarily saving for "liquidity" or prc<:autionary savings to guard 

againslunexpected cFumstances. The nexl most common reasons for savings were 

education. home purchases and future purchases. Based on Ihis data. we believed Ihat 

individuals wilh limited me'ans 10 save would be more willing 10 eontribule to an LSA 

bccaase they would be comfortable Ihat the money saved in Ihe LSA could be used in Ihe 

evelll of an emergency. 

Retirement Savings Accoun ts. Indivjdnals also could conlribute $5.000 (or earnings 

includible in gross income. if less) on an after-lax basis to an RSA. with account earnings 

growing on a lax-free basis. Like Ihe USA. no income limil~ would apply to 

comributions to an RSA. Qualifk'd distribuflons - i.e .. any dislributions made after an 

individual al!aincd age 58 or in thc evenl ofd6th or disability .. would be tax free. All 

other distributions would be considered non-qualified dislributions and would be 

included in income to the exlent that the distribution exceeds basis and would be subject 

10 a 10 pereent additionalla'l:. 

Transition Issues ... ith LSAs and RSAs. While simplific:tI Kln was the goal. movillg 

from the current tax regime 10 another raised transition issues. For example. existing 

ROlh IRA~ would be renamed RSAs and subjecled 10 Ihe nell' RSv u1c . whercas 

cxisting IraditionallRAs would be convened into RSAs with the con.: rsil}n amount 

includible in income - much like the conversion rules when Roth IRAs were enacted. 

The income recognized by these conversions could be spread over a 4-year period. 

Medical Savings Accounts. Archer MSAs. Coverdell EducalKln Saving Accounts. and 

Qualified Sime Tuilion Plans also could be converted to an LSA. 

Modification or the LSA and RSA Proposal. After the Bush Administmlion's proposal 

was firsl released in the Fiscnl Year 2004 budgel proposal. Ih: Office of Tax Policy meet? 

wilh many imereSled panics. some of whom poimed olltthm the proposals could result in 

fewcr savings opponullities available for employees who wOIked in small businesses. 

Some groups uotcd that the s.'wings oppol1unities availablc throUgillilc tSA and RSA 

mighl result in small business owners deciding Ihallheir relirement sal'ings needs were 

adequatel), addrcssed Ihrough Ihe LSA and RSA and opting nOI to offer cmployees an 

employer-based savings vehicle. Changes were made in the Fiseal Year 2005 budget 

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proposal to address those cOllcems and help ensuTC that simplification did not 10 result in 

fewer savings opportunities. 

Employe r Retireme nt Savings Accounts. ERSAs would be availablc for all 

employees regardless of the type of employing entity. ERSAs genemlly would follow the 

existing rulcs for ~401(k) plans. including the 401 (k) COlliribution limit! the catch-up 

~ol11ribUlion limit for employees age 50 and above and the availability of Roth-type 

contributions. 

'" . , 

/ The nondiscrimination testing rules would be simplified. Under the proposal. 

the average ~ontribution percentage of highly compensated employees could not ex~eed 

200 pe t"lJl of the non-highly compensated employees' average contribution perecntage. 

However. iftlie non-highly compensated employees avemge contribution pereelllage 

exceeded 6 perrenl. the plan would be considered to be clTeetivcly providing savings 

opportunities'for the non-highly compensated employees and. like the currcmlaw safe 

harbor plan designs no further nondiscrimination testing would be required. Like current 

law. the proposal would pr'l.vide for design-based safe harbors based on the amount of 

employer matching contributions. Finally. as under currellt law. there would be differellt 

nondiscrimination testing rules for state and local govemmenlS and certain ta.~-e ~cll1pt 

organi~..ations and the proposal did not anempt to change those requirements . 

... Even though these simplification e!Torts did not adV31\Ce in Congress--

although it is worthwhile noting th:n Rep. Sam1 ohnson (R_31d TX) did introduce 

legislation regarding the LSAs -- the e!Tort to TC\1kw-and reeommend comprehensive 

changes to the current savings system was. t believe. worthwhile. Any effon to advance 

tax refonn wil! likely include a rev1cw of thc retirem(.'f\t sav,gs incentives. If one goal 

of tax reform is to simplify the currcnt system. I would recommend that the Committee 

examine the work Oflhe Office of Tax Policy during the llusll administration. 

Thank you for this opportunity \0 address the Committ ee. I will be happy \0 

answer any questions the Commillee may have. 

) suppon amoog Amcriean llouscholds for mainlaining tUffi'm coolrii>ulion limilS is sub!<1amial. s....,. for 

example. Am,",;""'.' C'>m",/In..-"I to Rnircm"/It ."",",,';1,.· bn',·llO,. Att"I,,, .... ,md Actl,,,, •• January 2012. a 

rcpon by The lnH'Slmcnl Coml"",ylnSli!ulc. shfming among OIhcr !hing;. lh~1 83 """,enl ofhOlls.:h"lds 

sU"'eyed do "'" Wam Ihc eoolribulioo limi!, lowc ..... d. 

7 
81 

Chairman CAMP. Mr. John, you are recognized for 5 minutes. 

STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW 

IN RETIREMENT SECURITY AND FINANCIAL INSTITUTIONS, 

THE HERITAGE FOUNDATION, WASHINGTON, D.C. 

Mr. JOHN. Thank you. Chairman Camp and Ranking Member 

Levin, I appreciate the opportunity to testify before you this morning on ways to ensure that all Americans have the opportunity to 

save for retirement. I am David John, a senior research fellow at 

The Heritage Foundation and also the deputy director of the Retirement Security Project. 

This is an issue that transcends ideological and partisan differences. For those who have access to a payroll deduction retirement savings account, the current system works fairly well. However, millions of Americans still lack that ability. In theory they 

can save in an IRA, but as Jack and Judy have shown, only a maximum of about 5 percent actually do so on a regular basis. Many 

of these workers who lack the ability to save through payroll deduction are part-time employees of smaller businesses, women, 

members of minority groups, younger workers, or all four. 

Social Security, even if it was fully funded, only provides about 

half the retirement income needs of an average-income worker. Either we can ensure that everyone has the ability to save to provide 

for themselves in retirement, or a Congress in the near future will 

face demands for additional taxpayer-paid benefits. Those demands 

will be very hard to resist. 

Ensuring that all Americans have the opportunity to save will require some hard decisions. The proposal developed by Mark Iwry, 

who was then at Brookings, and I for automatic IRAs would provide a relatively simple, cost-effective way to increase retirement 

security for millions of Americans. The automatic IRA would enable these Americans to save for retirement by allowing them to 

regularly contribute amounts from their own paychecks to an IRA. 

The plan is simple for both employers and employees. Employees 

would be automatically enrolled into their employer’s automatic 

IRA. Automatic enrollment is a process that has proven to build 

participation, which employees like, and under which employees 

have complete control ultimately of their own retirement savings 

decisions. 

To avoid confusion and to keep costs low, all automatic IRAs 

would offer three, and only three, investment choices. For employers, the plan is also very simple. They would be asked to do the 

same thing they now do, to withhold income and other taxes from 

an employee’s paycheck, except that the money would go into an 

IRA instead of to the Treasury. Employer contributions would neither be required nor permitted. Employers would not be required 

to comply with ERISA rules or other types of regulations that 

apply to 401(k)s or a variety of other things. These simplifications 

eliminate almost all the costs associated with an automatic IRA, 

but the plan also includes a tax credit designed to cover any remaining start-up and administrative costs. 

While the automatic IRA is especially valuable for new savers, 

it would be equally valuable for older savers who change jobs from 

a company that offers a 401(k) plan to a smaller company that curVerDate Mar 15 2010 10:29 Apr 02, 2013 Jkt 079935 PO 00000 Frm 00085 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\79935\79935.XXX 79935

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rently has no type of retirement savings plan. Right now these 

workers stand to have gaps, which cripple their ability to build retirement security. However, under the automatic IRA, they could 

roll their 401(k)-type accounts into the automatic IRA and continue 

savings. That would also work if they went to a larger company. 

This is not a partisan or an ideological proposal. The concept has 

been endorsed by a number of varied publications, such as National Review and the New York Times. It has been endorsed by 

significant conservative and liberal officials and other types of officials. 

Earlier this year Representative Richard Neal introduced 

H.R. 4049, the Automatic IRA Act of 2012. While The Heritage 

Foundation, as a 501(c)(3) nonprofit, does not and cannot endorse 

any legislation, let me say that the policy contained in his bill 

would significantly improve our retirement savings system. 

My written statement also discusses the value of simplifying the 

current confusing series of retirement savings accounts so that ordinary Americans and employers can better understand them. In 

addition, my statement discusses two modest proposals, first to use 

tax information to encourage taxpayers to consolidate their retirement accounts if they desire to do so, and second to include Social 

Security on an annual 401(k) or IRA statement so that the account 

owner has a complete picture of their expected total retirement income in time to make a change so that they could actually increase 

savings and improve their potential outcome. It also discusses the 

desirability of allowing multiple employers to share a retirement 

savings platform, and a thought or two about the tax treatment of 

retirement savings. I would be happy to discuss them at any point. 

Thank you for giving me this opportunity to testify. I look forward to your questions. 

Chairman CAMP. Thank you very much. 

[The prepared statement of Mr. John follows:] 


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114 !HIIS';ac/llm,'/ll' A .'ellue, N li • Washillgtoll DC 10001 - (101) 546-4400 -heritage.arg 

CONGRESSIONA L TESTIMON Y 

Pursuing Universal Retirement 

Security Through Automatic lRAS 

and Account Simplification 

Testimony before 

The Committee on Ways and Means 

United States House of Representatives 

April 17, 2012 

David C. John 

Senior Research Fellow 

The Heritage Foundation 
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I am David C. John. the Senior Researeh Fellow for Retirement Security and 

Financial Institutions at The Heritage Foundation. In addition. I am also the Deputy 

Dircrtor of the Retirement Security Projcct (RSP). The views I express in this testimony 

are my own, and should not be construed as representing any onicial position of The 

Heritage Foundation or RSP. 

Chainnan Camp and Ranking Member Levin, I appreciate the opportunity to 

testify before you on ways to increase retirement savillgs opportunities for all Americans. 

With the continued dcclinc in the number of Americans covered by employer sponsored 

defined benefit plans, millions of individuals whose employers don't offer any way for 

them to sa\'e for retirement at work. and Social Security'S continued financial problems'. 

it is crucial that the Congress develops a common strategy to expand retirement savings 

in a manner that transcends ideological and partisan differences. 

In 2006, a bipanisan majority in Congress eliminated barriers to the use of 

automatic enrollment and similar automatic techniques in retirement savings plans with 

the result that millions more Americans arc both saving and building retirement security. 

The results have been stunningly good. With automatic features. enrollment in 40 I (k)-

type accounts has grown to average over 80 pereent of eligible employees. In addition. 

eve!)' major income. age. racial or ethnic, and gender has shown an increase in 

participation rates. 

However. the job is not complete. As I will discuss in a moment, there are still 

millions who do not have access to a payroll deduction retirement savings account, the 

best and most effective way to build a retirement nest egg. J[ is true that these workers 

could save in an I RA, but studies show that only about 5 pereent to at most 10 percent of 

those workers who have access only to a non'payroll dcduction IRA actually have such 

an account and make regular contributions to it. 

Mccting this challenge will require some hard dccisions. and the longer those 

decisions are delayed, the harder they will become. While Social Security provides a 

benefit that is sumcienl to meet the retirement income nccds of most lower income 

retirees. it only provides a fairly modest proportion of the retirement income needs of 

averagc and abovc a\'crage income retirees. Even if Social Security was fully funded and 

had all of the resources necessary 10 pay all ofils promised benefits, which it docs not. 

Ihose benefits would still provide only about half of what the average income retiree 

needs for a comfortable retirement. 

Most retirees will nccd some other means of additional retirement income. and 

given today's realities. thai means it will be either come from an expanded and improved 

retirement savings system or from additional government.provided benefits. In a future 

I For a discussion of Social Sccurity's financcs. sec ··Sociat Sccurity 20t I Trustccs Rcport Shows 

PCmlanCn! Deficils'· by David C. John. II~ritag~ I'oundalion Wcbm~mo 113256. May 16.2011 al: 

hll :ll w.hc a~g1rcscarc hl re port !il20 05 ·scc rj y·20 I t ·lruslccs·rt:I1Qn ·shows·pcrlnancmddkils. 
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where massive deficits will remain commonplace. it will be difficult to impossible for the 

govenuncntto provide additional retirement benefits. But. as it takes time for savings to 

accumulate to the point where they can finance a decent level of income. delay makes it 

much more likely that a future Congress will face a demand for additional government 

benefits. 

With the looming retirement security crisis facing our country. policy-makers 

from both parties are focused on ways to strengthen pensions and increase savings. 'Inc 

proposal developed by Mark Iwry. who was then at Brookings, and I for Automatic IRAs 

would provide a relatively simple, cost-effcctive way to increase retirement security for 

thc 75 million Americans working for employers (usually small businesses) that do not 

offer a retirement plan. Many of these workers are part-time employees of smaller 

busincsses, women, members of minority groups, or all three. lne Automatic IRA would 

enable these cmployees to save for retirement by allowing them to regularly transfer 

amounts from their paycheck to an IRA. 

This fact. a national saving rate that has bccn too low since the 19805. and the 

expectation that Social Security is unlikely to provide increased benefits, make 

inadequate retirement saving a major national problem, Research and experience both 

point to a simple and effective solution. the Automatic IRA. 

The Automatic IRA is certainly not the only step that should be taken to expand 

retirement savings for small business workers or others, but it would be a good start. In 

fact, both Mark lwry and I have long believed that employer-sponsored retirement plans 

induding 40 I(k)-type retirement savings accounts are the best way for individuals to 

build retirement security. Additionally. both The Heritage Foundation and the 

Retirement Security Project continue to advocate strongly for expanded participation in 

employer sponsored retirement savings accounts through automatic features in 40 I (k) 

and similar retirement savings plans and for several other initiatives designed to expand 

retirement security. especially for the moderate- and lower-income households that 

comprise a majority of the U.S. population. 

Making saving easier by making it automatic has bccn shown to be remarkably 

effective at boosting participation in 40 I (k) plans. but they are of no usc to the millions 

of US workers who are not offered a 401 (k) or any other type of employer-sponsored 

plan. We could and should extend the benefits of automatic saving to a far wider array of 

the population by combining several key elements of our current system: payroll deposit 

saving, automatic enrollment. low-cost, diversified default investments, and IRAs. 

The Automatic I RA offers most employees who are not covered by any foon of 

employer-sponsored retirement plan the opportunity to save through the powerful 

mechanism of regular payroll deposits that continue automatically. The employer's 

administrative functions are minimal and under our proposal should involve no out of 

pocket cost for thc employer. In addition, the arrangemcnt is market-orientcd and 

realistic: it uses a well established and familiar vehicle. [RAs. provided by the same 

banks. mutual funds. insurance carriers, brokerage finns. credit uniolls. and other private 

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financial institutions that have provided them for decades. As a fallback. if individuals or 

employers could not find an acceptable Automatic IRA on the market. they would be able 

to use ready-made. low-cost automatic I RA accounts provided by a consortium or pool of 

private-sector financial institutions. 

Automatic enrollment is a key part of the Automatic IRA because it especially 

helps those groups who are most likely to undersave: women, minorities, younger 

workers, and low- to moderate-income workers. Experiencc shows that these groups 

move from very low participation rates that range in percentages from the mid-teens to 

the mid-twe11lics to participation rates that reach the mid-eighties. This is equal to those 

of all workers. Overall. 401 (k) participation nlles under automatic enrollment increase 

participation rates from roughly two-thirds of eligible workers to the mid-SO peree11l 

level. A key improvement is that individuals start to save earlier than they would have 

otherwise. which opens the door to their accumulating much higher amounts by the time 

they are eligible to retire. 

While many focus on the value of the Automatic IRA to new savers. it would be 

equal1y valuable to older workers who ehange jobs from a eompany that olTers a 401 (k) 

plan into a smaller company that currently has no type of retirement savings plan. These 

workers tend to now have savings gaps, which can cripple their ability to build retirement 

security. However, under the Automatic IRA, those workers could combine his or her 

old 40 I (k)-type accounts into an Automatic IRA and to continue saving. Data shows that 

most workers change jobs as many as 10 times during a career, and without the ability to 

continuously save throughout their careers using payroll deduction. many Americans will 

have less than they need for a comfortable retircme11l. 

This is not a partisan or ideological proposal. In 2008, the Automatic IRA won 

the endorsement of both the Obama and McCain campaigns. and it has continued to 

enjoy support from all sides of the ideological spectrum. Earlier this year. Rep. Richard 

Neal of the commillee introduced HR 4049, the Automatic IRA Act of2012. While the 

Heritage Foundation as a 501 (C)3 nonprofit docs not and can not endorse any legislation. 

let me say that the policy contained in his bill would significantly improve our retirement 

savings system. In the Senate, a similar bill was introduced last September by Sen. JeIT 

Bingaman as S. 1557. Previous versions wcre either sponsored or co-sponsored by 

former Rep. Phil English (R-I'A) and fomler Sen. Gordon Smith (R-OR), and thc concept 

has been endorse by such varied publications as the Nationalloumal and the New York 

Times. It has also been endorse by significant conservative and liberal officials and 

former officials. 

While my testimony will focus on the Automatic IRA. a second part will discuss 

simplifying the current confusing series of retirement account types and tax treatments so 

that both ordinary Americans and employers can better understand their savings options. 

Rather than the current system of multiple account-types named after sections of the tax 

code. past legislators and others, there could be a couple of simple savings options 

available to all. and structured so that they can be combined and rolled over from onc 

employment situation 10 another as the saver progresses through his or her career. 

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Finally, 1 will end wilh IWO modesl proposals 10 usc lax informalion 10 encourage 

laxpayers 10 consolidate their retirement accounts if they desire 10, and to itlc1ude Social 

Security information on an annual 401 (k) or I RA statement so thatlhe account owner has 

information aboUltheir expected total retirement income, the need 10 enable multiple 

employers to share a relirement savings platform, and a thought aboUithe tax treatment 

of retirement savings. 

The Automatic IRA 

The Aulomatic IRA is inlended 10 help households overcome the barriers to 

saving by building on the success 40 I (k) plans with automatic features. Ooth automatic 

enrollment and automatic escalation encourage employees toward sensible decisions 

whi le still giving them complete control over their retirement savings choices. The 

Automalic IRA features direct payroll deposits into a 10w-oCast, bUI simple IRA structure 

that offers diversified inveslments. Employers above a cenain size (e.g., 10 employees) 

Ihal have been in business for at least two years but do not sponsor a 401 (k) plan or any 

other retirement plan lor their employees would be asked to facilitate their employees 

saving - without the need to sponsor a formal ERISA-regulated plan, without making 

employer matching contributions, and without complying with plan qualification or 

fiduciary standards. They would simply act as a conduit, remitting a portion of their 

employees' pay 10 an Automatic IRA, preferably by direct deposit. 

The AUlomatic IRA is also dcsigncd to address the concerns of financial providers 

that have found it less profitable to serve groups of people with a small average account 

balances. The proposal would provide an oplional R-Bond arrangement Ihal uses a 

Treasury bond account to enable new and small savcrs to build a nest egg large enough to 

interest privale sector providers, and a private sector backstop arrangement that enables 

any employer unable to find a local financial institution interested in offering them an 

Automatic IRA to use one of a series of private sector providers who have agreed to 

accept any business in any location. 

The Automatic IRA Is Simple ror Employers 

The Automatic IRA would not impose a burden upon employers. They need do 

lillie more than they do now with the income and payroll taxes Ihey deduct from an 

cmployec's paycheck and send to the IRS. In this case, employers will deduc t some of 

the employees' own money and send it to the private sector funds manager that 

administers thc employcr's Automatic IRA. Thc cmploycr would select that private 

sector manager from an online list located at a central website, and if the employer does 

nOI wish 10 choose a providcr, thai company would be assigned at random to a funds 

manager Ihat is willing to accept all comers. 

Because an IRA is personal savings, employers would not be requircd-oreven 

allowed- to match these savings in any way. Employers would also have no liability for 

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detennining if employccs arc eligible for the program or face the complexity of ERI SA 

and othcr regulations that govcrn a 40 I (I..) plan. 

lillie or No Cost to Employers 

Dirttt deposit to IRAs is not new. In the late I 990s, Congress, the IRS, and the 

Department of Labor all encouraged employers not ready or willing to sponsor a 

retiremc11l pl:m to at least olTer their employees the opportunity to contribute to IRAs 

through payroll deduction.! However. employers did not respond to this option. Very 

few employers have ever adopted direct deposit or payroll·deduction I RAs - at least in a 

way that actively encourages employees to take advantage of the arrangement. 

With this experience in mind, the Automatic IRA is an improved strtltegy 

designed to induce employers to olTer, and employccs to take up, dirttt deposit or payroll 

deposit saving. For employers. olTering an Automatic IRA would in\'olve little or no cost 

or regulatory burden. The cmployer would not be maintaining a retirement plan, and 

employer contributions would be neither required nor pennilled. Finns would lIot be 

required to 

(I) comply with plan qualification or ERISA rulcs. 

(2) establish or maintain a trust to hold assets, 

(3) detcnnine whether employees are actually eligible to contribute to an IRA or 

arc complying with the limits on contributions. 

(4) select investments for employee contributions, 

(5) select among IRA providers, or 

(6) set up IRAs for employees. 

These simplifications eliminate almost all of the costs associated with a 401(k)· 

type plan. As discussed below, any remaining cost of establishing and operating the 

Automatic IRA would be reimbursed through a tax credit. Employers would be required 

simply to allow employees to make a payroll.deduction deposit to lRAs. This dovetails 

with what employers are already required to do by way of with holding income and 

payroll taxes from employees' pay and remitting those amounts to the federal tax deposit 

system. Another factor in avoiding cost is the fact that virtually all employers who would 

be subject to the Automatic IRA already utilize either an outside payroll processor or use 

I In 'he C(lnkrenee Rep<ll1'(I'I>c Ta, Ref""" ,\<, of 1997. Congress ~,"1<d ,I"" "emplo)ers tM' rhOl>$« no' to SpO<I_ 

a retire men' pll1l <hould be: cnc""mged to.cl up a P't)"",11 deduction IIRAI <ystem '0 hdpcmplo)"e« o;a,'c ro< 

lC1iremcn, by m.kinl\ P'tyroll..deduetiQn con"it •. II""'1 '0 'hei, IRAs" and encouraged 'he St:<:retary of 'hc "'",.sury to 

"c,,",inur hi, tlT<>r1< to rubl;"iL. ,hc .vailabili,)" oT'hcst P'tyroll dcduct"'" IR,\." (II.R. Rep. No. 220. IO"h Coni .. 1st 

~,. 77511997]). IRS and l abor K"ida""" "'o. sh'en in IRS AnnouIKcmenl 99·2. "1'0)",11 Oed"Clion IRA,," and 

Dcpa""'ent orl."bor Intcrprcti.-e !lulletin 99·1 (lUll<' 18. 1999).29 C.I'.I!. 2S09.99.I(b). 

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payroll software. Companies that provide both types of payroll services indicate that the 

Automatic IRA would simply be another componem in services they already offer, 

Employer Tax Crcdit to CO\'cr Automatic IRA EXllcnscs 

The Automatic IRA has been designed after lengthy consultations with many 

small businesses, retirement savings providers, consumer groups, and government 

agencies to have very low costs for both employers and employees. We recognize that 

small businesses already hove p!cnty to deal with just to stay in business, As a result, 

after discussions with many small businesses, designed a tax credit to cover the 

remaining sma!] costs, if any, of establishing and operating the Automatic IRA. 

Unlike some other government-required programs, the Automatic IRA is not an 

unfunded mandate, and it would be a serious mistake to consider it as such. Unlike 

health care mandates and similor programs, employers under the Automatic IRA ore 

essentially being hired to provide a service that will benefit them as employers. A 

detailed survey of employers and employees who would come under the Automatic IRA 

showed that even if eve,)' other firm also offered the AUlomotic IRA. the foct that their 

employer does so would increase employees' loyalty to the employer. This can be a great 

help in allT:lcting qualified employees and retaining them. Further, the same survey 

showed that the more an employer heard about the Automatic IRA, the more they liked 

the program and were willing to support it. Many employers want to provide retirement 

benefits to their employees. but they are simply too busy with keeping the doors open to 

be able to take any action. are confused by the complexity of401(k)-type plans. and arc 

worried about the cost. The Automatic IRA deals with all of these concerns. 

Businesses and others should also take very seriously the consequences of taking 

no action. As I mentioned earlier. retirement savings take time to build to an amOlmtthat 

can provide a significant amount of income. and mi11ions of Americans currently have no 

way 10 save at work, and don't do so on their own. Failure to improve this situation will 

lead to demands for additional government-provided benefits either through Social 

Security or another new program. Those benefits would almost certainly be financed in 

whole or in part through higher taxes on businesses. Another equally disturbing approach 

would be a govenuncnt managed contributory system that would eventually crowd out 

the private system that provides jobs, tax revenues to all levels of government. and is so 

innovative that it constantly improves its services at lower costs to employers and 

employees. 

The Automatic IRA would provide a temporary tax credit designed to cover 

reasonable costs of establishing Automatic lRAs. As described in H R 4049. the tax credit 

would be in two parts, both of which the finn would receive. The first would be 

available to a firm for the first two years in which it offered Automatic IRAs and would 

provide $500 the first year and $250 for the second year to cover any reasonable startup 

costs. In addition. the finn would receive $25 per employee for up to 10 employees (a 

maximum of $250) for six years to cover the costs of adding employees to the system or 

reilloving them if they leave. After six years experience. Congress could re-exailline the 

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tax credit and continue or adjust it as needed. This tax credit structure would be 

designed to avoid competing with the tax credit available under current law to small 

businesses that adopt a new employer-sponsored retirement plan. Also. it would be 

available both 10 those employers required to offer the accounts and to very small or new 

finns that are not required to offer the Automatic IRA, but do so voluntarily. 

Increase IheTa ~ Credit for Employers thai Adopt a New Employer-Sponsored 

Retirement I'lan 

Under currcntlaw, an employer with 100 or fewer employees that starts a new 

retirement plan for th(' first time can generally claim a tax credit for startup costs. The 

credit equals 50 percent of the cost of establishing and administering the plan (including 

educating employees about the plan) up to $500 per employer per year for three years. To 

maintain employer in('entlves to adopt an employer plan. this tax credit should be 

increased to at least $1.000. and preferably $1,500. Employers could not claim both the 

new plan startup credit and the proposed Automatic I RA credit. 

Simple and Low Cost for Employees 

An employee does not need an MBA to understand and participate in an 

Automatic IRA. As discussed below, most employees will be automatically enrolled into 

their employer's Automatic IRA, a process that is proven to build participation, which 

employees like. and under which employees have complete comrol over their savings 

decisions. To avoid confusion and to keep costs low, all Automatic IRAs will offer three 

and only three investment choices. 

For most employccs, their money would go into a target date fund that provides a 

diversiJied mixture of investments that gradually change as the employee get closer to 

retirement. This is the same default investment choice for 40 I (k) plans. However, the 

financial markets are constantly innovating, and when a better or lower cost investment 

choice comes along, the regulators will have the ability to substitute it for the target dale 

funds. 

A second fund choice would be directed at new and small savers. Depending on 

the wishes of the employer and/or provider. it would be either a stable value fund or an 

R-Bond account within the Treasury Department. An R-Bond account would be invested 

in Treasury securities and would be expected to pay about the same rate as a 5.year TBond. It would not have any maturity as it would be an account instead of a specific 

security, and would be a temporary way for small savers to build up a high enough 

balance to interest many private funds managers. When the account reached $5,000, it 

would either be automatically rol1ed over into the employer's choice of private funds 

manager or rolled over at the request of the account owner. 

The third choice could be either a balanced fund or a slightly more aggressive 

target date fund. [\ would only be available at the request of the saver. And of course, 

Ihe employer also has the option to allow their employees to make payroll deductions into 

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an account they already have. Finally. if an employer docs not allow this. the employee 

always has the option to roll his or her Automatic IRA into a private IRA at an institution 

of their choice invested whatever they choose. However. if the employee chooses an 

account that is outside the Automatic IRA structure of their employer. he or she would be 

responsible to make additional contributions on their own. 

Direct Deposit a nd Automatic Fund Transfe rs 

The Automatic IRA would capitalize on automated or electronic fund transfers. 

Many employers retain an outside service provider to manage payroll. including 

withholding, federal tax deposits. and direct deposit of payched.s to accounts designated 

by cmployees or contractors. For the numerous firms that already offer their workers 

direct deposit. direct deposit to an Automatic I RA would entail no additional cost, even in 

the short term. As mentioned earlier. virtually every employer that still processes their 

payroll by hand would come under the exception for very small employers. As a result. 

the proposal focuses chiefly on those employers that already use electronic payroll but 

have not used the same technology to provide employees a convenient retirement saving 

opportunity. The tax credit should cover the cost of providing this service to their 

employees. 

Employees Con ' red 

Employees eligible for the Automatic IRA would include those who have worked 

for the employer on a regular basis (including part-time) for a specified period of time 

and whose employment there is expected to continue. Employers would not be required 

to offer Automatic IRAs to employees who are already covered by a retirement plan or 

are excludable from coverage (such as recently-hired employees. those who work less 

than 1.000 hours a year. union.represented employees or nonresident aliens without US 

source income) under the qualified plan rules. Accordingly. the proposal is not intended 

to apply to employers that olTer 401 (k). SIMPLE, pension or other qualified retirement 

plans to their employees.) 

Portability of Sa\'ings through Choice of Roth or Traditiona l IRA 

Li ke a 40 I (k) contribution. the amount elected by the employee as a salary 

reduction contribation would go to either a Roth IRA. which receives tax-favored 

treatment upon distribution, or to a traditionaL tax--deductible I RA. To spare households 

the need to undertake the comparative analysis of Roth versus traditional IRA. after 

examining the income levels of the target population. Automatic IRAs would be Roth 

IRAs unless the saver chooses to have a traditional I RA at the time of enrollment, an 

option that he or she would have. In cithercasc. the usc oflRAs as a savings vehicle 

maximizes the portability ofthosc savings. lRAs generally continue in existence without 

'·,.he onl}' ~~""plion """Id be an .mpk>)"~' ,h., SpOIlsorW. reliremenl pt.n bUI cxd"d«l . major po"ion ofils 

worHorcc _ for e,ampic. c_,cluding an cn,ire di, iSOon or subsidia,y IMI is "'" "n'''''''''pre$<OI«l or foreign _ in "h",h 

cose Ihc cmpK>y<:, would be ""iuired 10 orr", p.» 'roll d'posil "'·'ns 10 Iii<: rest of In. workforc •. 

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regard to changes in the owner's employment status and, in general. are freely 

transferable by rollover to othcr IRAs or qualilicd plans. 

Expanding Saving through Automatic Features 

Today. individuals who want to save in an IRA must make a variety of decisions 

that they may not feel they are ready to make in order to open an account. In addition, 

they must overcome a natural tendency to delay making important decisions until they 

have "cnough infonnation" to make a decision. a time that almost always never arrives. 

At least five key questions arc involved: 

whether to participate at all; 

which financial institution to use to open an IRA (or. If they have an IRA already, 

whether to use it or open a new one); 

whether the IRA should be a traditional or Roth IRA; 

how much to contribute to the IRA; and 

how to invest the IRA. 

These obstacles can be overx:ome by making participation easier and more automatic. 

Under automatic enrollment, an employee would be enrolled in an account, contribute a 

set percentagc of income into it, and have that money investcd in a safe, diversified 

investment at a reputable financial services provider. However, the employee would also 

have the ability to have complete control over all of those decisions. 

Further. employees like aUlomatic enrollment. An October 2009 survey by 

Prudential Insurance found that 74 perx:en[ of American workers would rather be 

automatically enrolled into a 401 (k) plan than usc the traditional method; while 65 

pef(;ent support automatic contribution escalation. 

Even more telling. a 2007 study by Retirement Made Simpler -- a coalition 

including AA RI'. the Financial Industry Regulatory Authority (FINRA). and the 

Retirement Security Project (RSP) - shows that workers who have been automatically 

enrolled strongly support the mechanism and start saving before they would have 

otherwise. According to the study, 97 percent of workers who had been automatically 

enrolled and remained in the plan were satisfied with the procedure. while 90 percent of 

those who had been automatically enrolled and then opted out due to individual 

circumstances felt the same way. Eighty-five percent of those participating in the 401 (k) 

plan said that they had started to save for retirement earlier than they had otherwise 

planned. while 95 percent felt that automatic enrollment made saving for retirement easy. 

Finally, 98 percent of those who were automatically enrolled and remained in the plan 

were glad their company olTered automatic enrollment, as were 79 percent of those who 

had opted out. This last number is key. as it shows that even if workers decided that their 

specific circumstances did not allow them to remain in the eompany's 40 I (k) plan, they 

still valued automatic enrollment. 

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This docs not mean that automatic features are perfC(;1. A continuing conccrn that 

Congress nccds to address is whcthcr thc current automatic choicc for the amount ofthc 

initial contribution is too low. Currently. that is set at three percent of income. and while 

employers have the ability to set a higher rate. most usc the three percent level. Unless 

this low level is paired with automillic escalillion, a procedure where the percentage 

climbs usually when the employee's salary goes up, employces may find that thcy still 

have insumcient savings when they retire. Evidence suggests that employees see the 

initial contribution level as the one recommended by the employer, and many fail to 

increase il. Furthcr, thcre are indications that lowcr income cmployees are more likely to 

stick with the initial levels than those with higher incomes. For this reason, Congress 

should consider increasing the initial contribution level. Several studies suggestthlll if 

the three percent is increased to five percent or more, the participation rates will rcmain 

nearly the same as they are loday. 

Th<' Automatic IRA Us<'s Automatic Enrollm<'nt or an Ex plicit "Up or Down" 

Employ<,<, Elect ion 

As shown earlier. automatic enrollment (more often applied to newly hired 

employees but now increasingly applied to both new hires and othcr employees) has 

produced dramatic increases in 401 (k) participation among all income and othcr 

employee groups. In view of the basic similarities between employee payroll-deduction 

saving in a 401(k) and under the Automatic IRA. the law should, at a minimum, pennit 

employers to automatically enroll employees into Automatic IRAs. 

However. simply allowing employers to use automatic enrollment with Automatic 

IRAs may nOI be enough. Requiring employers to use automatic enrollment in 

conjunction with the Automatic IRA would almost certainly increase participation 

dramatically while preserving employee choice and control ovcr all saving decisions. 

However, in some situations. such as small business owners who work with all of their 

employees closely each day, the employer might regard automatic enrollment as 

unnC(;essary or a potential disruption of the existing relationship between employer and 

employee. 

Accordingly, while automatic enrollment would be the presumptive or standard 

enrollment mcthod, employers could Opt out of it in favor of an altcrnative approach. 

which is in em .. -c\ a variation on automatic enrollment. The alternative requires all 

eligible employees to submit a form where they explicitly either accept or decline 

participation in an Automatic IRA. Requiring an "up or down~ elcction picks up many 

who would otherwise fail to participate because they do not complete and return the 

enrollment form due to procrastination, inertia, inability to decide on in\'estments or level 

of contribution, and the like.4 Any employee who fails to comply with the elC(;tion 

requirement is automatically enrolled. In either case, to maximize par1icipation, 

• Jamb Cho;. t)a"id I.. ibson. I)ri, il'. Mad,ia". and I\II<lre\\" ~kl'i<k. "Optimat 1'Je!Oulls and 1\<lh·. I'!e<:i,iolls. • NRER 

\\'(lrking rape' No. 11 074 (Jall"3r)l2005), 

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employers would receive a standard enrollment module renecting current best prnctices 

in enrollmem procedures.s 

Complia nce 

Whether using automatic enrollment or explicit "up or down" elections from 

employees. employers would be required to obtain a written (including electronic) 

election from each nonparticipating employee. That way. no one would be left out by 

reason of inertia. Employers using automatic enrollment would usc a notice that also 

informs employees of that fe3turc (including the automatic contribution level and 

in\'estment and the procedure for opting out). and the employer's records would need to 

show that employees who failed to submit an election were in fact participating. 

Employers would be required to certify annually to the IRS that they were in compliance 

with the payroll deposit saving requirements. 

The Importance of Protecting Employer Pla ns 

The Automatic IRA is designed carefully to avoid competing with or crowding 

out employer plans. Probably the most important protection for employer plans is the use 

oflRAs. which have maximum permitted contribution levels of$5.0oo with an additional 

$1,000 if the contributor is age SO or older. This is sufficient to meet the demand for 

saving by millions of households but not high enough to satisfy the appetite for taxfa\'ored saving ofbusincss owners or decision-makers. who can contribute up to $1 7.000 

ofthcir own salary to a 401(k) (or $22,500 ifagc 50 or older) plus matching or nonmatching employer contributions that can bring the total annual 401 (k) contributions on 

their behalf to $50.000 a year. In addition, by design, the employer tax credit for 

providing access to Automatic I RAs is significantly less than the proposed increases to 

the small employer tax credit for sponsoring a new 401 (k), SIM PLE or other retirement 

plan. 

In fact, the Automatic IRA is designed to actually promote more employer plans. 

First, any employer that wants to match its employees' contributions must adopt a 

qualified plan or SIMPLE. To preserve that incentive, the Automatic IRA is structured 

around the I RA, a retirement savings option that docs not allow employer contributions. 

Second. e)(pcrience with the Automatic IRA will give most employers of all sizes 

sufficient e)(pcrience with payroll deduction retirement savings that they will be open to 

considering moving up to 401 (k)s, SIMPLEs and other ta)(-favored employer plans. 

Because these plans can now be purehased at very low cost, it would seem natural for 

many small businesses -especially those whose owner would like to save more or to 

match employees' saving - to graduate from payroll deduction saving and complete the 

journey to a qualified plan. 

' A "31i"",,1 w<~itc Muld provide (,mlS Ihe.., '13n<!ard <nrollmen, an<! oI""lion r""" .. as w<ll as pro. ide an 

opportunily to promolc empk»''''' educal"," and besl pra<lic", .. the)" e,·o" ·e. such a. aUIO<1\.lic enrollmenl and 

polen'i,II)". lifetime gu.rantced inMme. 

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Encouraging Contributions by the St ir-Employed a nd Independent Contractors 

For the self-employed and others who have no employer, regular contributions to 

Automatic IRAs would be encouraged in three principal ways: 

Expanding access to automatic debit affilngements, including through 

professional and trade associations that could help affilnge for automatic debits 

into an Automatic IRA. Automatic debit essentially replicates the power of 

payroll deduction insofar as it continues automatically once the individual has 

chosen to initiate il. 

Extending the Automatic IRA to many independent contractors through direct 

deposit with linns from which they receive regular payments (without affccting 

the individual's status as an independent contractor); and 

Enabling taxpayers to direct the IRS to make direct dcposit of a portion of their 

income tax refunds to an Automatic IRA or other similar savings vehicle. This 

mechanism has existed for several years, but is under utili7.ed. 

Guaranteed Lifetime Income 

The Automatic IRA could also serve as a natural platfonn or proving ground for 

best practices in retirement savings, possibly including perhaps at some point in the 

future, an expanded use of lifetime guaranteed income. There is reason to believe that 

many households with savings but no lifetime income stream to supplement Social 

Security would be better ofT if they converted a portion of their savings to appropriately 

priced guaranteed lifetime income. 

Yet most consumers are reluctant to do so. One approuch would be to usc the 

same automatic strategy that has so successfully improved enrollment and sensible 

investment could also encourage more workers to obtuin the security of an annuity or 

other guurantecd lifetime income6. including perhups "longevity insurance" thut provides 

a deferred annuity beginning at age 80 or 85, for example. The unifonn default 

investment and the backstop Automatic IRA for any employees who cannot lind an 

appropriate IRA in the market may also lend themselves to ("xploring means of 

encouraging greater use oflow-cost guaranteed income in IRAs generally as wcll as in 

40 I (k) and other employer plans. 

In the interim. interim steps such as the draft regUlations proposed by the Treasury 

Department and Dcpurtment of Labor would be a good start at reducing the regUlatory 

impediments that discourage employers from ofTering annuity-like products as part of 

their plans. Further incremental steps should follow. and both Congress and the 

regulators should continue their eITorts to completely catalogue the remaining 

impediments faced by employers and employees and llndcrstand their efTecl. Among 

• As an ~xampte. sec "tlwrcasing Annuiti7;1tiQn Qf 401(k) Ptans with AutQmatk Tria! tn,Qmc" br William 

Gale. Mark I ..... ry. Da"id John and Lina Walker al: 

htlp)b'· ..... ":.brookin&<.cdulfl"pqsf2008/Q6 annuities galc.a'r ~ 

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other issues. innovation should be encouraged both in product otTerings and pricing with 

all industry or industry scgmcnt being givcn advantages over anOlhcr. 

Part U: Simplifying Retirement Savings Accounts 

About ten years ago. the Bush Administration proposed simplifying the several 

types of retirement savings accounts into two accounts: thc Rctirement Savings Account 

(RSA) and Employer Retirement Savings Accounts (ERSA). [n addition. the 2005 

Bipartisan Tax Reform l'ancl7 proposed a modified version of these ideas. These ideas 

arc worth revisiting although with changes from what they proposed. (Thc reforms also 

included the creation of a Lifetime Savings Accounts (LSAs), but those arc beyond the 

scope of this testimony.) 

Given thc widespread know[edgc ofthc IRA and public support for it, thcre is no 

compe[[ing reason to change it into an RSA. In addition. the proposed RSA would have 

had a higher $7.500 contribution limit, but as Congress has increased the IRA limit since 

the RSA was proposed and could do so again, that is not really a reason for such a 

rcfonn. 

On the other hand, the ERSA would be a good idea. The original proposal would 

have consolidated 40 l(k). thrift. 403(b). and governmental 457 plans as well as 

SARSEPs and S[MPLE IRAs into one simple account. which could be sponsored by any 

employer. The cxisting structure is confusing to employees, most employers. many tax 

professionals. and many financial services finns that don't speeializc in thc specific 

account in question. [n addition, because each account type has specifi c tax incentives 

and restrictions. it can be difficult to consolidate differing types of accounts. 

At thc time. three improvements to thc retirement savings system were expected 

from the ERSA. First. the expected covcrage and participation to increase because !inns 

that wcre not currently otTcring rctiremcnt plans because of the complexity and 

compliance costs were expected to be more likely to offer ERSAs. Second, they 

expected that more small businesses would otTer ERSAs because the redllction in red 

tape would make it easier and cheaper to do so. Finally, employees were expected to 

benefit from reduced compliance costs. 

To some extent. all three of their expectations remain realistic. After a transition. 

which could be handled by grandfathering existing accounts with the voluntary option to 

consolidate existing accounts of differing types into an ERSA. the new system should 

have much lower administrative costs. As providers focused on the new account type 

competition should put serious pressure on its administrative costs. 

In addition. the simplified structure should encourage more employers to otTer an 

ERSA to their employees or to upgrade their Automatic IRA to an ERSA. This would 

'The fin.1 ...:port Df lhe rrcsidenl' ~ Advisory I'anel on Fctlcrnl Tax rdoml is available aI; 

l1!!p:lfgo\"info.l·brary.um.cdulw.x...:fonnralle! 

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almost certainly includc greater covcragc by small busincsses. The ERSA would expand 

eovcrage, but would not eliminate the need for an Automatic IRA. In fact, the presence 

of the Automatic IRA would actually increase the number of smaller businesses that offer 

an ERSA as they would still have to oHcr the Autom3l1c IRA. and the difference between 

an ERSA and an Automatic IRA would be much smaller than under the current account 

structure. 

The simplified account structure would have many benelits, but it would be a 

mistake to completely eliminate the anti-discrimination tests. An ERSA that resulted in 

low to moderate income employees receiving a less favorable employer contribution than 

their beuer paid co-workers or were not encouraged to panicipate would be a serious 

mistake. Unless low to moderate income employees are able to build sufficient 

retirement savings, they will put increasing pressure on Congress for either higher Social 

Security benefits or some other fonn of government paid benefits. 

Pa rt III: Use Tax Information to Consolidate Retirement Accoun ts 

Today, millions of Americans have more than one retirement savings account. 

While some have additional accounts because of a conscious decision, most of them 

come from past jobs where the account owner failed to take the necessary actions to roll 

the money into accounts sponsored by their current employers or rolled them into [RAs 

that the owner has lost. Many ofthesc accounts are "orphaned·· because the current 

account administrator docs not have current information about the owner's address, and 

many of these are consumed by administrative fees, leaving nothing for the saver's 

retirement. 

This is not an inevitable side effect of the existing retirement savings system. 

Account owners can consolidate most types of retirement savings accounts, but many do 

not. Few know the procL>dure, and many lack the needed information, such as the current 

address or contact information of a former employer. MOTCOver, employers may go out of 

business. and fomleremp[oyees may not know who administers them or how to recover 

their accounts. These "orphaned'· accounts hun both employees and employers. Some 

employers send the accounts to custodians who try to troee the account owner. but 

custodians often impose annual fees that can consume the entire balance. Even when 

employers retain accounts and employees can find thcm, owncrs may pay more in fees 

than if their accounts were consolidated. 

One way to deal with this problem would be to use tax infonnation to help the 

account owner to identify what accounts they own. This change would help to make 

saving simpler and minimize the losses associated with lost or duplicate accounts. At the 

same time, some account holders may want more than one account, and Ihis proposal 

would allow them to continue to do so. 

If this rcfornl was adopted, when an individual files a 1040 or other tax form with 

a current address, the Intcrnal Revcnue Service (I RS) would cheek its rccords to scc 

whethcr thc individual's SSN is associated with morc than one tax-prcferred retircment 

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savings account. Infonnation from past employers is already available to the IRS. 

Rolling 401(k) balances into an IRA after an employee leaves triggers an annual IRA 

Fonn 5498 that lists fair market value plus any contributions or withdrawals. For money 

that remains in 40 I (k) accounts. the details of fonner employees arc found on Fonn 8955 

SSA in the year they leave the employer. Both fonns include infonnation on the accounts 

owners that could be used to provide the infonnation needed for such a cross-check. 

Once individuals with more than one tax-favored account have been indentified. 

they would receive a leuer detailing the number of accounts they own. the value of 

consolidating accounts, and the process they could use to consolidate. The leller would 

also include a method that would allow the account owner to access account numbers, 

names and addresses of custodians, and a copy of the fonn to use for consolidation. A 

taxpaycr who wishes to retain several accounts could notify the I RS perhaps through a 

simple chC(:k fonn or online that they do not wish to either consolidate accounts or to be 

reminded in the future. 

This measure would help to reduce the number of "orphaned" accounts and the 

cost they pose to employees and employers by creating a way to consolidate accounts that 

is efficient and reliable. 

Part IV; Combine Social Security and 401 (k) Statements 

Individuals must have beller infonnation in order to make appropriate dC(:isions 

about how much to save for retirement and to have realistic expectations as they approach 

retirement. All too often. retirement savers are blinded by the aggregate amount of their 

savings. and fail to understand how that figure translates into a monthly income stream. 

In addition. individuals need 10 have an accuratc idca about what level of Social Security 

benefits that they will receive and combine the two in order to have an idea of their full 

retirement resources. They also need this infonnation in time to change their potential 

future by increasing saving; waiting until retirement is close is too late. Fonunately. 

there are simple steps that can go a long way to providing this data. 

Currently, 40 I (k) and IRA statements infonn accounts owners of their balances at 

regular intervals. In the near future, the Depanment of Labor will implement standards 

that will require 40 I (k) statements to include the annuitized value of those balances on 

those statements at least annually. Until recently, the Social Security Administration 

(SSA) issued annual Social Security statements that showed panicipants an estimate of 

their benefit levels. However, the agency has suspended the statements for anyone under 

age 60 citing its cost. Combining the infonnation on retirement savings accounts - and in 

panicular the annuilized value of those savings - with that fonnerly provided by SSA 

would go a long way towards helping individuals 10 prepare for retirement. 

Retiremen! savings accoun! providers should be encouraged to add estimates of 

the account owner's fulure Social Security benefits using infonnation provided by SSA 

together with the annuilizcd value of retirement savings balances every year on either an 

annual statemelll in the case of I RAs or on one 401 (k) quarterly statcillent. Distribution of 

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the infonnation would be paid for by the 40 I(k) administrator. just as quarterly 

statements are now, but SSA could pay the cost of providing thc additional bencfit 

infonnation. This would both reduce the cost to SSA, but still ensure that the agency is 

meeting the requirements of legislation passed by Congress some time ago. 

Some 401 (k) providers already can and do simulate Social Security benefits and 

provide this information to account owners, but these providers lack the income and work 

history data to make a truly accurate projection. Collaboration between the Social 

Sccurity Administration and 401 (k) plan administrators would improve the accuracy of 

those providcrs that currently indude this infonnation and add the infonnationto the 

statements of those providers that do not. 

Two sets of concerns abom using Social Security infonnation would need to be 

addressed: concerns about privacy and concerns about accuracy. Previous discussions of 

Ihis proposal have failed because of privacy concerns, as many individuals do nOI want 

employers 10 have access to their Social Security inlOnnation. The privacy of account 

holders is a concern for 40 l(k) providers too, and they already go to great lengths to 

protect confidential data contained in the quarterly statements. To assuage concerns about 

the data from SSI\, Social Security data could be provided to 40 l(k) administrators and 

included on an annual 401 (k) statement only if the providers meet certain SSA-developcd 

privacy standards. Plus, individuals could have control over whether their Social Security 

infonnation is included either through the ability to opt in to the service or the 

opportunity to opt-oul. if the service were automatic. This should preserve individual 

choice and satisfy those persons especially concerned about privacy. 

Of course, the value of a 401 (k)-type account can vary over time dependi ng on 

market results and investment strategy while Social Sccurity benefits are fixed assuming 

that the program is properly funded. For this rcason, account owners should be strongly 

encouraged to review their statements eve!)' year to detennine if they need to increase 

savings rates. In addition, the statements should include a clear and bold disclosure that 

savings balances can both increase and decline over time depending on market 

conditions. 

To ensure accurJ.CY and consistency annuitized balances in the 40 l(k) and SSI\ 

proj, .. ctions would necd to be produced using roughly the saillc Illcthodology. The utility 

of these statements would be increased if they included projected Social Security benefits 

plus both ( I) current bal:lIlces annuitizcd with payouts beginning at age 65 and (2) 

projections of annuilizcd future balances lfthc account owncr continucs either 10 savc at 

Iheir current level or increases the percentage of their salary that they save. The 

additional infonnation will enable savers to have a better idea of how much they should 

be saving in order to have a comfortable retirement. 

This simple rcfonn would give taxpayers important infonnation about how to 

plan their futures. Savers desperately need this infonnation, and providing it should be 

fairly simple and cost effective. 

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Part V: Multiplc Emplo}'cr Plan 

There is no one perfe<:t platfornl for a 40 I(k)-type account, and both Congrcss and 

the appropriate regulators should encourage companies to develop innovative ways that 

would make it easier and cheaper for employers to offer these accounts to their 

employees. Onc way that definitely dcservcs eonsidcration is the multiplc cmploycr plan 

that focuses on a moditied version of the IRA SIMPLE. This idea originated with 

Pmdcntial as a variation on a proposal from the Conversation on Coverage. 

Like all IRA SIMPLE plans. this of the multiplc employer plan would be limited 

to smaller employers with less than 100 employees. By adding the multiple employer 

structure, smaller businesses would be able to join together to negotiatc the lowest 

possible administrative fees. Unlike the original I RA SIMPLE, this version does not 

require an employer contribution, a feature that should make it much more attractive to 

eomp.:lnies. [n return. there is a slightly lower contribution limit. 

The multiple employer IRA SIMPLE is not a substitute for the Automatic IRA. If 

only this idca was adoptcd. there would still be millions of cmployees without the ability 

to save to retirement at work. However. it would expand the options available to 

employers. Even if Congress docs decide to simplify the current confusing system of 

retirement accounts as I discussed earlier, there would still be different structures under 

which employers can offer accounts to their employees. 

I'art VI: A Few Thoughts on Retirement Tax Incentives 

The tax incentives that Congress has granted to employees and cmployers in 

retum for sponsoring or contributing to a retirement savings account is a crucialp.:lrt of 

the system, and should not be changed without serious consideration. That docs not 

mean, however, that the current system is pcrfe<:t and cannot be improved as part of a 

comprehensive tax reform. For instance, it would be very useful to find a way to enable 

lower and moderate·incomc retirement savers to receive higher tax benefits. In addition, 

it may be that upper incomc savcrs would be willing to accept slightly lower tax bencfits 

in retum for lower overall tax rates. Howcver.lel mc reiterate that nothing should be 

done lightly. without a clear understanding of the complete consequences. or unless it is 

p.:lrt of a comprehensive reform. 

Conclusion 

Thank you for allowing me to present several ideas for improving retirement 

saving. American households have a compelling need to increase their personal saving, 

especially for long-term needs such as retirement. This testimony summarizes several 

strategies for making saving more automatic - hence easier. more convenient, and more 

likely to occur. In particular. by adapting to the IRA universe practices and arrangements 

that have proven sllccessful in promoting 401 (k) participation, the Automatic IRA holds 

considerable promise for improving the retirement security of millions of workers. 

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******************* 

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During 201 0, it had 710.000 individual. foundation, and corporate supporters 

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IS 
102 

Chairman CAMP. Mr. Hardock, you are recognized for 5 minutes. 

STATEMENT OF RANDY H. HARDOCK, PARTNER, DAVIS & 

HARMAN LLP, TESTIFYING ON BEHALF OF THE AMERICAN 

BENEFITS COUNCIL, WASHINGTON, D.C. 

Mr. HARDOCK. Thank you for the opportunity to speak with you 

today on behalf of the American Benefits Council. I am an attorney 

with over 30 years experience specializing in retirement plans. I 

served as Benefits Tax Counsel at the Treasury Department and 

was the Senate Finance Committee’s tax counsel responsible for retirement issues during consideration of the 1986 Tax Reform Act. 

This Committee, the Ways and Means Committee, has been responsible for every major improvement in the retirement system. 

That includes the bipartisan Retirement Security Act passed in 

2001, the legislation that established the successful framework for 

defined contribution plans and IRAs that is still in place today. 

That 2001 bill was cosponsored by you, Chairman Camp, by you, 

Ranking Member Levin. We thank you both for that. It was cosponsored by every senior Republican still serving on this Committee 

and by 10 of the 15 Democrats now serving on this Committee. It 

was cosponsored by Speaker Boehner, Minority Leader Pelosi, Majority Leader Cantor, and Minority Leader Hoyer. Promoting retirement savings is an area where Republicans and Democrats have 

long been able to agree, and we urge you to continue your support 

in the context of tax reform. 

The current retirement system is working. It is working for the 

almost 80 percent of full-time employees with access to retirement 

plans at work. It works for the almost 100 million Americans who 

have saved through workplace retirement plans or IRAs. So, the 

first and most important principle to consider when you discuss tax 

reform and the retirement system is do no harm. 

In 2012, 80 percent of households with defined contribution plans 

said that tax savings were a big incentive to contribute. Almost 

half said they would not contribute at all to any retirement savings 

if it weren’t for their defined contribution plan. 

Today, coverage and nondiscrimination requirements, the saver’s 

credit, and various other rules ensure that the benefits in defined 

contribution plans are delivered fairly across all income groups. 

Current rules also provide balanced incentives that encourage business owners to voluntarily maintain retirement plans and encourage employee participation. 

Any major restructuring of the system that reduces or tries to reallocate existing retirement tax incentives is a gamble we cannot 

afford to take when dealing with the retirement security of working 

and retired Americans. Reducing retirement savings tax incentives 

to pay for other initiatives would be counterproductive. Proposals 

that appear to increase short-term Federal tax revenue from 

changes in the retirement savings incentives generally get those 

additional revenues because individuals are saving less for retirement. Making matters worse, as Ms. Miller indicated, short-term 

revenue gain from changes in the retirement incentives under the 

current budget rules is an illusion because when a worker saves 


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less money today, it will mean smaller distributions and less tax 

revenue when the person retires. 

Just like the short-term budget scoring conventions, the tax expenditure scorekeeping also does not paint an accurate picture. The 

bulk of today’s estimated retirement tax expenditure comes from 

savings that are already in retirement plans and IRAs, not from 

new contributions. So that big tax expenditure number cannot be 

turned into big new tax revenues without retroactively taxing the 

existing retirement savings nest eggs of Americans. That action 

would rightly be seen as a breach of trust by those workers who 

contributed (and those employers who contributed) on the assumption that this money would grow tax free and be taxed only at distribution. 

Still, the retirement system can and should be improved for all 

Americans, and especially those with lower incomes who find it 

most difficult to save. Tax reform offers the opportunity to do just 

that—by building on the existing system, not by tearing it apart. 

Today, employer-sponsored plans make effective use of payroll deduction, provide fiduciary oversight, and typically include an employer contribution. More Americans need access to those workplace retirement savings plans, and all Americans should be encouraged to save at higher levels. 

One area that deserves particular attention is automatic enrollment and automatic increase strategies. Those are plan designs 

where workers must opt out of plan participation rather than opt 

in and where the default contribution levels are increased each 

year. These plan designs increase participation and savings rates 

significantly, especially for low-income, younger, and minority 

workers. More employers are adopting these designs each year, but 

greater incentives should be considered to accelerate that trend. 

We also believe much could be done to reduce the costs of plan 

administration. For example, regulations on delivery of required 

notices should be brought into the 21st century to better accommodate electronic delivery. 

We stand ready to work with the Members of this Committee to 

assist this Committee in continuing its long history of promoting 

retirement savings. Thank you. 

Chairman CAMP. Well, thank you. 

[The prepared statement of Mr. Hardock follows:] 


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o 

AMERICAN BENEFITS 

COUNCIL 

TESTIMONY OF 

NDOLF H. HARDOCK 

ONBEHALFOF 

'I" 

AMERICAN BENEFITS COUNCIL 

BEFORET.H E 

U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON WAYS AND MEANS 

H EARING ON 

TAX REFORM AND T Ax-FAVORED 

RETIREMENT ACCOUNTS '? 

• 

APRIL 17, 2012 
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Chairman Camp, Ranking Member Levin, and Members of the Committee, thank 

you for the opportunity to speak with you today on the issues involved in tax reform 

and tax-favored retirement accounts. 

My name is Randy Hardock and I am testifying on behalf of the American Benefits 

Council (the "Council"). I am a partner in the law firm of Davis & Harman LLP 

sp<.'Cializing in employe<> benefit issues and have been a Member of the Council's Board 

of Dil-eclors for the last 15 years. During that time, I have advised the Council and 

numerous employers that sponsor retirement plans, plan administrators, plan service 

provide,> and individuals with respect to a wide range of retirement plan issues. I also 

served as Bqlefits Tax Council in the Department of the Treasury's Office of Tax Policy 

(from 1993-~5) and as Tax Counsel to the Senate CommittL'C on Finance (from 1986-

1993) (including (luring the Senate's consideration of the Tax Reform Act of 1986). 

The Council and appreciate the opportunity to particip.1te in today's critical and 

timely hearing on retirement. The Council is a public policy organi7.ation representing 

principally Fortune 500 companies and other organizations that assist employers of all 

sizes in providing benefits to emploYL'CS. Collectively, the Council's members either 

sponsor directly or provide services to retirement and health plans covering more than 

100 million Americans. 

The House Ways and Means Committee has been directly responsible for the 

enactment of every major improvement in the employment-based retirement system 

over the last two decades. Most notably, it was the tireless work of this Committee in 

1999 and 2000 that led to the enactment of the Retirement Security Act early in 2001. 

That legislation established a sensible and successful fiamework for defined 

contribution (IX:) plans and IRAs that is still in place today. Significantly, the 

Retirement Security Act was cosponsored by every senior Republican still serving on 

this Committee today. It was also cosponsored by Ranking Member Levin, and by 10 of 

the 15 Democrats now serving on this Committee. Other cospqnsors of that bill 

included Speaker Boehner, Majority Leader Cantor, Minority Leader ~elosi, and 

Minority Whip Hoyer. In short, the importance of encouraging retirement savings has 

been one a rea where Republicans and Democrats have long been able o~gree and we 

urge this Committee to continue to support poliCies that promote retirement saVings. 

o SUM MARY 

Employer-sponsored ex: plans and defined benefit (DB) retirement plans are an 

indispensable building block of our Nation's retirement system. Retirement plans, like 

those sponsored and administered by the Council's members, successfully assist tens of 

millions of families in accumulating retirement savings and will provide trillions of 

dollars in retirement income and a more financially secure retirement. Congress has 

adop\L>d rules that encourage employers to voluntarily offer these plans, encourage 
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employees' participation, promote prudent investing, allow operation at reasonable 

cost, and safeguard participant interests through strict fiduciary obligations. 

Understandably, individuals have heightened retirement income concerns resulting 

from the recent economic downturn. But those concerns only serve to rccmphasize the 

vital role workplace-based retirement plans play in ensuring personal financial security 

and in generating savings to fuel the type of capital investment the economy needs to 

generate long-term growth. 

With.about 100 million active and retirL>rl workers (and their spouses) accumulating 

f(~tiremfntJ:vings under employment-based retirement plans and IRAs, today's 

retirement Jl'I?licies arc working. Those rules enable Americans - with support from 

their employers - to accumulate savings and generate retirement income. For that 

reason, the first" tll1d most important, principle we urge this Committee to consider in 

the context of taX'"rcfornl is: do no harm. We urge policymakers to avoid any actions 

that would make it mor~iffjcult for individuals to save for retirement or that would 

discourage employers from starting or continuing to maintain retirement plans. Thus, 

the wisest course in mos(instances will be to //0/ enact new laws or new regulations that 

would disrupt the success of the$urrent system. 

Dramatic Changes in the rules and entives governing retirement plans arc 

perilous and unintended consequences aTs-likely. Major restructuring of the current 

system is a gamble we cannot afford to take when we arc dealing with the retirement 

security of working and retired Americans. ·hat is especially true now, with the Baby 

Boom generation reaching retirement age. In this context, it is important to remember 

that the employer-sponsoTL>rl retirement system is premised on its voluntary nature -

employers can choose to provide retirement plans to their workers, but they arc not 

rC<Juired to do so. That voluntary system is built to supplement the safety net provided 

by Social Security. Changes in the retirement plan tax ince~ves would require each 

plan sponsor to reevaluate and completely redesign its retirement plan offerings and 

could force them to consider eliminating their plans entirely. Even SC\.'mingly small 

changes in laws and regulations often generate confusion and enormous costs for 

individuals and employers. 

As this Committee considers retirement issues <in a tax reform context or otherwise), 

it is critical to focus on policics that will help individuals and employers gcncrat<; 

retirement income sufficient for employees to maintain their standard of living. Too 

often, retirement policy is driven by extraneous consideratiOl1S, such as the need to). 

generate revenue for the federal government. When these revenue considerations arc at 

the fo refront, the result has often been unnL'Cess.1ry complexity and cosl, or worse ye( 

direct harm to Americans' retirement prospects. Proposals tllat purport to increase 

short-term federal tax receipts by redirecting, eliminating, or eroding the existing 

retirement savings incentivcs achieve those additional taxes 1.1rgely bemuse individullis 

Ilrc salling less for retiremcllt. Making matters worse, any short-term revenue gain that 

might be derived from changes in the retirement savings incentives is largely illusory 

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because when a worker saves less money today it will mean smaller distributions (and 

less tax revenue) when the individual retires. That is a lose/lose situation for the retiree 

and the government. 

Still, the retirement system can and should be improved. Even at current savings 

levels, too many Americans are at risk of a finandally insecure retirement. More must 

be Clone to increase retirement security (and overall financial security) for all American 

famllies, especially those with lower incomes who find it the most difficult to save. Tax 

reform offers the opportunity to do just that with relatively modest targeted changes 

that build upon the existing successful structure to generate greater retirement savings. 

In particular, in light of the dear evidence of dramatic increases in retirement plan 

coverage and 5.1,\ings that result when employers implement automatic enrollment and 

automatic increase designs, we urge the Committee to explore incentives that will 

accelerate the trend toward utili:r.ation of those mechanisms. 

THE CURRENT EMPLOYMENT-BASED RETIREMENT SYSTEM Is WORKING FOR M ILLIONS OF 

AMERICAN WORKERS AND REJIREES 

Today, the vast majority of largeemployers offer a DC plan and an increasing 

number of small employers do as well. ccording to the Bureau of Labor Statistics, 73% 

of full-time and 64 % of all private industry workers had access to retirement benefits as 

of May 2011.' Over the past three decades, 40 ~) and other OC plans have grown 

dramatically in number, asset value, and employee ,Participation. Private-sector DC 

plans cover more than 70 million active and retire'd workers, with millions more 

participating in 403(b), 457, and the Thrift Savings Plan - types of DC plans maintained 

in connection with ('mployment by tax-exempt and govef1mental employers. While 

not the topic of today's hearing, DB plans also remain vita).-to the retirement security of 

many millions of Americans. Ensuring that workable DB plans remain an option for 

employers must also be a critical priority. 

This broad coverage and partidpation results from the unique advantages 

employment-based plans bring to bear for employees when it comes to retirement 

savings and income. These advantages would likely not be available for millions of 

working Americans if it were not for the existing tax incentives that motivat employce 

saving and that encourage employers to maintain and contribute to retirement plans. 

,. When discussing retirement plans, media foc us is often on employee deferrals into 

40"l(k) plans. Yet, many employers make matching, non-elcctive, and profit-sharing 

contributions to complement employee deferrals - thus chOOSing to share the 

responsibility for financing employees' retirement. Other employers fund DB plans that 

' See Bu","u of ..... borS!a!is!ics, Employ..., Benefits in !he United Sta!e;:, March 2(111, nl'llilnbl~nl 

hup·llwww bls goy/ocS/ehs/sp/ebmOOIZ pdf 

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further add to the retirement security of their employees. Recent surveys of DC plan 

sponsors found that at least 95% make some form of employer contribution.' While 

certain employers suspended matching and profit sharing contributions due to the 

recent economic downturn (and, in some cases, because of a dramatic spike in their 

defined benefit plan funding obligations), the vast majority have not, and in most cases 

the suspended matches have already been reinstated: 

Employees participating in employment-based plans also benefit from enhanced 

barggning and purchasing power resulting from economics of scale, fiduciary dccisionmaking and oversight, and access to beneficial products and services. Moreover, 

Congress has est.-.blished detailed rules to ensure that benefits in DC plans are delivered 

across all inC2.me groups. For example, extensive coverage, nondiscrimination, and topheavy rules promote fairness regarding which employees are covered by a DC plan and 

the contribution!J made to these plans. 

Employers are also in a strong position to know the retirement needs of their 

employee populations an can tailor retirement programs to these needs. With the 

growth in DC plan coverage, those plans have continued to evolve and improve, with 

plan sponsors and service providers developing many features, including automatic 

contribution escalation, Single-fund investment solutions, and investment education 

programs. Legislative changes and m",rket innovations (often supported by legislative 

clarifications) have improved both employcc participation ratL'S and employcc 

outcomes. For example, the Pension Protoction Act of 2006 (PPA) included several 

landmark changes to the DC system that are already beginning to assist employees. 

PPA encouraged automatic enrollment (which {tudies demonstrate significantly 

increases participation rates, particularly among lower-income, younger, and minority 

workers) and automatic contribution escalation. With the PPA changes, adoption of 

these features has increased dramatically. In PPA, Congr$ss also provided new rights 

to diversify contributions made in company stoo:;k, ",,,derating existing trends toward 

greater diversification of 401 (k) assets. 

The evidence is clear: The DC system works and the incremental changes adopted in 

rccent years have made them even morc eficctive. There arc still gaps (especially for 

lower income workers); more can and should be done to expand coverag~and to 

increase contribution: •. But one of the most important advantages of the curren )~ 

' Diversified Investment Advisors, Ikport On Rctirementl'l~n5 - 2007, (Nov. 2007). Vanguard report& 

that in 20tO, for DC pl~ns it services, 95% of participants wc'"" in plans that include an employ ..... 

contribulioll. See Vanguard, How America 5."' .... , 2011, figure 5. a,,,,i/,,blr al 

bu!!S;1 fim!j!LI!iPNI '"'""'Idol romIYCAppijipi'i!..Jimli!IIlior .. 1 triicnbolLlIi"miik/b" ..... wr' qM)"' .. i See also: 

Plan Sponsor Council of Americ .... 54th Annual Survey, Renecling 2010 Experience, p. 23 (J"{'porting 93.4% 

of surveyed compani .... makeconlribttlions 10 I"'" pl.Il). 

' See, c.g., VisJ",1 A/lie a",18,..."lall McFarla"d, Ta""rs Wals<", NeWs/'ll" (Ckl"wr 201 IJ. Of 260 companics 

that discontinued or redu ~d thcir401(k) matching contributions in the downturn.. 75% have now 

re5tored them. 

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retirement savings tax incentive structure is that it efficiently produces retirement 

benefits fo r millions of American families. Analyses have shown that the tax 

expenditure mOTe than pays for itself. This multiplier effect produces a remarkable 

amount of benefits for retin.·(·s, with the Department of Commerce reporting tha t in 

2010 employer-sponsored re tirement plans paid out $836 billion in benefits,' 

substantially more than the 5577 billion in re tirement benefits paid by Social Security in 

the same year.' 

'Qy importance of the current system is demonstrated by the fact that retirement 

plans held.approximately 517.9 trillion in assets as of December 31, 2011.' ThC5C 

trillions 6 f dollars in assets, representing ownership of a significant share of the total 

pool of stocKs and bonds, provide an important and ready sourcc of investment capital 

for American businesses.' This capital permits greater production of goods and services 

and makes possible additional productivity-cnhandng investments - investments that 

help companies h'TOW and add jobs to tht'ir payrolls and raise employee wages. 

TH E CURRENT T AX I NCENTIVE,STRUCfURE I s TH E FOUNOATIO:-.l OF O UR SUCCESSFUL 

R ETI REMENT SAVINGS SYSTEM 

The U.s. retirement savings system sucp~ssfully encourages ind ividuals to save for 

retirement by providing tax incentives including income tax exclusions or deductions 

- for contributions to employer-sponsored retirement plans and IRAs, up to statutory 

limits. This tax structure provides a strong and effective incentive for individuals at all 

income levels to save for retirement and encourages employers to sponsor plans that 

deliver meaningful benefits to Americans up and dO\\'n the income scale. The 

fundamental building blocks of the current tax incentiv/ structure arc: 

COl/tribuNolls are Excludible or Deductible From II/come: C;ontributions to qualified 

workplace retirement plans, both those made by employees ana those made by 

employers, are generally excludable from employees' taxable iocO'me, and contributions 

to traditional Individual Retirt'ment Accounts (IRAs) arc tax-dedu ble in some 

instances. This pre-tax treatment allows individuals to 5.WC more from each paycheck 

' 91 Bureau of f.conomic AMlysis. US. Dep't of Commerce, Survey of Current Business 8, National 

rocome and Product AcrountsTable 6.110 (Aug. 2011) . 

• Social5e<:urity Trustees Report 2011. 

' See Investment Company Institute, Re'i",,,,.,,, As.srlS Toln! $17.9 Tril!io" i" tOl"O, Q,mrlrr 2011, nmi!nblr 

al http' llwww kjpq;/rgsearrh /rgtjrrnwot/rgtjrgmentl rgr II q~ 

• At ~·~ar..eod 2010, % of mutual funds' assets were held in a lax-deferred housellold accou nt. See 

Investment Company Institute. 201 II1UYS'm',,' eo"'I''''Y F4c/ 800/<, Figure A.2.. "pni/nM. nl 

hUp'llwww ki Qq;/pd((2QI! fartbopk pdf. 

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Ihan would be the case with after-tax contributions.' For a worker in the 25% income 

tax bracket, for example, a 520 deferral into a 401 (k) plan will only rrouce take home 

pay by 515, making saving into the plan an effident economic proposition. 

Employer ContribntioJIS are Exempt from Payroll Tax: Because employer contributions 

10 plans are not regarded as "wages/ neither employees nor employers owe payroll 

taxes on Ihese amounts. These payroll tax savings arc most significant for modestincome employees earning amounts below IheSocial Security wage base (5110,100 in 

2012) since payments in cash rather than into the plan would be fully subject to payroll ~ 

laxes. 

Taxes QlllllvestmclIl Caills are Deferred: There is no lax on investment gains while 

funds remain de the retirement plan. This defe rral is critical for incenting savings as 

workers know th y will not have to divert income year-by-year to pay tax on their 

retirement savings. INs critical to remember that pre-tax contributions made to DC 

plans and IRAs - and the earnings on these contributions - do not escape taxation but 

rather are taxed when withdrawn. Thus, Ihe federal tax incentives devoted to spur 

savings arc not lost but arc reclaimed as additional tax revenue when individuals make 

withdrawals. 

Saver's Credit Supplements ExclllsiowV eduction: The Saver's Crroit, which provides a 

credit of up to 51,000 ($2,000 if married and filing jointly) to low- and middle-income 

individuals' who contribute to DC plans and IRAs, provides a more robusl savings tax 

incentive for eligible individ uals than would be provided by the exclusion or deduction 

alone. Between availability of the underlying inc9 me tax exclusion/deduction for 

contributions, payroll tax savings on employer contributions and the supplemental 

Saver's Credit, eligible individuals are provided wilh a verz significant lax incentive to 

contribute to retirement accounts. It is one thilt far excL'Cds mere proportionality to 

their income tax bracket. 

CQlltri/)IIIiOIlS Are limited (wd Rilles Promote Fll imess: Congress has imposed 

maximum dollar limits on individual contributions to DC plans and lRAs. In 2012. the 

maximum individual contributions arc generally $5,000 10 IRAs ($6,000 if.50 or older) 

and $17,000 to DC plans (522,500 if 50 or older). Separate limits also apply10 total 

combined employer and employee contributions for any employee and to thc7 

maximum benefit a worker can accrue at retirement in a definL>d benefit plans/ Tflese 

limits act to constrain the tax-preferred savings of upper-income savers while allowing 

robust tax-preferred savings by low- and middle-income households, and retaining 

• Contributions to Roth 401(k) Accounts and Roth IRAs are not deductible or excludable, bUI they derive a 

comparable tax benefit when the taxpayer withdraws a .... ts in the form of an exclusion from tax on 

earnings while the funds were in the accounL 

' In 2012.. theSavd5 Credit is available to married couples filing jOintly with adjusted gross income (AI) 

of up to S57,500 and Single indi,·iduals with AGI of up to $28,500. 

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enough of a personal incentive for business owners and decision-makers to set up and 

maintain plans for their workforce. In addition, a substantial statutory and regulatory 

regime requires employer plans to adhere to coverage, nondiscrimination and topheavy rules, which are designed to ensure that individuals at all income levels receive 

fair benefits. 

T E F[RST PRINCIPLE OF R ETIREMENT T AX POLICY: Do N o H ARM ." . odaY.'~ retirement laws and policies are working well and are helping many 

millions of families (supported by their employers) accumulate savings and generate 

retirement income. For that reason, the first, and most important, principle we urge this 

Committee to consider in the context of tax reform is to do no harm. Policy makers 

should avoid a(tions that make it more difficult to accumulate savings and generate 

sufficient retirement income. Since the employment-based retirement system is the 

most effective and significant source of retirement saving, any changes in that area 

should in pa rticular be approached with extreme caution. The wisest course in most 

instances will be to /wt enact new laws or implement expansive new regulations that 

would disrupt the successes of the current system. 

The American people agn.'C with thattlS<.'Ssment. [n a study published in 2012, 84% 

of U.s. households said that continuing to provide incentives to encourage retirement 

saving should be a national priority. In spite;o{ recent stock market volatility, 89% of 

households expressing an opinion had favora91e impressions of 401 (k) plans. Nine out 

of 10 households with IX accounts agreed that Inesc plans helped them think about the 

long term and made it easier for them to save. Morl).than 80% of OC-owning 

households said the immediate tax savings from their retirement plans were a big 

incentive to contribute. With almost half of IX-owning households stating that they 

probably would not be saving for retirement at all if it weren't'for their IX plans.'" 

-r Dramatic changes in the rules and incentives governing retirement plans arc not 

warranted and would be perilous. Unintended conscquencesare likely, and we simply 

cannot afford to gamble with the retirement security of working and retired Americans; 

espc'Cially when retirement assets are 36% of total household financial assets." In this 

context, it is important to remember that the employer-sponsored retirement s~tem is 

premised on its voluntary nature - employers can choose to provide retiremenlPlans to 

their workers, but they are not requin.>d to do so. Changes in the tax incentives would 

require each employer to reevaluate and potentially redesign retirement plan offerings 

~ Hold en, Sarah, and Bass,Ste"en., A"'eri",·s Commi/",,,,llo I/;>Ii",mf"/ $,>("rily; J,,, .. slor AI/i/Ulks m,d 

Mlkms. Washington, DC: Investment Company Institute Uanuary 20(2). 

" Investment Company Institute. 2012. "The U.s. Reliren",nt "larke!, Fourth Quarter 2011" (Aprit), Table 

3. http://www.id.org/info/reUl_q4_data.xb. 

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and could lead to eliminating the plans entirely. Even seemingly SJT\illl changes in laws 

and regulations generate confusion and enormous costs for individuals and employers. 

RETIREMENT TAX INCENTIVES LEADTO LONC-TERM R EVENUE GAINS 

The retirement savings tax expenditures should not be reduced or tinkered with to 

pay,,for other initiatives, whether inside or outside a tax reform process. Significantly, 

the b,:Yk of the existing "tax expenditure' for retirement plans is attributable to the 

deferral of tax provided to already saved retirement assets, not to future annual 

permitted contributions. True, there arc trillions of dollars in existing retirement plans 

and IRAs, but those funds are the primary retirement nest eggs of millions of American 

families. Those,exil!ting savings should not be taxed in order to finance more 

government spend ~ deficit reduction, or to offset other tax initiatives (including 

lower marginal tax rates). Similarly, prOpo5<1ls that purport to increase short-term 

federal tax receipts by redirecting, ('liminating, or eroding the existing retirement 

savings incentives would realize those additional tax revenues largely because imfi{Jiriuais 

woulll be s(lfIing less for retirellu;nt. We cannot afford to let Americans save less for 

retirement; we need to encourage them to save more. 0'. 

Particularly troublesome is that anY' short-term revenue gain that might be derived 

from changes in the retirement tax inc/,ltives is largely illusory and cannot responsibly 

be used to offset costs of reducing tax rates{,r other long-term government initiatives. 

The revenue scoring that is performed by the Treasury Department and the Joint 

Committee on Taxation generally produces estimates in five- and ten-year budget 

windows, using a cash-now analysis. Under that mettlodology, the taxes an employee 

will p..1y when he or she retires and starts taking taxable plap distributions generally 

occur outside the budget window. Proposals that reduce retirement savings today will 

mean the government actually colle<:ts less revenue in years outside the budget window 

because retin.>es will have less taxable retirement income. As a,result, total long-term 

budgetary savings that might result from scaling back the existing retirement savings 

tax incentives would be conSiderably smaller than the short-term revenue estimates 

might suggest. In fact, a rcecnt stud y completed by former staff of the Joint Committee 

on Taxation finds that the present value of tax benefits attributable to current-year 

retirement savings contributions is as much as 77% less than estimates of revenu loss 

under Treasury's methodology. " In effect, proposals that reduce retirement savings 

would actually increase the burden on future generations. That type of shortsighted 

thinking will not help the Nation address its structural budget deficits, nor would it-? 

offsctthe long-range costs of other changes in the tax law. In that regard. it is important 

to bear in mind that the assets saved in the employment-based retirement system 

" Judy Xanthopoulos and Mary 1\..1. Schmitt, Rt-lirr"'~'" Sm,j"gs a",1 Tax EXp",dj/,,,,, Estjmates. American 

Society of l'ellSion Profe5Sionals &. Acluark .... May 2011. m",jlabl~"' hlt~!,llwww Upra prg/DocUDl!'ol_ 

aull/pd(s/GAC/20II /RrliIl'DlCD!SaYingMndTalMrrodilu[cs ASPI'AMay201 1 pdf aspx 

8 
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supplement and help reduce pressure on other government programs, like Social 

Security. 

R ECENT PROPOSALS COULD SERIOUSLY UNDERM INE THE RETIREMENT SAVINGS SYSTEM 

'Two sweeping proposals that have gained some recent attention illustrate the 

dangers that could flow from even well intentioned rewriting of the curr(>nt retirement 

ru[~ 

One illustrative option for deficit reduction that was explored in the National 

Commission on Fiscal Responsibility and Reform Report was to lower the cap on 

annual total employer and employee retirement plan contributions to the lesser of 20% 

of the (>mployces compensation or 520,000 (the 20/20 proposal). This proposal and any 

similar proposal to further limit the incentives to save (or discourage business owners 

from establishing plans)·would, over tim(>, do irr(>parable harm to the retirement 

security of Americans at -;;n income levels. 

Today, total employee and employer contributions to 40'1 (k) and other OC plans 

cannot exceed the lesser of 100% o{compensation or 550,000 per year (in 2012)." Even 

those contribution levels can only be reached for owners and higher-paid employees if 

the plan s.1lisfies tough non·discrimin.1tion rules that ensur(> pnrticipation and 

contributions for rank-and-file workers. Thc.existing tax incentives playa critical role 

in encouraging key decision-makcrs to sponfur and maintain plans. When a typical 

small business owner evaluates the significant legal responsibilities, risks, and costs of 

plan sponsorship, it is often the promise of meaningful tax benefits for key employees 

that is the deciding fac tor in choosing to maintain a retirement plan. If tax benefits to 

decision-makers arc substantially diminished, businesses that would have considered 

plan sponsorship will no longer do so and existing plan spqnsors will reduce matching 

contributions or stop offering retirement plans altogether. All emploYL'CS will suffer. 

The 20/20 proposal would severely depress aggregate retireme~lsavings for tlil 

income /ellds. The Employee Benefit Research Institute (EBRI) found that only 5% of 

workers save for retirement on their own without the benefit of an employer sponsored 

plan. By contrast, 70% of workers earning between $30,000 and $50,000 partidpate in 

employer-sponsored retirement plans when they are offered. Preliminary EBRI analysis 

of the 20/20 proposal projects reductions in 401{k) balances at retirement of betweet~5% 

and 14% across 1111 income levels. Younger savers with the lowest income would be liit 

particularly hard, with projected savings at retirement dropping by about 10% for 

" In manycascs, key emptoyC('S of small bUSinesses do oot reach th~-se levels ~'Very ye.r. Many 

contribute more during yearslheir business is doing well and II"SS in other yea ,.". 

9 
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individuals under age 45 in the bottom income quartile." And this EBRI analysis does 

not take into account the fact that the 20/20 proposal couid cause many plans to be 

termin.1ted and would causc other employers to eliminate or reduce matching and 

other employer contributions. 

Retirement tax incentives are not like other tax incentives, and changes in that 

structure can very easily harm the very people who arc most in need_ Today, 79% of 

the fede ral tax incentives for OC plans are attributable to taxpayers with less than 

5150,000 of adjusted gross income." Under current limits, working families with Jess 

than 00~ in income receive 62% of the tax benefits associated with qualified 

retirement plans - despite p3ying only 26% of the total personal income taxes received 

by the federal government." In other words, lower- and middle-income taxpayers 

receive more than twice as large a share of savings tax breaks as the share of income 

taXL'S they actually pay'." As a practical matter, those low- and middle-income plan 

p.1rticip3nts would suffCI the most under the 20/20 proposal when they lose access to 

employment-based eti ll1ent plans and the employer contributions that go with them. , Another recent proposal. ~ Brookings Economist William Gale, suggL'5ts replacing 

all exclusions and deductions for retirement savings with a flat -18% tax credit that 

would be deposited directly inrc, individual 's retirl'ment s,wings account (the "18% 

match proposal')." This restructuring-'Pihe current system (and previous proposals 

like it) would also be disruptive, counterproductive, and potentially catastrophic, 11 

would cause a steep decline in retirement plan sponsorship and would lead directly to a 

significant reduction in retirement s.1vings across all income classes . 

.. Or,'I"·IIg Tn·Preforml RRUre"",,' Colllri/mUOI .. : Pwlimjllnry f"j,/ell17 of lite Impocl ofilli' NnljOlwl 

Olmmi"jOll 011 "iSOlI ~p(msibilily nlill fl.'form RRcom"",,,,lnUOII$ 32 £8RrNO~S No.7 (July 2011) at 2-6. 

" Am.".kan Society of Pension Prolessionals and Actuaries, Estimated Ilenefils of Tax Expenditure 

Eo;limab.'S for Defined Contribution Plan I'articipants and Reti......,. with Accoun1 Balanc ... (Aug. 2<Xl9) 

(analyzing IRS da ta), nlwi/nbl. nt bUp·1 twwwa:;ppaorg/documenl_ 

vault/psllsl medjaroom/l.IENYIJ)82509,aspx 

~ ASrrA Release Ma y 31. lOll, mll!i1nbl~nl http·llwwwlSl'panrw:;;org/21l11/QS/31(a:;PW'-"yan:h. 

ShOIYS-Svjngs,frpm-s:uttjng-rrti[s'ment-wvjngs=plag.joccnljvrs-arr-dr.Jrnatjrall)''fuggcratrsll 

" A recent study published by the Center for Retirement Research at Kost"" College provides further 

evidence that the DC plan incenti,·es are more progressive than tuditional income distribution analySiS 

would predict. 111e study found "evidl'nce that additional employer contributi ons to40!{k) pla~ reduce 

money wages much less lor low-income than for high- income workers" and coocluded thai: "{b]l'Causeof 

non-discrimination rules, employers must induce pilrtkipiltion of low·iocome employees in order to 

provide qualified benefits to high-iocome emptoyees. Therefore, employers who "'ish to contribute 10 

plans in order 10 attract high-iocome employ .... ,,; may be unable 10 reduce money wag ... to low-income 

workers in exchange for compensation in the form of retirement plan contributiom;. See, EricToder and 

Karen E. Smith, Oil Lo"~llIro,,,. Workers &1I~fi'fro'" Wlli) Plnll.' ~I'QilnN~~' 

blip" t Iwww polkyarchive mgt haodlef J020Zlbjtsl[f;lms/9651 7,pdf 

- See, William G, Galc, Testimony to the United Stales Senate Committee on FiMOCCSept.15, 201 I. 

JO 
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As with the 20/20 proposal, the 18% match would substantially reduce the incentive 

for key business decision-makers to have a plan. Even where the business did keep a 

plan in place, it is likely that any employer matching contributions would be curtailed 

substantially or eliminated. The fact is that the 18% tax credit provides so little benefit 

to a busincss owner (especially when compared to other available investment options) 

that there would often not be sufficient incentive for a business owner to t.1.ke on the 

many costs, responsibilities, and risks of maintaining a retirement plan. As indicated 

abl ,t , when plan sponsorship declines, all employees suffer. 

A Mili ch 20n study by EBRI confirms that the 18% millch proposal will reduce 

retirement{ ecurity for workers at all income levels, not just high-income workers. 

Specifically, the study revealed that some employers would decide to no longer offer a 

plan to their wQlkers and some participants would dl'Creasc their contributions. The 

combined effe<;t-of "thesc changes would result in reduced savings balances at retirement 

between 6% and 22%)0,) workers currently age 26·35, with the greatest reductions for 

those in the lowest inc mc,.9 uartile. Lowest·income participants in small busincss plans 

would sec final retircmen~vings reductions as high as 40%." 

For those employers who might stH! continue to maintain plans under the 18% 

match, most other employer contributions to retirement plans, like profit·sharing 

contributions, could well become 11 distant memory. The reason is simple. Under the 

18% match proposal, if an employer were to rontribute $1,000 to each employee's 

retirement account, the government would then contribute $180 to the individual's 

account. The $1,180 in the employee's account would be locked in. The employee could 

not access the $1,000 employer contribution Without incurring substantial taxes and 

penalties, and the 5180 government miltch could nor6e withdrawn for any reason for 

some period of time (perhaps not until retirement). The problem is that employees 

would immediiltely owe income tax on the 51,000 employe .... contribution, even though 

they may not even have the money to pay the tax. Employers will not want to put their 

employees in a situation where they are forced to pay income tax today on wages they 

never saw, in order to get a small government match that they may not be able to access 

until retirement. 

Furthermore, the majority of 401 (k) plans that include matChing contributions 

provide for a match of at least 50% with respect to employee contributions."" )1t~ 

providl'S a powerful incentive for employees to save. Employers have found that the 

match must be sufficiently large to get the employees' attention. It is not at all clear that 

Ihe "government match" under the 18% match proposal would be a sufficient incentive 

to save. Younger employees, in particular - the very people who should be encouraged 

.. Vanl)crhei, Jack. " Modi/ying the Federal Tax T .... atment 01401(k) Plan Contributions, Proj<.>cted Impact 

on Partid p.ant Aerount Balances: March 2012. EHRt Notes 

• See I'lan Sponsor CO\I nc il 01 America. 5·Hh Annual Survey. Reflecting 2010 Experience. T~bl .. 45. 

" 
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to save - will be reluctant to set aside money today in order to get a small government 

match. 

Finally, moving to this complex new regime would create great confusion among 

individuals, thereby deterring savings. This would be extremely counterproductive at a 

time when all have agreed that the way to foster savings is 10 kl>ep things simple. 

Reducing and impeding the incentives to Sowe in plans and JRAs in this way would be 

particularly detrimental as such savings typically repn.'SCnt a significant share of 

families' total financial assets. 

, C HANGES tN'R"ETIREMENT POLICY SHOULD BUILD ON EXISTING SYSTEM, N OT ERODE IT 

Promoting retirement savings must remain one of our Nation's top policy priorities. 

We urge this Committee,.to continue its leadership in pursuing policies to improve our 

Nation's retirement system. But any changes that arc made should build upon our 

existing and successful tax incentive structure so that it works even more effectively to 

facilitate retirement plan coverage and savings by American families. 

} 

As this Committee considers tllese issues in the future, the Council urges you to 

focus on four objectives wh,m crafting Wific retirement policies. These objectivt'S are 

all designed to advance the goal of retirement income adequacy for American workers. 

/: 

A ccumulating Retirement Savings: The firs antlmost important policy objective in 

helping Americans generate adequate retirement-income is to assist them in 

accumulating retirement savings d uring their working lives (which can then be used to 

generate income in retirement). Current retirement policies and vehicles, particularly 

employer-sponsore-d plans, successfully assist American families in doing so. 

Employer-sponsored retirement plans make effective use of payroll deductions, provide 

fiduciary oversight and group pricing.. typically involve substantiiil financial 

contributions by employers to employees' benefits, and facilitalc access to investment 

education and advice. But in order to ensure that as many Americans as possible 

accumulate the retirement savings they need, pollcy improvements ~quld be made in 

the following areas: ~I 

• 

• 

• 

• 

CO!'Cmge - expanding access to individual and workplace retirement savingi 

plans; 

Adeqnacy - helping individuals (supported by their employers) to save at higher 

levels; 

Imlt's/illg - encouraging the wise investment of retirement assets; and 

Presen'aliCII - promoting portability of retirement savings and avoiding spending 

of savings prior to retirement (leakage). 
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Unfortunately, given the fiscal condition of the federal government. it will be 

difficult to remove revenue considerations from policy deh.1tes, even in the retirement 

area. Some good proposals will likely have to be del<lyed at this time because they arc 

too costly and the required federal resources arc simply not available. 

Still, incremental improvements in each of these areas can and should be made and 

even small changes that help create a culture of saving will make a big difference. One 

area that deserves special attention is promoting the use of default enrollment and 

incre~sc.strategies. Automatic enrollment and automatic escalation strategies hold 

great promise for increasing DC plan coverage, and also increasing contributions to 

those plans. Such plan designs, under which workers must opt out of plan 

parti ipation her than opt in, have bt .. en demonstrated to increase participation rates 

significantly, hclp,ing to move toward the universal employee coverage typically 

associated with dcfrned benefit plans." More employers are adopting these designs 

every year, but accelerating those trends is important. Employers arc also beginning to 

increase the default savings rate at which workers are automatically enrolled and 

designs that automatically increase an employee's rate of savings into the plan over 

time, typically on a yearly basis. Those changes all will help ensure that workers will 

have saved enough to generate meaningful income in retirement. In particular, studies 

show that automatic enrollment'has a J?articularly notable impact on the participation 

rates of lower-income, younger, and min09ty workers because these groups arc 

typically less likely to participate in a 401(k) plan where affirmative elections are 

required.'" 

Recent experience shows the power of auto~;(tic enrollment and automatic 

escalation designs to increase participants' annual savings percentages to the higher 

levels that they will need to achieve a secure retirement. Plan sponsors that establish an 

initial automatic enrollment default rate of 6% s('C very little reduction in the participant 

opt out rate, but experience substantial increases in total employ,ce contributions when 

compared with employers who establish a more modest 3% "tldault rate. Significantly, 

even those employees who affirmatively make their own choic~ on how much to defer, 

appear to save more when the default level is set higher. Similarlf,.plan sponsors that 

~ St.-, (.g., Vanguard Center for Retiren>ent Research. M"'~J/n J/g /I", E/fi'CIi/"'''ffl of Aulomnlic E"roI/",m l. 

(Dec. 2007) (st..ting that " JaJn analysis of about 50 plans ~doptingautomatic enrollment confl; ms th~t the 

feature docs impro"e participation ratl'S. particularly among low·income and younger employ..es" ); 

401(k) B<"IJ(/""nrki"g SU r"!l'y - 2008 Edi/;,m, Ddoitte Consulting LU' (2008) (sta ting that J full 82~ of 

survey respondents reported that auto-enroltmcnt had increased participation rates"). 

"St.-, (.g., Copeland (<xt. 2(08). ~"p'" note 27 (noting that Hispanic workers weresigniEcantly less likely 

than both black and white workers to participate in a retirement plan);Jack VanDerhei &: Oaig Copeland, 

11.e //l/p,"/of PPA /)/, ReI;n''''''''' SIU';"gs for40 l(k) Pnrlirip''''/s, EMiunu ~_'1Em RESEARQt INSlTTUTE 

I$UF. BRtEF No. 318 (June 2(08) (noting that industry stud iI'S h.ve shown retatively low participation rates 

among young~nd low·income workers); Fidelity Investments, a,,;/di"g F,,/,ues Vol"", .. VIII: A Reperto" 

Gorpomlr iXfi,,,,d ec"lribuliall Pla"s (2007) (stating that in 20(16, among employ "CS earning less than 

$20,())), the participation boost from automatic l'fU"ollment was approximately 50%). 

J3 
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allow participants the choice to opt in to an annual automatic contribution escalation 

feature find that only 5.8% of participants do so. But if participants default into 

automatic escalation (with the opportunity to opt out), then 79.6% take advantage of 

automatic escalation!' 

We encourage this Committee to find ways 10 create incentives that will accelerate 

the trend toward employer adoption of automatic enrollment designs that include 

higher initial default contribution rates and automatic annual increases. Those changes 

could include the creation of new and simpler nondiscrimination testing safe harbors, 

removal he existing limit on auto escalation levels in existing safe harbors, and lax 

ch.'<Iits t$' employers that adopt automatic enrollment and escalation features. 

These enhilncoo automatic enrollment strategies should be accompanied by an 

extensive effort (1) to ooucate all Americans on the importance of the level of savings 

needed to meet anticipated retirement expenses and (2) to inform low- and moderateincome taxpayers on the vailabilily and operation of II simpler and improved Saver's 

Credit. 

Trallslatitrg Rctirellielit Saviugs mto Rctiremcllt Income: A second important policy 

obje<:tive is helping individuals un\fc;rstand how their ,lCcumulated retirement savings 

from all sourc(.'S (including the savings am,! benefits of one's spouse, where applicable) 

may be converted into streams of income in retirement. Recent guidance from the 

Internal Revenue Service and the Department of the Treasury providL'S an example of 

how even modest clarifications can simplify decisions for retirees and provide new 

ways for them to gain comfort that they will not.outlive their retirement savings. 

Slipportilig au Evo!viug Approac/I to Retiremcllt; A third important policy objective is 

to facilita te a nexible and evolving approach to retirement Ihlll accommodates those 

individuals who need or choose to continue paid work into the traditional retirement 

years. Those individuals should be able to reduce their level of work over time as they 

transition into full retirement. 

Simplifica tiotr: Tax reform efforts in the retirement area should focus on simplification 

and reducing the administrative burden on plan sponsors. For example, the number of 

required notices should be reduced and streamlined and rules should be upd;(e,\ to 

better accommodate electronic delivery. Those changes could substantially rooucc..,the 

costs of plan administration. But simplification should not ne<:essarily need to involve 

consolidation of existing retirement plan options. Different types of employment-baseU 

retirement plans provide employers with the nexibi!ity to dL'Sign plans that meet the " 

unique needs of their particular workforce in the business's specific competitive 

environment. DC plans, traditional DB plans, hybrid plans, and SIMPLE IRAs all are 

" I);,ta from the PrillCil"'i FinallCi.l Group* o..-ccmbo.'r 2010and May 2011; Profit Sharing/4111k Council of 

Amerka 2011. 

" 
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the right fi t in different situations. Plan participants arc not asked to choose between a 

401(k) plan and 403(b) plan, they simply have one or the other (and most are quite 

happy with the one they have). IRAs have their own unique roles, and arc critical for 

individuals rolling over funds from employment-based plans and provide an 

opportunity to save when they may not have access to another retirement plan. We also 

do not believe that existing retirement savings plans should be consolidated or 

eliminated in favor of other typt.'S of non-retirement savings vehicles (e.g., Coverdell 

Education Savings Accounts, Medical Savings Accounts, or Health Savings Accounts), 

whichhave their own purpose and relative merits. 

/.-

We stand ready to assist the Members of this Committee in continuing its long 

history of promoting retirement savings. Thank you. r 
120 

Chairman CAMP. Thank you all for that excellent testimony. 

Today is tax filing day, and it is a deadline which Americans 

have to spend millions of hours preparing their taxes because our 

system is a complex one, and not only is compliance complicated, 

but long-term financial planning is complicated as well because of 

our Code. And I would like to just explore and ask each of you how 

the Tax Code is performing in the area of retirement security. Employers who want to offer a retirement plan, as many of you—retirement savings option, as you mentioned, they have a choice, as 

many of you said, of many different proposals out there with different rules. And certainly individuals trying to save for retirement 

have one set of rules; individuals trying to save for health have another system with another set of rules; and families trying to save 

for education also have many options available, each with its own 

set of rules. 

But my question is, should the system—and why don’t I start 

with Mr. Hardock and go down the line. But should the system of 

existing tax-advantaged retirement savings, should those be consolidated to make it easier for individuals to save, if you have an 

opinion on that? 

Mr. HARDOCK. Most Americans that have retirement plans are 

quite happy with the plans they have. The fact is that plan participants and most employers do not choose between a 401(k) plan or 

403(b) plan or 457 plan; they simply have one. Those choices are 

not particularly difficult, and when they do come into play, they 

are made by employers. 

What you get if you try to consolidate is you make everyone reconsider and everyone amend their plans. That can be very disruptive, disruptive for the individuals involved and expensive for the 

employers that have to do that. I would add that the members of 

the American Benefits Council are also very concerned about any 

proposals that would consolidate retirement savings options with 

savings vehicles for other purposes like education or health. Most 

people save for a purpose, and confusing that retirement savings 

message could be very counterproductive. 

Chairman CAMP. All right. Mr. John. 

Mr. JOHN. I understand what my colleague just said, but the 

fact is when we talked to multiple small businesses and the like, 

the number of different types of savings plans and, frankly, their 

rather confusing numbers and names cause a fairly great anxiety 

among small businesses that were considering starting some sort 

of a plan, especially the ones that were fairly early in that process. 

So something that would consolidate, something that would simplify, not the least of which—as I say, it is a simple marketing 

technique—just changing the name of the blasted things—I mean, 

what is a 401(k) when it comes right down to it—would be exceedingly useful. 

There is another aspect to this, though, which is that you referred to savings for different things, and as you pointed out, there 

are a wide variety of different types of advantages or Tax Code 

treatments of this. It would actually be much simpler if you just 

created all real savings the same way and exempted it from income 

without necessarily having to have one level for a 401(k), one for 

college savings, one for various and sundry other savings. Savings 


dkrause on DSKHT7XVN1PROD with HEARING
121 

that is not consumption is actually an exceedingly valuable thing 

and should be encouraged. So to the point that you look at simplification, it is not just the matter of the accounts, it is the matter 

of savings itself. 

Chairman CAMP. All right. Thank you. 

Mr. Sweetnam. 

Mr. SWEETNAM. Thank you. 

Well, let me first focus in on the individual retirement savings 

vehicles. First off, I think one of the things that we tried to do in 

the Administration’s proposal was to eliminate the income limits, 

because when you have those income limits you really weren’t quite 

sure whether you were eligible to make a contribution to an IRA. 

In fact, if any of you remember prior to the income limits being put 

on, banks used to stay open on tax day until midnight in order to 

accept people’s IRA contributions. There used to be lines in banks 

to make IRA contributions on April 15th. Once we put in the income limits, those lines went away. So I think that was one of the 

things that we tried to do in our proposal. 

The second thing that we tried to do, and I think David alluded 

to this, was with our RSA and LSA proposal. Our LSA proposal 

was a means for people to save for any reason and to pull money 

out of those accounts to use for any reason. 

I think one of the things that people have to realize is that people’s savings needs change over time. Younger people may be 

thinking about savings, but they may not be thinking about retirement savings. I have a 30-year-old son now, and he is doing saving, 

but what is he saving for? He is saving to buy that house, which 

I think would be a really good thing. But when he gets a little bit 

older, he is going to be saving for retirement. What we tried to do 

with our LSA proposal was to give lower-income people or people 

who were at the margins of savings a way to have a tax-favored 

vehicle in order to have savings. 

On the retirement side, I think one of the things that you have 

seen—I have probably been practicing as long as Randy, and what 

we have seen over the years is Congress legislating to make the 

differences between the various types of retirement plans less and 

less and less, and so that what we were trying to do in our proposal 

was just take that final step. We had all of the plans have the 

same contribution amounts. We said, let us just take the final step 

and eliminate the various Code differences between the two. But 

Congress has been going that way over the last few years. 

Chairman CAMP. Thank you. 

Ms. Miller. 

Ms. MILLER. Thank you. 

I would like to focus on the employer side of this, and I think 

it actually ties into the individual, too, in that when you are talking to a small employer, it really isn’t that confusing. I mean, if 

you poll somebody that is not thinking about a retirement plan and 

say, here is this, this, this, but if you are actually talking to an employer saying, do you want to put in a retirement plan, you are 

really saying, do you want to have an IRA-based plan, or do you 

want to have one that has a trust that your employees are more 

likely to leave the money in? You know, if you put your money into 

a 401(k) for them, they can’t pull it out right away. If you put it 


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122 

into a SIMPLE plan, they might run off with it. So you are drawing those distinctions. Then you are really talking about how much 

can you afford and what would you like to do. 

This is where I get concerned about the proposals for individual savings in that right now we have the $5,000 IRA limit, and then 

you can go up to $10,000 for a SIMPLE plan, and then you can go 

up to $17,000 for the individual deferral in a qualified retirement 

plan. So there really are rewards for stepping up and providing 

better benefits, and I think that is why the system really has been 

working so well. 

If you have—and there is a proposal for, I am sorry, a deferral- only safe harbor of like 8- or $10,000. What happens is if you have 

somebody that can put $5,000—a small business owner can put 

$5,000 in an IRA, $5,000 in an LSA. Suddenly there is absolutely 

no reason in the world in terms of what they can save on a taxfavored basis for them to put in a SIMPLE plan. Right now they 

have the $5,000 IRA. If they want to put in $10,000, they are going 

up to a SIMPLE plan. So you have to be careful that what you do 

on the individual savings side doesn’t disrupt the structure that 

really works pretty well on the individual employer side. 

And I think when you look at it from an employer’s perspective 

in selling them a plan, there are options, there are things you can 

do as opposed to the IRA charts at the beginning of Bill’s testimony 

where it is basically telling you when you can’t do something. With 

the employer side, it is here is what you can do, here are your options. So it is very positive on the employer’s side. 

Chairman CAMP. All right. Thank you. 

Mr. VanDerhei. 

Mr. VANDERHEI. Thank you. 

While EBRI doesn’t take positions on proposals of this sort, I find 

a lot to agree with in what Randy and Judy just said, and I think 

from a rather abstract viewpoint, if you look at what is happening 

with respect to employers, you would introduce a whole new set of 

nondiscrimination testing if you did something like this. 

The other thing you have to keep in mind is many employees are 

very targeted in what they are saving for, and I think what you 

would need to keep in mind is if you make it rather amorphous as 

far as an overall savings target, it is going to be much more difficult for any individual to find out whether or not they are basically on track for a specific retirement income. 

Chairman CAMP. All right. Thank you. 

Mr. Levin may inquire. 

Mr. LEVIN. Well, thank you very, very much for your testimony. 

Mr. Chairman, I think this is a hearing that has significance for 

tax reform for this issue and beyond, because while there are some 

differences among you, and while I think everyone believes that we 

can improve the system, I think your testimony issues a warning 

to those who propose to eliminate all tax expenditures or those who 

equate tax expenditures loosely with tax loopholes. Because this 

tax expenditure, I think, is not a loophole. It is a policy. And some 

have essentially said, let us start by eliminating them all and go 

on from there, and some propose getting down to a certain point, 

assuming the elimination of all tax expenditures. And do any of 

you favor eliminating this tax expenditure? No. 


dkrause on DSKHT7XVN1PROD with HEARING
123 

Mr. HARDOCK. That is a big no from this end of the table. 

Mr. SWEETNAM. No. 

Ms. MILLER. No. 

Mr. LEVIN. And I am not sure that this is quite the way to put 

it, but, Mr. Hardock, you said here after talking about the importance of retirement savings, you say for that reason the first and 

most important principle you urge this Committee to consider in 

the context of tax reform is to do no harm. I am not quite sure I 

would put it that way. But maybe as to this area I think that is 

true, and the same is true in other areas relating to policies embraced in tax expenditures. 

So maybe I will leave it at that except to say, Mr. Sweetnam, I 

think there is a distinction between what you save for—I am all 

in favor of supporting, for example, savings for education purposes 

and for buying a house. I think the proposals to eliminate the 

present provision for purchasing a house and homeownership, 

again eliminating that without reference to any income level or 

anything else, is a mistake. 

But I do think you all feel that the retirement structure is more 

or less working, while we still need to improve it. I think we need 

to be careful not to lump everything together and lose the emphasis 

on having a strong Social Security system, which is added to by 

savings for retirement. I think we need that combination, and I 

think the point we want to drive home (you mentioned that the 

percentage now saved for retirement has improved a bit) is that we 

need to try to build that up not by eliminating Social Security, but 

by adding on to it. 

So I really think your testimony has importance today for this 

issue and all other issues relating to tax reform. We need to look 

at it, but with care, and not with such broad strokes that we would 

sweep away a system like retirement savings that is working, basically working. Thank you. 

Mr. SWEETNAM. May I respond? 

Chairman CAMP. Thank you. Well, I will do that on somebody 

else’s time. I do want to say, though, that I think we are having 

a very good discussion today. I do think it is important to point out 

that I don’t think there is anyone who is proposing eliminating this 

area. The closest thing that came to it was Simpson-Bowles, the 

President’s Commission on Fiscal Responsibility, which capped 

this, did not eliminate this, and there is no proposal to do such a 

thing itself. 

Mr. LEVIN. Mr. Chairman, let me just say, in the chart that is 

on page 29 of Simpson-Bowles, it has a number of alternatives—— 

Chairman CAMP. Yes. 

Mr. LEVIN [continuing]. Including eliminating all tax expenditures. 

Chairman CAMP. Yes, and that is one reason why I voted 

against the Simpson-Bowles Commission, as did Mr. Ryan. 

So Mr. Herger, you are recognized for 5 minutes. 

Mr. HERGER. Thank you, Mr. Chairman. 

Mr. John, I want to thank you for your work you put in on an 

automatic IRA proposal. As someone who comes from a small business background, I know the first question that many small business owners will have about any kind of mandated automatic IRA 


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is what is this going to cost me. Would automatic IRAs create any 

significant new costs or burdens on employers who offer the IRAs? 

Mr. JOHN. No, it actually would not. The way that it is structured, it is simple enough that most employers that are covered 

with this, roughly 97 percent according to studies by a variety of 

firms, actually already use some form of payroll-processing software or an outside payroll processor, and for those, having had 

many discussions with both of those industries, this would just 

simply be a new module that would be added. 

Plus the fact there is a tax credit. The tax credit has two components to it, one part which applies for 2 years which would cover 

any capital costs of setting up an auto IRA, and the other, which 

would last for 6 and could be extended if Congress chose to do so 

during that period of time, would provide a certain amount to cover 

the costs of actually putting employees on and off the system. It is 

a very simple, easy-to-understand system, and we found—a major 

insurance company did some market research with employers for 

us, and they found that the more they discussed it with the employers, the stronger the employer support for the proposal went 

up. 

Mr. HERGER. Do the rest of you agree with this or have any additional thoughts? 

Ms. MILLER. I definitely would agree with that. Even for those 

that don’t use a current payroll provider, we have members who 

are very interested in providing this. An employer could do it 

strictly over the phone. The credits should more than cover any 

cost incurred by the employer. 

Mr. HERGER. Thank you. 

Mr. John, I understand your proposal would utilize private financial institutions to administer the automatic IRAs. In the past 

there has been proposals to create personal retirement accounts 

that would be administered by the Social Security Administration, 

and some might argue that it would be simpler for small businesses if this could be tied in to the existing payroll tax withholding process. Could you comment on the pros and cons of these 

different approaches? 

Mr. JOHN. Sure. This is a very different—this is completely separate from the proposal in 2005 and before to set up personal retirement accounts in Social Security. There is a private sector 

funds management industry which works exceedingly well. We 

don’t see any reason to supplant it by government entity for that. 

We do have the ability if the private sector provider so chooses 

to have what is called an R bond, which is a retirement savings account. It is somewhat similar to the I bond, which has been a U.S. 

Treasury savings account for a number of years now, and that 

would allow small savers to accumulate roughly $5,000, but at that 

point then that would be rolled into the private sector. We feel that 

the private sector is going to be more innovative, it is going to create more jobs, and frankly it will do a better job of keeping costs 

lower. 

Mr. HERGER. Thank you. 

Thank you, Mr. Chairman. 

Chairman CAMP. Thank you. 

Mr. Tiberi. 


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Mr. TIBERI. Thank you, Mr. Chairman. Thank you for holding 

this hearing today and for your leadership on these issues as well 

as overall tax reform. As someone who has been interested in pension and retirement issues since I have been here, I look forward 

to working with you, Mr. Chairman, and others on this issue. 

I think strongly that we need to make sure that Americans have 

the tools and the education necessary to feel as though they can 

make the right choices with respect to retirement, and one of our 

panelists did a study with the Employee Benefits Research Institute, and in that study, Mr. VanDerhei, only 14 percent of Americans are confident they will be able to afford a comfortable retirement, and more than half of all workers reported they have not calculated how much they will need to live during retirement. And 

you are nodding your head in agreement. Those are pretty unbelievable numbers. 

I find out there—anecdotally, I have a friend of mine who is a 

lawyer who took a 401(k) plan and put it into an IRA, and then 

ultimately put his IRA into a real estate investment that he has 

a third party, pretty sophisticated and doing really well according 

to him, versus others who have not quite an understanding of how 

much—it has been talked about before—how much they can put in 

because of the contribution limits or what they can put it in. 

My question to all of you, and I will start here on my right, is 

whether it is simplification, whether it is reform, whatever it is— 

how do we get more Americans to change that 14 percent number 

so they have a better understanding, and can make better choices, 

and can have that—so we can have that 14 percent number be 

something substantial, like 75 percent of Americans feel they comfortably can live in retirement and understand what they need in 

retirement? How do we get there as policymakers? Starting here. 

Mr. HARDOCK. Well, I like to think of the American people as 

falling into three buckets. There are the folks who really aren’t 

going to save no matter what you do. If you force them to save, 

they will borrow more money somewhere else. There are the folks 

I call the squirrels, who will save no matter what. That is my 

mother. And then there is almost everyone else, certainly including 

me, that want to do the right thing, know they need to save, 

doesn’t know quite how to do it, doesn’t want the government telling them how to do it, but want to do the right thing. Strategies 

like auto-enrollment and auto-escalation send a signal to that vast 

group of people that these are the levels you should be achieving 

to get to retirement security. 

So, earlier Mr. Sweetnam talked about his son who felt that saving for his first home was more important. Well, my son is 25 years 

old. He asked me, I want to buy a home, but I have this 401(k) 

plan at work, and there is a match. I said, put the money in the 

401(k) plan first. And that goes back to the issue I mentioned earlier, people save for a purpose—for retirement. We need to set up 

structures and incentives that let people know how much to save, 

and we will see Mr. VanDerhei’s savings numbers for the Gen Xers and others start to go up even more. We need to start them 

young, get them involved and get them into the habit of saving, ultimately changing the culture of saving in this country. 

Mr. TIBERI. Thanks. 


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Mr. John. 

Mr. JOHN. I actually have four thoughts on this. They will repeat, and I imagine you are going to hear much of the same thing 

here. Number one is obviously everyone has to have access. If you 

don’t have access, we can talk all we want to about doing it on your 

own, but 95 percent of people don’t. 

Second is, of course, start young. That is absolutely crucial with 

that. 

Another thing is the auto structures, auto-enrollment, and particularly auto-escalation. And one of the things that this Committee 

can do as part of its discussion of tax simplification, tax reform, is 

to look at the 3 percent default rate for auto-enrollment. There are 

a number of studies out there that show that people will have precisely the same participation rate if it is 5 percent, 6 percent and 

the like to start. People think that they are doing the right thing, 

and that 3 percent, since that is the way it starts, that must be 

the right amount for them to save, and they find themselves in a 

trap later on. 

Mr. TIBERI. Mr. Sweetnam. 

Mr. SWEETNAM. One of the things that we were looking at 

when we did our retirement simplification proposals is that we 

thought that we were trying to harness the industry to do a lot 

more advertising with regard to savings, and one of the things that 

we looked at was by eliminating the income restrictions for IRAs, 

that people—that there would be advertisements to get people to 

come in and do this. 

You know, we actually saw this happen when Congress enacted 

the Roth IRA. I was working on Senator Roth’s staff at that time. 

And when the Roth IRA was enacted, we saw for all different types 

of IRAs additional savings because everybody was promoting it. 

Mr. TIBERI. All right. 

Chairman CAMP. Thank you. 

I see we are over the time. Mr. McDermott is recognized. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

I think this is a very important hearing to have to talk about, 

and I agree, Mr. Tiberi and I probably come at the same concern 

over having people’s security. But I fly back and forth from Seattle, 

where United Airlines has its largest base, its oldest base. Most of 

the flight attendants are about 55 to 60 years old, and one of them 

told me a story, and I would like you guys to respond, and ladies 

to respond to this. 

Her husband worked for a big bank in Seattle, Washington Mutual, and one day they closed the bank, and he lost his entire 

401(k). Boom, gone. All gone because it was invested in the bank. 

Right? Because he was required to invest it in the bank. Now she 

flies for United Airlines. They have gone into bankruptcy twice, 

and each time they go into bankruptcy, the first thing the bankruptcy judge does in response to the company’s pleadings is to 

scrape off the retirement. So this woman who has flown for United 

Airlines for 29 years now has a guarantee of $231 a month from 

the PBGC on top of her Social Security. 

Now, here are middle-class Americans who did everything right, 

and they got clobbered by the system, and I want to hear that this 

automatic system that we are going to enroll everybody in is going 


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to protect those people. This woman said to me, I and my husband 

are going to work until we die because we have nothing but Social 

Security. 

Ms. MILLER. I would like to take a first stab at that, because 

the situations you described are just horrible, and Congress has 

acted to prevent a company forcing an employee to put all their 

money into employer stock. 

That is no longer permissible. And that was—you know, the ability was phased out. And you guys did a great job on that. So hopefully that one won’t happen again. 

I think the key on automatic enrollment is really all the defaults, 

and one of those defaults is investment. And in PPA, that was—— 

Mr. MCDERMOTT. Let me stop you, though. You heard Mr. 

Tiberi talk about how many people know how to invest or understand, 14 percent. 

Ms. MILLER. Right. Uh-huh. 

Mr. MCDERMOTT. So how in the world can anybody sit up here 

and sensibly believe that we can design a system that says we are 

going to give all of you a choice, but only 14 percent of them understand what in the world they are in? 

Ms. MILLER. Most people don’t take advantage of that choice; 

they will stay where you put them. If you automatically enroll 

them, they will stay in your default investment. So I think the key 

is having a secure and appropriate default investment. And again, 

there were changes made in PPA, and I think there has been a recent study—— 

Mr. MCDERMOTT. Does that mean then, that the company, the 

small business or whatever, has certain places they could put the 

money that is safe? They will be restricted as well? Or can they do 

whatever they want? 

Ms. MILLER. They choose the provider, but the type of investment that is the default investment is defined. It is like a targetdate fund. Or you could, frankly, that is something that you could 

be considering, what should that be? But there is ample evidence 

that whatever you say the default investment can be is where most 

people are going to end up putting their money. 

Mr. MCDERMOTT. So the automatic investment or the automatic enrollment would put it into something that is judged to be— 

by whom? Who would say that this is a safe investment? Because 

I would like to know who those people are. 

Ms. MILLER. You define the parameters in terms of the individual companies. 

Mr. MCDERMOTT. The Treasury will ultimately put the blessing, they will bless the company that is going to make these investments; right? 

Ms. MILLER. Right now, it would be the plan sponsor or if you 

are in—would be the one that is choosing their investment advisor, 

and the investment advisor, if they hire an investment advisor, 

would accept fiduciary responsibility—would have fiduciary responsibility for choosing a company that provides—— 

Mr. MCDERMOTT. Who is on the hook if they made a bad 

choice? 

Ms. MILLER. The fiduciary that is responsible for that decision. 


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Mr. MCDERMOTT. So any investment counselor would then be 

responsible for making the patient—the patient, I am a doctor— 

would be responsible for making the client whole? 

Ms. MILLER. Well, in theory. You know, fortunately, there 

aren’t very many situations—now that employer stock is off the 

table—there aren’t many situations where you have a company 

that the investment has gone down to zero. When you do have responsible people choosing investment providers, it is not—there 

are—horror stories are more and more rare. 

Mr. MCDERMOTT. And the flight attendants, I should just tell 

them tough luck; $231 is what you are going to get? 

Ms. MILLER. The defined benefit system is a whole other—— 

Mr. MCDERMOTT. It seems to me they ought to be connected 

somehow. Or we should take away the ability of the companies to 

take off the pension at bankruptcy. 

Chairman CAMP. Thank you. Time has expired. 

Dr. Boustany is recognized. 

Mr. BOUSTANY. Thank you, Chairman Camp, for holding this 

very important hearing. 

As we look at tax reform and the very equally important area of 

retirement security, I have taken away a few things just from all 

of this discussion: Number one being that, obviously, we need to 

look at how you can promote personal responsibility and savings. 

Second, whatever we do, I certainly appreciate the adage of, first 

do no harm how. So how do you avoid major disruptions? And 

thirdly, can we simplify yet maintain flexibility. 

And so, as I am trying to think through this, I remember when 

I was running a small medical practice and dealing with some of 

these issues after a full day in the operating room and focusing on 

the clinical side of my practice, oftentimes individuals come in to 

work for you, and they have worked somewhere else. They have a 

retirement account, multiple retirement accounts. And yet—and 

they may also have an IRA on top of that. And there are a variety 

of rules that govern this. And I remember having to make phone 

calls to figure out, how do you incorporate somebody into your business structure when they have had these other outside arrangements in the past. 

Talk to me about the rules, the complexity that these rules really 

present to a business owner trying to work with incoming employees and is this an area that we can really simplify? Any of you, 

please. 

Mr. HARDOCK. I will just start by saying that the problem you 

describe has been around for a while. The changes made in 2001 

on portability of assets allowed individuals to combine, when they 

switched jobs, assets from one employer plan to the next employer’s 

plan—or an IRA to consolidate those assets in one plan. That was 

a major improvement and really streamlined the process and made 

it possible for a business owner to take those assets in for new 

hires. 

It is still complicated because you have items that may have 

been contributed as pre-tax dollars and others as post-tax. Those 

are issues we have to deal with no matter what because they exist 

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tax treatment. But we have made enormous strides since 2001 in 

improving those rules. 

Ms. MILLER. Yes, I think there has been an awful lot of 

progress made. And I also think that if you look at the options that 

are available, these days you are more likely to have somebody 

that comes into your practice that also had a 401(k) plan at their 

other arrangement. And so there is a little more simplicity because 

I think sometimes when we talk about consolidation, then you are 

talking about a 403(b), 457, 401(k); in the medical practice, maybe 

there was a 403(b), but as Randy said, the rules have been simplified to make that an easier process. 

But in most instances, you now will have somebody coming from 

a similar type plan to your current arrangement. And I think that 

really smoothes it. I do think—in our written testimony, there are 

some comments on rules that can be changed that make it a little 

easier for small business to not get themselves in trouble. And I 

think we should get rid of those rules that trip people up. Frankly, 

they are rules that apply whether it was an ERSA or 401(k). Just 

plain commonsense stuff. 

Mr. JOHN. And if I may add, the real serious problem is the fact 

that people forget to combine. I have actually an IRA that was 

rolled over from TSP 20-plus years ago, and I keep meaning to roll 

it into Heritage’s plan, but I have yet to do that. What we see is 

we have a significant number of people who lose their accounts, especially over the years, whether employers go out of business, the 

providers change and the like. And there is some suggestion in my 

written testimony about a way to use tax information to enable 

people to find their lost accounts and to encourage them to combine 

them. 

Mr. BOUSTANY. Thank you. 

One last question. Are there incremental steps that would make 

it easier for employers to offer annuity options as part of a defined 

contribution plan? 

Mr. SWEETNAM. Well, I think that this is something that the 

IRS and the Treasury Department are currently looking at. And I 

think that it has been something that the policymakers are really 

looking to give people that ability to address, to use an annuity. 

Now I am not speaking for the current Treasury Department or 

the IRS, but I think what they have been trying to do is to eliminate some of the difficulties under the current law to go and to 

move into an annuity product. And that is something that I think 

policymakers have been looking at over a number of years. 

Mr. BOUSTANY. Thank you. 

Chairman CAMP. Thank you very much. 

Ms. Jenkins is recognized. 

Ms. JENKINS. Thank you, Mr. Chairman. 

Thank you for holding this hearing, and thank you to all the 

panel for participating. I have a question for you, Ms. Miller. The 

President’s 2013 budget proposal includes a proposal capping certain individuals’ itemized deductions to 28 percent. 

Ms. MILLER. Right. 

Ms. JENKINS. And the limitation on deductions under the proposal include the exclusion or above-the-line deduction for pretax 

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tions to traditional IRAs. Given that the tax break for retirement 

savings is a deferral, not a permanent write-off, wouldn’t limiting 

deduction on the front end but not when the amount is distributed 

result in double taxation? And what are your thoughts on how the 

President’s proposal would affect retirement savings rates and also 

on small business owners’ decision to set up or maintain retirement 

plans for their employees? 

Ms. MILLER. I appreciate that question. 

I was very disappointed to see retirement savings included in 

that proposal because you are right, it would be double taxation if 

you have someone who—because this is a deferral. So if you have 

someone who is at a 31 percent marginal rate and you are giving 

them 28 percent cap on that, then they are paying that 3 percent 

now. But when they pull it out, there is no special accounting. I 

am not saying there should be because that would be a wreck. But 

when you pull it out, they are paying taxes on it again. So it really 

literally is double taxation. 

And if you are being honest when you are talking to an employer, why would they want to put themselves in that position? So 

I do think it would be harmful and anything that reduces the tax 

incentive for a small business owner, to me, I think will discourage 

coverage. 

Ms. JENKINS. Okay. Thank you. 

Mr. Sweetnam, your testimony mentioned that following the 

Bush administration’s proposal simplifying this area, many interested parties were concerned about the proposal resulting in fewer 

savings opportunities being available to small businesses, causing 

them to opt out of offering an employer-based savings vehicle. You 

also mentioned that the 2005 budget proposal addressed some of 

those concerns. Can you just elaborate for us on what you heard 

during your proposal and what changes you made to the 2005 

budget? And if Congress were to move forward to meaningful reforms, what are some of the transition rules that you might advise 

us to keep in mind? 

Mr. SWEETNAM. Well, the two big things that were problems, 

one, in 2004, we had the LSA and the RSA contribution amount 

at $7,500, and we reduced it to $5,000. And what we heard from 

some of the policy folks, particularly ASPPA being one, was that 

by having that high of a tax-favored savings amount, some smaller 

businesspeople might say, well, you know what, I can put in $7,500 

in my LSA, $7,500 in my RSA. I have sheltered everything; I don’t 

need any further savings through an employer-provided plan. 

The other thing that we did was in our ERSA proposal, we tried 

to simplify some of the nondiscrimination rules. And one of the 

things that we did was we eliminated all the various testing methodologies that are currently available, thinking that that was simplification. Well, as I think Judy has said before, one person’s simplification is another person’s opportunity to make various changes. 

And so we listened to them and what we did was we just reduced 

the general complexity of the test. We didn’t reduce some of the opportunities that small businesses would have in order to create 

more flexible types of plans. 

Ms. JENKINS. Thank you. 

I yield back. 


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Chairman CAMP. Thank you. Mr. Neal is recognized. 

Mr. NEAL. Thank you, Mr. Chairman. 

Mr. Chairman, I have had a long-standing issue and I think pretty strong credentials in this area. Just to recount quickly, I worked 

with Bill Thomas before he was Chairman of this Committee on 

raising IRS rates. As you recall, that was not a favorite of Mr. Rostenkowski at the time. And I carried the RSA proposal for the Clinton administration with Bob Rubin, recalling that the Clinton proposal in terms of differentiating itself from the Bush proposal was, 

the Clinton RSA proposal was as an addition to Social Security; the 

Bush RSA proposal was as a substitute for Social Security. 

And I have carried this auto IRA proposal for a long period of 

time. Now, I introduced this bill 5 years ago, and at least three of 

the panelists I know have already endorsed it, and I suspect the 

other two have some sympathy for it. Now this proposal would 

raise the national savings rate by nearly $8 billion a year. Endorsed by Brookings and now with hard work from David John and 

The Heritage Foundation, we have developed this proposal. I have 

kidded David many times; it is not every day that a Massachusetts 

Democrat’s legislation is endorsed by The Heritage Foundation. We 

have done just that. 

Let me tell you who else supports this legislation: The AARP, 

Latinos for a Secure Retirement, the Black U.S. Chamber of Commerce, Putnam Prudential, Natixis. And I must say with some 

grave disappointment, since Phil English left, I can’t get one Republican to sign on to this legislation. 

Mr. Herger I thought was headed in the right direction. He was 

headed in the right direction as he began to question Mr. John. He 

couldn’t bring himself to say it was the Neal proposal, but came 

very close to going to the altar without saying ‘‘I do.’’ 

Now, David, why does Heritage support this proposal? 

Mr. JOHN. Heritage supports this for two reasons. And we have 

enjoyed working with you over the years. Although, for some of my 

colleagues, it has been a little—I tell some of them I just went to 

a bar. 

I have also enjoyed working with your staff, both Melissa initially and Kara Getz now. 

Conservatives support the auto IRA for two very good reasons. 

Number one is that savings changes behavior. It takes people and 

it brings them closer to the community. It makes them more future-oriented and makes a variety of cultural changes that are very 

important. 

A second one which is equally important, crucial that every 

American has the opportunity to save, is the alternative: If we 

don’t have a retirement savings system that applies to all and allows people to start at one company and move to another and continuously save, inevitably, we are going to see the data that Jack 

had initially, where people do not have sufficient retirement savings, and they are going to come to Congress, and they are going 

to say: Please, sir, we need more taxpayer benefits. We don’t have 

the money for that right now. 

Mr. NEAL. Also endorsed by The Brookings Institution, that is 

important. 


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Ms. Miller, could you tell me why you have endorsed the IRA 

proposal that I have offered? 

Ms. MILLER. Yes, we are very supportive because it really does 

build on the current employer structure. And we think once employers—first of all, people need to have an opportunity to save at 

work and you just can’t do that without having the employer involved. When you get over that hurdle, then we feel that once employers are used to doing payroll deductions and feel comfortable 

with that, it will be easier to approach them and say, listen, you 

have been doing this; can you afford to do a little more? Maybe a 

simple plan would work for you or a 401(k). And once they are in 

the system, they will more comfortable moving up and providing 

some employer contributions as well. 

Mr. NEAL. It would require no matching contributions from the 

employer. 

Ms. MILLER. It would require no matching contributions from 

the employer. And just the way—you know, 30 years ago, it was 

a different story, but right now with the development of electronic 

systems, it would be so easy and so little trouble for the employer 

to make this work. 

Mr. NEAL. Particularly good for the small employer. 

Mr. Hardock, why do you like the proposal? 

Mr. HARDOCK. The good thing about the proposal is that it 

sends a signal that we need to get more employers into auto-enrollment and auto-escalation. The proposal is one way to move in that 

direction. 

As Dr. John indicated, providing incentives to employers to do 

that—making it attractive to employers to go in that direction—is 

something that I think is well worth exploring. Providing those incentives, getting more employers to do it, and giving employees 

that option of the auto IRA if they don’t have a plan of their own, 

is valuable. So it expands the reach. 

I think there is a question of how quickly you can get there. 

Chairman CAMP. Thank you. 

Mr. Buchanan is recognized. 

Mr. BUCHANAN. Thank you, Mr. Chairman. 

And I also want to thank our witnesses today. 

As you know, we have 10,000 Baby Boomers retiring every day, 

they claim, for the next 30 years, 20 years. But a lot of them are 

very uptight, frankly, about planning on retiring with all of these 

concepts that they had, and now they are getting to the point 

where they can retire, 60, 65; they don’t know if they are going to 

have enough money, if they are going to get the return on their assets because they like to put them in more conservative assets 

going forward. And then the other thing is they are not sure, 

maybe at one point, they thought they were going to live to 75; now 

my mother-in-law is 92. They are all concerned about it. 

What can Congress do, do you think, if anything, to help bring 

a little bit more security and dignity? What incentives or what 

would be one thing that we could do that we are not doing to make 

a difference? I can tell you I am slowly getting to that age, and a 

lot of our friends who thought they were fine 10 years ago in terms 

of retirement are very, very concerned today. They are working 

longer; they are not sure. Any thoughts on that. 


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I will start with you, Ms. Miller. 

Ms. MILLER. Yes, thank you. When we are talking Baby 

Boomers with such a short timeframe, I think one thing that you 

should do is, when you are looking at tax reform, keep those catchup contributions in. Because as a Baby Boomer, I can say that I 

am a lot more conscious of how much I need to save now that it 

is too late. And it would be very good to keep those options there. 

I think looking further down the road, it is really important to 

engage younger people. And automatic enrollment and auto-escalation are critical. 

But I also think we need to look more at e-delivery of things. We 

are all very supportive of all sorts of disclosures, but when people 

get a stack of paper, they don’t necessarily look. And if we could 

approach people more with something that is interactive, it could 

be easier for them to plan, easier for them to get engaged, and they 

really would like you to enable more electronic delivery. 

Mr. BUCHANAN. Mr. John, would you comment? 

But let me just mention, I was reading in USA Today, they were 

talking about where they are at in terms of retirement. I think it 

was 60 percent, an enormous number, that was just relying on Social Security, and they don’t have much beyond that. It is pretty 

scary to think you worked 40 years of your life, and there is not 

something in place. Do you have anything you want to add to that? 

Mr. JOHN. Let me add two things if I may. First, of course, is 

to take this as an object lesson. The fact is if you reach 55 or 60, 

you don’t have nearly the flexibility that you used to have. And we 

need to make sure through the auto IRA and a wide variety of 

other things to make sure that this doesn’t happen to the next generation. 

But we have a second crisis that is coming with the Baby 

Boomers. The first one is going to be not having enough money, 

and the second is not managing it properly so that they run out 

of money at the time when they are 80 or 85. We need to very carefully examine the question of guaranteed lifetime income, annuity 

type products, whether they are ones that kick in at the age of 80, 

whether they are ones that are purchased at the time of retirement, to make sure that we don’t have the same individuals who 

are worried now even more worried when they are 85 and their 

bank account is empty. 

Mr. BUCHANAN. Let me ask one more quick question just in 

terms of Congress helping small business. I am concerned there are 

a lot of small employers out there where employees would like to 

have some kind of retirement; they don’t offer it. What—you know, 

that is tax deductible—what incentive can we help with small businesses in terms of making sure that as many of them as possible 

would provide some kind of retirement package, 401(k) or whatever 

else that is available out there? 

Mr. Hardock, do you have any comments on that? 

Mr. HARDOCK. I think many Members of this Committee, both 

Republicans and Democrats, have supported incentives, for example start-up credits for small business to send the signal that if you 

set up this kind of plan the government will help you with that initial administrative expense. I think doing more on that front would 

be helpful. 


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I think Mr. Neal now has a bill in. But others on this Committee 

have in the past supported that concept, and it could easily be expanded on because that is where our problem is. Small businesses 

that are not covering their employees partly because of the costs. 

Electronic delivery would help there, too. It is amazing how expensive it is to send out all of this paper. 

Mr. BUCHANAN. Thank you. 

Mr. Chairman, I yield back. 

Chairman CAMP. Thank you. 

Mr. Marchant is recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Mr. VanDerhei and Ms. Miller, you both state in your testimony 

that despite what some may claim, studies show that current tax 

incentives for savings for retirement are quite progressive. What 

would be the effect on progressivity if you lowered the top marginal 

rate to 25 percent? 

Ms. MILLER. That is a very complicated question and depends 

in part on what else you have done when you have lowered that 

marginal rate to 25 percent. I mean, it is a fact that as the top rate 

declines, there is less incentive for tax deferral because you are 

saving less money when you contribute. But there are other competing ways to save. It depends in part on what is happening with 

capital gains and dividends. If you have no tax to be paid on an 

investment, as David would like to see generally, then it becomes 

very difficult to incentivize an employer to put in a plan unless you 

specifically have a targeted tax credit or some other specific benefit 

to encourage that employer to put in a plan. 

So I think that this is something that is particularly sensitive to 

what else is happening. But it is true that as the rate declines, the 

incentive, cash that is freed up by putting it in this plan, also declines. So you have to be careful not to give it a double hit certainly 

by also—maybe you need to increase the contribution limits in 

order to maintain an incentive there for employers to put in plans. 

Mr. MARCHANT. Thank you. 

Mr. VANDERHEI. I agree with what Judy said and would like 

to amplify it a bit. We had done some work last summer looking 

more at the Simpson-Bowles type proposal, but a lot of that could 

be expanded to this type of proposal. If you are reducing the marginal tax rates, especially for the small business owners, you are 

changing the calculus of what their cost-benefit analysis is of providing that to the employees. And Judy has in her written testimony a graph that we worked on last year that actually shows— 

I believe we had as much as an 11 percent decrease in the number 

of small plans, defined as plans with less than 100 employees, 

because of the 20–20 limits. If that is something you would be interested in, we could very easily modify that to look at what the 

impact of decreasing marginal tax rate would be apart from the 

20–20 limits. I could get back to you on that if you are interested. 

Mr. MARCHANT. I think we would be interested in that in all 

our proposals, that that tax rate be capped at 25 percent. And for 

Mr. John, what would be the overall effect on retirement savings 

of adopting the 20–20 proposal as was proposed by the Bowles commission? 


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Mr. JOHN. I am not a micro or macro economist, so I have not 

really modeled it. I usually tend to defer to Jack on issues along 

that line. 

Mr. MARCHANT. Okay. Well, Jack. 

Mr. VANDERHEI. The 20–20? Actually, we have a figure in the 

written testimony that takes a look at what would happen. I don’t 

think, surprisingly, the biggest hit would be on the highest income 

quartile. We found, for example, that people currently 36 to 45 if 

it were applied today would have a 15 percent reduction on average 

in their retirement balances. What I think comes as a surprise to 

many, though, is that the second biggest hit actually comes on the 

lowest-income quartile and that is because of the 20 percent, not 

the 20,000. And one thing that many people ignore is that oftentimes, people will come back into the workforce later on in their 

age. They may be a spouse, and they may find that because of 

catch-up or whatever, they have the ability to put much more of 

their income in. We find that they are the ones who typically end 

up triggering the 20 percent as opposed to the high income, who 

trigger the 20,000. But even for what we found for 36 to 45, almost 

10 percent for the lowest-income quartile, 10 percent reduction in 

average account balances because of 20–20. 

Ms. MILLER. I think that is actually understated for the lower 

paid, because small business owners, they would have about zero 

incentive for putting a plan in, and the safe harbor contributions 

they make for rank and file workers would be gone. And so I think 

that really understates the negative impact. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Chairman CAMP. Thank you. 

Mr. Thompson is recognized. 

Mr. THOMPSON. Thank you, Mr. Chairman. 

And thank you for holding this hearing. I think it is extremely 

important, and it is an area where we ought to have a lot of common agreement. This is something we can actually do to help people. A lot of young folks out there who could really benefit from 

good work that this Committee could do. 

I want to follow up on a couple of questions that were asked by 

other Members. Mr. Buchanan asked about what to do to encourage small business folks to participate. 

Ms. Miller, in your written testimony, you mentioned that employers who don’t offer any sort of retirement plan for their employees cite business concerns. Could you elaborate on what those business concerns are? And did your research show any downturn or 

any of the folks who were offering it, did they jettison those programs during this recession? 

Ms. MILLER. Sure, I don’t have any data on that last piece, although our members certainly anecdotally if a business goes out of 

business, obviously, the plan is gone. And certainly as a small business, when your resources are drained, you will cut back on contributions if nothing else. 

But when employers say they are not putting a plan in for business reasons, there are a few that are top line reasons. One is that 

they don’t think the employees care. And if the employees say, give 

me cash, then the employer would rather just give them cash if 

they have it. 


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The second is that small businesses are notorious for not lasting 

very long. And if you aren’t sure you are going to survive, then you 

are hesitant to do something that really says, hey, I have arrived, 

I can plan long term, too. 

And the third is the cost. I think there is—some employers don’t 

understand how inexpensive it is to actually set up a plan. But 

most commonly the issue is that they don’t feel they can afford to 

make a contribution or to promise to make a contribution. And that 

is why really we are supportive of the auto IRA proposal, because 

it could get employers in without out-of-pocket costs themselves. 

And we think that they will find that employees do actually appreciate it, and we can get over a couple of hurdles at the same time. 

Mr. THOMPSON. I think Mr. Neal’s bill would speak to that 

issue. 

Ms. MILLER. Absolutely. Yes. Yes. 

Mr. THOMPSON. For public record, I told him a minute ago that 

I would coauthor the bill. I think it is a good one. 

Mr. John, you have done some research on retirement savings 

plans in other countries. Was there anything there that really 

knocked your socks off? 

Mr. JOHN. There were actually a couple both good and bad. If 

we look, for instance, at New Zealand, New Zealand has a form of 

the auto IRA, but given the fact that they only have 3 million people, it is a much more centralized form. But it works exceedingly 

well early on. 

The one that is a huge mistake is the United Kingdom. The 

United Kingdom went through and back in 1997, then Chancellor 

of the Exchequer, Gordon Brown, increased the taxes of retirement 

plans by about 5 billion pounds a year. The net result obviously 

was a collapse. The second thing they did was the U.K. continuously tinkers. They come up, they set up a program, they actually 

have a brilliant program called NEST, National Employment Savings Trust, that starts to go into effect this fall, except that the 

government just announced within the last week or so that now 

they are looking at a completely different approach. And what that 

does is to breed confusion and distress. 

Mr. THOMPSON. Is there anything that we should take from 

the different foreign programs that you evaluated and look at putting in place here? 

Mr. JOHN. The ones that work the best are the ones that have 

the broadest coverage and start people young and keep them saving throughout. Australia has a mandatory system which works exceedingly well. I am not suggesting that the United States move to 

something along that line, but the broader the coverage, the better 

it is. And it is possible to do a very simple system, like the auto 

IRA, and keep it cheap. Frankly, we studied overseas systems very 

extensively in developing it. 

Mr. THOMPSON. Thank you all very much for being here. 

Thank you, Mr. Chairman. 

Chairman CAMP. Mr. Berg is recognized. 

Mr. BERG. Thank you, Mr. Chairman. 

You know, obviously, the goal in this whole thing is, how do you 

make it simple and easy to pick the right plan for each individual? 

And you know, obviously someone’s understanding of financial 


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markets and what is best for them and trying to make a lifelong 

decision rather than a short-term decision, so I was intrigued by 

the automatic IRAs. 

And in part of your testimony, Mr. John, you talked about simplifying things but also having an automatic IRA. So kind of my 

question to you, does the simplification come first, or do you do the 

automatic IRAs and then simplification after that? 

Mr. JOHN. I anticipate that, given the direction of things, that 

the auto IRA comes first. The auto IRA is crucial, because if people 

don’t save, if they do not get started early on, it doesn’t matter if 

you simplify or not. 

Mr. BERG. Thank you. 

I just had one kind of out-of-the-box question. And it seems like 

so many people are going through a lot of different jobs today and 

sort of the new normal is several different careers, several different 

jobs. And a lot of younger people that I know have been to two or 

three different employers in a short period of time. So each time 

you are trying to analyze what is the best retirement program? 

Here is what the employer is offering. Has there been anything 

done like out of the box and looking at a plan that would just be 

an individual’s plan, and this plan would follow the individual, 

even though they are an employee but, again, they would make the 

decisions on what is the right package for them for their working 

career? And as they went in and out of different careers and different jobs, those employers might pay into their individual plan 

rather than the employer sponsoring a separate plan? 

Mr. JOHN. There have been some examinations of that sort of 

thing, but the key factor is that most people, especially when they 

are starting out, don’t have the expertise to make that kind of 

choice. And the natural human reaction when you are faced with 

a choice that you don’t understand is that you do nothing. So people stop. That is the value of both an employer-sponsored plan, 

where you have the payroll deduction and the auto-enrollment and 

the auto-escalation. And what we find as time goes on that a certain proportion of people who started out in auto-enrollment later 

learn and take more control over their activities. 

Mr. BERG. Any other comments on more of an individual plan 

that follows an individual? 

Ms. MILLER. I think it is very hard to motivate an employer to 

participate in that kind of an arrangement, because the employer, 

once they feel financially secure enough to put in a plan, they are 

looking at the tax benefits. They are also looking at what works for 

their company. And what sometimes, I think, gets forgotten in talk 

about a single, simple plan is that employers will use—they still 

use vesting schedules. If they are putting in a contribution for 

workers, it might be fully vested because it is a safe harbor, but 

if there is something more than that, they don’t like the idea of giving money to somebody that is coming and going right away. And 

so the money won’t necessarily all be vested right away. And it will 

vest after a few years, or maybe a graduated schedule, it is 5 years. 

So that really doesn’t work when you have an individual account. 

And so there are things that employer—flexibility that the employer has under an employer-based arrangement that would disappear and I think make them less engaged. 


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Mr. BERG. Thank you. 

I yield back. 

Chairman CAMP. Mr. Reed is recognized. 

Mr. REED. Thank you, Mr. Chairman. To follow up on Mr. 

Berg’s sentiment, one of the issues I see is the need—we talk a lot 

about employers and the government here in Washington being the 

ones to choose best what individuals should do with their futures, 

especially when it comes to retirement. And we kind of have this 

attitude up here sometimes that I try to fight every day that Washington knows best; just trust us, we will take care of it. And I want 

to get to ways to try to enhance individual accountability and responsibility for people, allowing them to control their own destiny. 

So are there things that we could be doing to encourage literacy 

when it comes to financial planning? Any ideas, thoughts from the 

panel as to where we could really change the mindset of individuals as they go into the workplace of actually being aware that 20, 

30 years will come, and we need to have something in the bank to 

take care of us? Are there any proposals that anyone could share 

with us that they would say we should be taking a real close look 

at and advancing? 

Ms. MILLER. I have to get back to electronic delivery and really 

getting people engaged. There are some amazing things going on 

out there in terms of enrolling people and having their own individual information set up on their iPad or handing them out when 

people come in to get enrolled and letting them work through and 

see what it is really going to be like. 

And yet there are constraints on how everything has to be handled right now that minimizes what you can do. And so it almost 

ties—you know, this market is incredibly competitive and creative 

and can’t always get to do everything it could do because—— 

Mr. REED. Could you give me some examples of those constraints? When you say there are constraints, are they regulatory 

constraints? 

Ms. MILLER. Yes, regulatory constraints. For example, right 

now, we have all of this paper that is due out for disclosure on investments, and it is going to be—we support the disclosure, but 

people are going to be getting a stack of paper, and I don’t think 

they are going to read it. 

And if you were able to—if you had their email address, I mean, 

we give people at work an email address. You can’t necessarily use 

that if they aren’t—you know, that is not a routine part of their 

job and all of this other stuff and even though they may have used 

our Web site. So if somebody uses the Web site, you should be able 

to drive them to that Web site to get this information. Once they 

are there, there are fun things you can do. There are people working on games to encourage people to save. We need to really be able 

to get them involved. 

But right now, you have to send them that stack of paper unless 

they went through certain steps. And it is just really a major expense, and it really discourages creativity and truly engaging people, especially younger people that are so much into electronics. If 

we can’t deliver this information on their iPhone, they are not 

reading it. And right now, we can’t. 

Mr. REED. Mr. John, I see you nodding over there. 


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Mr. JOHN. I agree with everything that Judy has said, as I usually do. 

But there are other areas—for instance, the U.K. has something 

called the Platform Account, which combines the retirement savings account with a variety of other types of savings and investment vehicles. And one of the things that they have found that 

works exceptionally well over there is that because the employer 

knows how old this employee is and in what stage of life they are, 

they can shoot them little target videos. So if the individual has 

just got a child, they can shoot them a video talking in 2 minutes 

about, here is what you can do to start saving for your child’s future. Or if you just married, here is what you can do to start saving 

for a house. And we found in studies that these work exceptionally 

well, and they work even better if the person who is being recorded 

is someone that is someone like a coworker or someone who has 

some sort of a connection to that individual. 

Mr. REED. How about in the educational, like our high schools, 

elementary school? Any thoughts on that type of forum? 

Mr. JOHN. Yes, my older daughter, who is 25, went through one 

of the finest high schools in the United States up in Montgomery 

County. And she took a variety of courses in photography, cooking 

with amazing results, and I think she didn’t have to take a single 

financial literacy course. 

Mr. REED. That is a great point. 

With that, I yield back, Mr. Chairman. 

Chairman CAMP. Thank you. 

Mr. Lewis is recognized. 

Mr. LEWIS. Thank you very much, Mr. Chairman. 

Mr. Chairman, I want to apologize to members of the panel. I 

had to run out and speak to a group of eighth grade students. So 

they kept me for a while. 

I heard your testimony, and I want to thank you all for being 

here. And thank you for your service. 

Ms. Miller, it is good to see you again. Thank you also for all that 

you do. 

Ms. Miller, many of the people who criticize or question our tax 

incentives for retirement savings argue that they are for the 

wealthy. They say that these laws favor high-income people. In 

your experience and research, do you find this to be true? Do you 

have any ideas as to how we can further increase participation 

among lower- and middle-income workers? How can we make it 

easier for people to save for retirement? 

Ms. MILLER. That is a very good question. I think if you look 

at the retirement savings incentives, first of all there is a cap on 

compensation that can be considered. It is at $250,000. So when we 

hear a lot of talk about let’s cut incentives for people who make 

over $250,000, I cannot help but think, we already cap it. We can’t 

include compensation over $250,000. 

That applies also when you are testing for nondiscrimination. So 

somebody might make a million dollars, but when you are comparing their percentage of pay in this plan to the lower-income person’s percentage of pay, you use the $250,000. So we already have 

something that is built in to limit that. 


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The nondiscrimination rules generally will say that if the busi- ness owner wants to put in the maximum of $50,000, those workers 

are going to be getting a contribution; 3 percent, 5 percent, you 

know, depending on the arrangement. They are going to be getting 

the employer money. And it really is additional money. 

There have been some people who will say, oh, they would have 

been getting that as pay anyway, but there was a really good recent look at this by Eric Toder and somebody else, I forget, showing 

that for lower-income groups, if there is a 401(k) plan, it is new 

money. It is largely new money. They have like 89 percent, but for 

small business, it is more like 100. It really is additional money. 

So I think these nondiscrimination rules do that. It is a matter 

of getting access to more people, and that is why we are strongly 

supportive of something like the auto IRA program, that would 

make these arrangements available to more workers and just grow 

what we have here. 

Mr. LEWIS. Mr. Sweetnam, you mentioned that in another time 

in another period, that the banks would stay open. And I remember 

rushing down to the bank when I was much younger, had all my 

hair, with my wife before the banks closed to get a $2,000 IRA. 

What happened to that spirit? What happened? Should we bring it 

back? 

Mr. SWEETNAM. That was one of the things that we proposed 

doing in the Bush administration simplification proposals. 

What happened was that we put income limits on who could 

make contributions to IRAs. So when you and I were seeing the 

lines going in and the banks staying open, it meant that everyone 

could make a $2,000 IRA contribution. Now, everyone cannot make 

a $2,000 or—can’t make a deductible IRA contribution. It depends 

on what their adjusted modified adjusted gross income is and 

whether they are an active participant in an employer plan. 

You will see in my testimony, I have two pages worth of charts 

that talk about who can and can’t make contributions. Before, you 

didn’t have that, and everyone could go in, and the banks could 

say, come on in, and we will set up your IRA. That is the difference. That is the difference now. 

Mr. LEWIS. Thank you. 

Mr. Chairman, could I yield the balance of my time to the gentleman from Oregon? 

Chairman CAMP. There is only 30 seconds left, but you will get 

your own time in a few minutes. 

Mr. BLUMENAUER. Then I will wait. 

Chairman CAMP. Mr. Paulsen is recognized. 

Mr. PAULSEN. Thank you, Mr. Chairman. We have had a lot of 

good discussion. I appreciate the testimony in the hearing. One 

thing that we haven’t talked about is ESOPs, Employer Stock Ownership programs that enable workers to accumulate substantial 

amounts of retirement savings, as compared to some of these other 

defined-contribution retirement plans. And there are studies that 

even show that the value of the retirement accounts of an employee 

that works for, say, an S ESOP, as an example, for that firm, 

would average $100,000 in 2008, and you compare that to only 

about a $45,000 average of an employee with an average 401(k) account. So I think these statistics definitely show that ESOPs have 


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been tremendously successful when it comes to helping workers 

save for retirement. 

Mr. Sweetnam, if I can just ask you, should Congress make sure 

that we protect ESOPs in the context of successful retirement savings vehicles as we tackle tax reform and also attempt to simplify 

the defined-contribution retirement system as well? 

Mr. SWEETNAM. When we looked at the retirement simplification when I was part of the Treasury Department, we thought that 

the ESOPs worked perfectly fine, and we didn’t try to modify them 

at all. I have dealt with ESOPs and S ESOPs over my career, and 

they have provided very good benefits for people. So I think that 

one of the things you are hearing from everyone here is that we 

shouldn’t be cutting back on retirement benefits and ESOPs and S 

corporation ESOPs are an important benefit, and I think that everybody is fine with continuing on. 

Mr. PAULSEN. Ms. Miller, you are nodding your head a little 

bit, too. But should ESOPs or S ESOPs be used, that structure 

serve a little bit as a model for tax reform or just having that encompass? 

Ms. MILLER. I think that it is important to maintain them. I am 

not sure that I could say they are a model because when you are 

dealing with an employer and what they should be doing, when it 

fits a situation, it is a wonderful thing, but it doesn’t always fit a 

situation. I think it sits alongside other retirement programs. 

Mr. PAULSEN. Let me ask a question for some of the other panelists, too. There has been a lot of mention of some of the current— 

or some mention, I should say, of some of the current law, the nondiscrimination rules that apply to 401(k) plans that make sure that 

lower-income workers also can benefit from these plans. Can you 

talk a little bit about how these rules work from the perspective 

of how a tax incentive could help the owner of a small business afford the contributions that would be required for those type of 

rules? Anyone? 

Ms. MILLER. I can speak to that. I think, most commonly, if you 

are dealing with a small business who has—probably their accountant has said, go see so-and-so about putting in this retirement 

plan, and they have gotten to the point where they are finally making some money, and they are coming to the end of the year, and 

they are going, wow, I have this $30,000 sitting there. I am going 

to take it out as a bonus, and I am going to pay all sorts of income 

tax on that money. 

You can show them if they put in a qualified retirement plan and 

make a contribution for themselves and save on that for income tax 

purposes, they can use some or close to all of that tax savings to 

make the required contributions for other people. And that way, 

then you say to them, okay, you can take this bonus home and you 

can write out a check to Uncle Sam for 28 or 31 percent of it or 

36. Or you can put in this plan and give that money—you find out 

the receptionist’s name when you go in, of course, you can give that 

money to your employees. And most times, they are very eager to 

have retirement savings themselves and help their employees save 

as well. So that tax incentive, though, is a key part of it. You have 

to show them how it can be better used than to just take it home. 

Mr. PAULSEN. Anyone else? 


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Thank you, Mr. Chairman. 

Chairman CAMP. Mr. Blumenauer is recognized. 

Mr. BLUMENAUER. Thank you very much, Mr. Chairman. 

I apologize, I have been in the Budget Committee defending the 

interests of the Ways and Means Committee. 

Chairman CAMP. Thank you for that service. 

Mr. BLUMENAUER. It is a pleasure. 

And I am sorry that I was not able to be more of a part of this. 

I had a chance to review some of the material. It strikes me as 

something that would be—our time is well spent. With all of the 

vagaries that are surrounding tax changes, some of the budget 

pressures, retirement security seems to me to loom very large. 

And I appreciate advice and admonition from the panel members 

about looking at the big picture, about things that encourage employers to provide a range of choices. I know at times, it may be 

bewildering, which is why I have supported the automatic IRA enrollment. It is why I am a lead cosponsor on the ESOP; where it 

is appropriate, it is very powerful. 

But I was struck by something Mr. John said about the experience in Great Britain. Be careful about tinkering—about taking an 

already confused and confusing system and, with all the best of intentions, changing it again. 

It seems to me that with your help and advice, and Mr. Chairman and the Committee, zeroing in on things that truly are refinements, not sea change, I am willing to explore all sorts of modifications in the Tax Code, including in some cases, raising taxes on 

myself and others. But I think that the investments that have been 

made in the Tax Code to incent retirement savings, insurance, 

these are things that a lot of people are relying on. These are 

things that it takes a while for the consumer to be educated. And 

there are opportunities for a whole host of unintended consequences if we are not careful. 

So I just wanted to express my strong support for the Committee 

working on this for the advice and counsel about refinement at a 

time when Americans have hit choppy water economically; where 

millions of people have lost what they thought was the value of 

their home, maybe it was artificially inflated, but they borrowed 

against it, and they were counting on it; where retirement savings 

and college education accounts have been diminished. 

I think the advice that we are getting here about refinement, not 

tinkering, moving forward is well taken. And I hope it is something 

that we can work on together to strengthen these retirement opportunities, send clear signals, automatically enroll, incent innovative 

approaches but have continuity and follow through. It seems very, 

very important to me. 

And I appreciate the courtesy. I am sorry I wasn’t with you more, 

but I think your contribution is very important, and this hearing 

I think is very important. 

Thank you very much, Mr. Chairman. 

Chairman CAMP. Thank you very much. And to another Ways 

and Means Member who also serves on Budget Committee, Dr. 

Price. 

Mr. PRICE. Thank you, Mr. Chairman, and I, too, apologize for 

not being here for the entire hearing. 


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I want to thank you for your testimony on what is, I think, an 

incredibly important issue. And I want to hone in, and it may have 

already been discussed, but ask Mr. VanDerhei and Ms. Miller, if 

you would, my sense, the small business folks at home, people that 

I talk to tell me that there are impediments and obstructions into 

both the employer and the employee being able to contribute to 

what might be a more open, flexible, and I think you called it creative plan. Ms. Miller, if you had to identify the greatest impediment that the government puts in place to either the employer or 

the employee for setting up a flexible, responsive retirement plan, 

what would that be? Mr. VanDerhei. 

Mr. VANDERHEI. Well, I will focus on the responsive part of 

that. One of the major improvements we have had in the retirement system in this country, certainly since 2006, is the increased 

adoption of automatic enrollment and automatic escalation of contributions. For a variety of reasons, a number of employers have 

adopted a safe harbor approach, this automatic escalation, which 

unfortunately currently has a maximum cap of 10 percent. 

I think if you talk to most financial planners, they would say 

that in addition to what the employer is probably matching, perhaps 3 percent, you need, especially for employees who are starting 

this process late in their careers, something more than just a 10 

percent contribution per year, and I think if there were ways to not 

only, first of all, have employers increase the default contribution 

rate, as David had already mentioned, from perhaps 3 percent to 

6 percent or more, but to allow those employees who want to automatically allow their contributions to escalate over time, to go beyond the 10 percent. 

Mr. PRICE. You would increase the cap? 

Mr. VANDERHEI. Yes. 

Mr. PRICE. Increase the cap. 

Mr. HARDOCK. Mr. Price, on that same issue there is some data 

in our testimony that shows that when you do that, it is like telling 

your kid a C is a good enough grade, you will get a C. If you tell 

him an A is the grade you want, you are going to get closer to an 

A. And then the data we have seen shows that if you set that bar 

higher, even the people who don’t do the automatic escalation do 

more because they see the bar, and they say, oh, that is what I am 

supposed to do. 

Mr. PRICE. Ms. Miller. 

Ms. MILLER. Yeah. I think one important point to make here is 

that auto-enrollment isn’t as popular with smaller employers as it 

is with larger ones, and the reason is that it is too easy—practitioners don’t recommend it to them because it is too easy to trip 

up, and then you get hit with penalties on it. 

And I think we need to take a look at some issues that would 

make it easier for small employers to do this kind of thing without 

incurring additional expense. And, you know, an example is if you 

are automatically enrolling, then when someone completes their 

year of service, you sign them up. With a small business, sometimes you forget that, that date passes, and you didn’t do it, and 

you get to the end of the year, and whoever is doing your retirement plan work says, oh, so-and-so should have been enrolled. 

Well, if they happen to only have missed a few months, that is 


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okay, you can get them signed up, but if they were out for close 

to a year, the small business owner, to do this automatic—this safe 

harbor correction not only has to put in whatever match they 

would have made, but they have to put in the automatic enrollment contribution, too, so the employee got their salary, but they 

also get the employer money. And it just is so much hassle that 

they just don’t want to bother, and that makes no sense. If they 

have to make the match, yes, but not to have to put the contribution in. 

Also, small business deals with top-heavy rules where if over 60 

percent of benefits are for key people, then there is a minimum 

contribution of 3 percent of pay, which is fine, but if the owner 

wants to be nice and let everybody contribute to the plan, even if 

they haven’t had a year of service in, suddenly they have to make 

the contribution for everybody, which, as I mentioned, if they are 

going to be short term, they really don’t want to. So they really are 

constrained by some of these things that are particularly difficult 

for small business and really would be pretty easy to clean up. 

Mr. PRICE. Thank you. 

My sense is that there has to be a right balance between this 

competitive and creative market that we want out there and regulation. 

Ms. Miller, would you say that that balance has been struck 

right now, or are we out of balance? 

Ms. MILLER. There is room for improvement, let me—definitely 

room for improvement. 

Mr. PRICE. Great. 

I thank you. I would appreciate each of the panelists, if you desire, to follow up on that score, identifying those areas where the 

regulatory environment is actually less helpful to employers and 

employees. 

Thank you, Mr. Chairman. 

Chairman CAMP. Thank you, Dr. Price. 

Again, I want to thank our panelists for excellent testimony 

today. Some good information was transmitted to us as many good 

points were made. And with that, this hearing is now adjourned. 

[Whereupon, at 12:06 p.m., the Committee was adjourned.] 

[Submissions for the Record follow:] 


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,l'ACLI 

Financial Security. For Life. 

The American Co uncil of Life Insurers 

Written Statement for the Record 

fo' 

"Tax Reform and Tax-Favored Retirement Accounts" 

Committee on Ways and Mellns 

United States House of Representatives 

April 17,2012 
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American Council of Life Insurers (ACLI) Sta tement for th e Record 

"Tax Reform and Tax-Favored Retirement Accounts' 

Commi ttee on Wa ys and Means 

United Sta tes House of Representatives 

April 1 7. 2012 

The American Council of Ufe Insurers (AClI) commends the Committee for holding this 

hearing on the Important tools Americans use to save for their retirement. We applaud 

Chairman camp (R·MI) and Ranking Member Levin (O·MI) for holding this particular hearing 

to consider the current menu of options Americans rely on to save for retirement and to 

examine how they increase retirement and financial security for American families. ACU 

urges the COmmittee. first and foremost, to do no harm to the existing retirement system 

as it is considered in the context of tax reform. Pollcymakers should avoid disrupting a 

retirement system that works well for most Americans and Instead focus on enhancing the 

system so that it works well for more Americans. 

THE AME RICAN COUNC IL OF LIFE INSURERS 

The American CounCil of Ufe Insurers is a national trade organization with over 300 

members Ihat represent more than ~ of the assets and premiums of the U.S. life 

insurance and annuity industry. ACLI member companies offer insurance contracts and 

investment products and services to qualified retirement plans. Including defined benefit 

pension. 401(k). 403(b) and 457 arrangements and to individuals through Individual 

retirement arrangements (lRAs) and on a non.quaHfied basis in an annuity. ACLI member 

companies also are employer sponsors of retirement plans for their employees. As service 

and product providers. as well as employers. we believe that saving for retirement. managing 

assets throughout retirement. and utilizing financial protection products are critical to 

Americans relirement and financial security. 

Seventy·five million - or two out of three - American families count on life insurers' products 

for protection. long·term savings. and a guarantee of lifetime Income when it's time to retire. 

Given toda{s economic uncertainties. the financial and retirement security these products 

provide has never been more important. To provide context on the extent to which the life 

insurance industry prote<:1S American families. In 2010 alone. American families received 

$58 billion in life insurance death benefits, $70 billion in annuity payments. $16 billion in 

disability income insurance benefIts. and $7 biUion in long·term care insurance benefits. 

Through these products. and other qualified offerings. Americans are able to plan. and save. 

for a secure retirement. 

AME RICA 'S PORTFOLIO OF RETI REM ENT SOLUTIONS 

Recognizing the need for Americans to have a private sector means by Which to save for their 

retirement. COngress has worked over several decades to create retirement solutions that 

meet the needs of varied employers who want to offer their employees a plan and individuals 

who want to save on their own. In this way, Congress acknowledged that 'one Size does not 

fit all: 

In fact. ACLI and other finanCial services providers have worked to provide educational 

resources to make sure these plans are well understood by the employers that offer them 

and by the Individuals that choose to save on their own. Workers that are covered by an 

employer-sponsored retirement savings plan understand their plan offerings through 
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educational efforts by their employer. Similarly. Individuals and employers have access to 

advisors, Internet education sites. and governmental resources that can help guide them to 

the best suited retirement solution. 

ACLI supports simplification of the retirement system to the edent that changes improve 

retirement outcomes for American families. In the past, piecemeal changes in the name of 

simplicity have actually resulted in more complexity - both for employers who are required to 

implement these changes and for individuals who had become accustomed to the previous 

rules. As policymakers consider ways to improve the current retirement system, it is 

Important that we build on its successes. not reduce the available solutions. 

AMERICA·S EFFICIENT SYSTEM OF RETIREMENT SAVINGS 

ACU thanks the Members of this Committee for their support of the H.Con.Res. 101 and its 

statement of support for the current structure of retirement savings tax rules. To date. more 

than half of this COmmittee - led by Reps. GerlaCh and Neal - support this resolution 

recognizing the Important role that 401(k). 403(b). 451. IRAs. and other current law 

retirement savings tax rules play in helping Americans build retirement savings. 

As noted in the resolution. a critical component of the current system is the tax rules 

designed to encourage Americans to save for their retirement. While enhancements can and 

should be made. in general the current system, and in particular the tax rules designed to 

encourage savings. have worked extremely well and are highly valued by American savers. 

A recent survey found that "a vast majority of households agree that preserving the current 

retirement savings Incentives should be a national priority. Elghty-eight percent of 

households owning DC accounts or IRAs agree with this policy priOlity. while 76 percent of 

households without DC accounts or IRAs agree."t Further. another survey by the National 

Association of Home Builders found that retirement savings programs like an IRA or a 401(k) 

are rated by American voters as the most important investment that will payoff for one·s 

family. 41% of respondents cited "retirement savings programs" as their number one priority 

(the second place choice of "a home" was the top priority of 28% of respondents).~ 

Additional savings Incentives have also been put Into place to further encourage low-Income 

Americans to save for their retirement. There Is a supplemental retirement saving Incentive of up to 

$2.000 exclusively for lower- and middle-Income individuals. This Saver·s Credit is only available to: 

an Individual earning less than $21.7S0. or a married couple earning less than $55.500. The ACLI 

would support enhancing this credit by permitting the credit to be deposited directly as additional 

savings to an employee·s retirement plan. More generally. when considering the distribution of 

public retirement benefits. we would note that lOw-income Americans enjoy significantly greater 

public retirement subsidies in the form of SOCial security benefits than do upper and middle-income 

Americans. "Measured against wage-indexed average earnings. the lowest jlncomej qulntile re<:eives 

a median replacement rate of 244 percent versus 47 percent for the middle quintile and 34 percent 

for the highest quintile."3 

POLlCVMAKERS SHOULD NOT LIMIT SAVINGS OPPORTUNITIES 

Unfortunately. short-sighted proposals that would dramatH;ally change the current tax rules 

I", ,,,ti,,,,,,.,,,t lKIV;"1;\S I'dv" 00"" put 1"' ..... dUI d,,\l d"dly~"\l I>y ",,,,,,l/t!,s "I CU!1I!lJ"SS. 

, -... s..-........ 5,_ 80 ... 2Ot2 __ .• Com~ \0 Retiteme,,, Security; "' ___ ..... Act\ofIs. 

~OC:~Com ... ",.....uwt.l_<y). ~_ ..... , B<atty. """"" ()pIrioo SttatO(ln. ....... a ... ..,.,., s..n.,. of likeI)o V« ...... _I\' 2012 , _,ew G. e;ag. on< GIoon R. ~_. -"""""",t. """"" .... of RopIaoomont RIM ... for Social Socuri!)' _its on< 

-.....'" In/:ome. - _ 5e<:uIity -. vol. 68, No. 2. 2008. 

1 
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Independent analyses have generally found that these proposals would be detrimental to 

retirement savings and would disproportionately - and negatively - impact younger and lower 

Income workers. 

In his testimony before the Senate Finance COmmittee in 2011. Or. Jack VanDerhei. 

Research Director at EBRI. discussed EBRl's analysis of a proposal to fundamentally change 

the retirement savings system put forward by Or. Bill Gale. Senior Fellow, Brookings 

Institution. His proposal envisions transitioning the current deduction· based retirement 

system into a system Incentivized by refundable tax credits for retirement savings. EBRl's 

analysis of thiS proposal found that the lowest Income workers would be most likely to react 

to such a change by reducing their retirement savings (56.7% of respondents to their SUNey 

would reduce savings). Additionally. EBRI found that a proposal of this sort would 

significantly reduce Americans' total retirement savings. This is especially true for younger 

Americans who. under EBRl's most generous assumptions, could see a reduction in their 

401(k) account balances of at least 11% - however this reduction could be as high as 30 or 

40% under more realistic assumptions. 

Another analysis by EBRlrevealed that the recommendation by The National Commfssion on 

Fiscal Responsibility to limit contributions to defined contribution retirement plans to the 

lesser of $20.000 or 20 percent of compensation will reduce retirement security for workers 

at all Income levels, not just high income workers. According to the study. those in the lowest 

income Quartile will have the second highest average percentage reductions and small 

business owners may be less likely to offer a plan to their employees jf contributiolllimits are 

lowered. Proposals to reform retirement savings incentives must focus on crafting policy that 

will result in better long·term retirement outcomes for Americans. rather than on short·term 

deficit reduction. 

Separately. some states are considering legislation to create government·sponsored 

retirement plans for private sector workers. These proposals raise mally Questions and 

collcerns. illcludillgapplicatioll of ERISA to state·rull plans. illcreased taxpayer liabilities. alld 

direct state competition with the private sector. Instead. states should focus their efforts on 

state·wlde educatioll programs that raise awarelless of retirement security issues. promote 

retirement savings. and encourage the adoption of new plans. 

INCREASING RETIREMENT AND FINANCIAL SECURITY 

ACLI urges this COmmittee to look at proposals that would ellhilflC6 retirement and fillallcial 

security. 

The ACLI supports reforms to alld expansioll of the private multiple employer plan (MEPI 

system to further encourage and facilitate participation by employers that are not prepared 

to sponsor a stand'alone retirement plan. 

MEPs can be all important tool to reduce costs and administrative burdellS. Under a MEP. 

businesses join together to achieve economies of scale and advantages with respect to plan 

administration. and advisory seNices. MEPs may be a good option for employers that are Ilot 

collfident they call or shOUld sponsor their own retiremellt plall. Participatioll ill a MEP may 

facilitate a smooth transition to a stand·alone employer·sponsored reUrement plan. ACLI 

would like to thank Reps. Kind and Neal for Illtroducillg legislation that would expand the 

private MEP system (H.R. 1534 alld H.R. 4050. respectivelyl. 

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ACLI also supports expanding participatiorl by encouraging employers to enroll workers 

automatically in defined contlibutlon plans and IRAs. and to Increase contributions through 

auto~scalation. 

Rep. Kind has introduced automatic IRA legislation that encourages employers to enroll 

workers automatically In an IRA. H.R. 1534. the SAVE Act. On the other hand. the 

Administration has put forward the Automatic IRA (AutoIRA) proposal In its budget proposals. 

Rep. Neal has also introduced legislation to this effect. H.R. 4049. These later proposals 

would require arlY employer in business for at least two years and havirlg terl or more 

employees to automatically enroll eligible employees into a Roth IRA. If the employer offers a 

qualified plan, SEP or SIMPLE retirement plan for its emplO)lees, it is not required to 

participate. However. if the employer's qualified plan otherwise excludes a portion of its 

workforce (i.e" a subsidiary, or diviSion of the company) from participation in its qualified 

plan, the employer must provide an AutolRA for those excluded emplO)lees. 

Other initiatives that would increase American's retirement and financ ial security inClude: 

Efficiently distributing disclosures to individuals through the electronic delivery of 

notices. Rep. Neal's legislation, H.R. 4050 also includes a provision to this end. 

Facilitate the use of longevity insurance. The Department of the Treasury has taken 

important steps to allow the use of longevity insurance, however COngress should 

consider doing more to modern ~e and reform minimum required distribution (MRO) 

rules. 

Facilitate the use of lifetime irlcome options Irl retirement plans. Rep. Nears 

Legislation. H.R. 4050. also includes provisions to prOvide lifetime Income portability 

and ease plan administration. 

PRESERVE ACCESS TO INVESTMENT ADVICE 

Access to affordable investment advice is key to helping individuals and employers select 

and utilize the most appropriate retirement savings SOlution. ACLI thanks Chairman Camp 

and many other members of this Committee for sharing their concerns over the Department 

of Labor's ("Department") initial proposed rule on the definition of fiduciary for purposes of 

giving Investment advice. In response to these concerns, in September, the Department 

announced that it would re·propose the rule. ACU appreciates the Department's concern that 

under some circumstances the current rule impinges the Department's ability to bring 

enforcement actions in situations that are clearly abUSive. We share the Department's 

Interest In seeing that plans and participants who seek out and are promised advice, receive 

advice that adheres to the standards imposed by ERISA. At the same time, we are concerned 

that the Initial proposed rule's pursuit of this objective would have disrupted investment 

sales and distribution practices that are customary in the marketplace, well understood, and 

commonly relied upon by financial service providers. plans and part!{:ipants alike. We are 

also concerned that these changes would have resulted in plans. plan participants, and IRA 

owners having less access to investment information. 

The SEC soon will issue a Request for Information in pursuit of its rulemaking. This is in 

response to Section 913 of the Dodd·Frank Wall Street Reform and Consumer Protection Act 

that a uniform fiduciary standard be implemented for all b.oker.(lealers, their registered 

representatives and investment advisors. This initiative directly impacts many of the same 

individuals that would be affected by the fiduciary rule being promulgated by the 
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Department. ACLI has requested that these two agencies coordinate and issue their 

proposed regulations simultaneously. We hope that any re·proposed rule will advance the 

Department"s and the SEC·s enforcement objective while avoiding unnecessary disruption 

and negative Impacts to plans. participants and individuals. 

IMPORTANCE OF LIFETIME INCOME 

As the first wave of the baby boom generation reaches retirement age. it is Important to 

educate American workers about the need to consider the need to have guaranteed lifetime 

income in retirement. Many current retirees are fortunate in that they are receiving lifetime 

monthly Income Irom both Social Security and an employer·provided defined benefit (OB) 

pension. That situation is rapidly changing. Today. more workers have retirement savings in 

defined contribution (OC) plans. which largely do not offer the option to elect a stream of 

guaranteed lifetime income. This change leads to questions of how individuals will manage 

their savings to last throughout their lifetimes. Workers need to understand the value of their 

retirement savings as a source of guaranteed lifetime Income. With this information. workers 

would be In a better position to consider augmenting their Social Security benefit with 

additional amounts of guaranteed lifetime income. This income may be used to meet 

anticipated monthly e. penses and it shifts the riSk 01 outliving one·s savings to a lile insurer. 

ACLIthanks Reps. Kind and Reichert for their continued support of the bipartisan "Lifetime 

Income Oisclosure Act." a provision that is part of their legislation, H.R. 1534. This is the first 

step In helping individuals think of defined contribution plan savings as not only a lump sum 

balance. but also as a source of guaranteed lifetime Income. With this additional income 

information on a benefit statement. coupled with the Social Security income statement. 

workers can see how mUCh monthly income they could potentially receive in retirement. 

Workers can better decide whether to increase their savings. adjust their 401(k) Investments 

or reconsider their retirement date. it necessary. to assure the Quality of life they e.pect in 

retirement. 

Over the long-term, the nation will benefit when individuals address their long·term financial 

security needs today. and wil l be less likely to rely on public assistance tomorrow. 

Government policies that encourage prudent behavior. such as long·term savings for 

retirement, should not only be maintained, they should be enhanced. Therelore, ACU 

continues to urge policymakers to support and build on the current retirement savings 

system and reject any proposals that would limit Americans· opportunity to save and prepare 

for their future. 

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Comments for the Record 

U.S. House of Representatives 

Committee on Ways and Means 

Hea ring on Tax Reform a nd Tax-F'avored Retirement Accounts 

Wednesday. April 17, 20 12. I o:()() AM 

By Michael G. Bindncr 

Center for Fiscal Equity 

Chairman Camp and Ranking Member Levin. thank you for the opportunity to submit these 

comments for Ihe record to the House Ways and Means Committee. Our comments are an 

expansion oflastmonth's comments and are. as always. in the context of our tax refoml plan. 

which has thc following four elcments: 

A Valuc Added Tax (VAT) to fund domestic military spending and domestic 

discretionary spending with a rate between 10"10 and 13%. which makes sure every 

American pays somcthing. 

Personal income surtaxes on joint and widowed filers with net annual incomes of 

$100.000 alai single filcrs earning $50.000 per year to fund net interest payments. debt 

retirement and overseas and strategic military spending and other international spending, 

with graduated rates between 5% and 25% in either 5% or 10"10 increments. Heirs would 

also pay taxes on distributions from estates. but not the assets themselves. 

Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income 

cap. which allows for lower payment levels to wealthier retirees without making bend 

points moT(' progressive. 

A VAT-like Net Business Rceeipts Tax (NBRT). which is essentially a subtraction VAT 

with additional tax expendituTCs for family support. personal TCtirement accounts. health 

care and the private delivery of governmental services. to fund entitlement spending and 

replace income tax filing for most people (including people who file without paying). the 

corporate income tax. business tax filing through individual income taxes and the 

employcr contribution to OASI. all payroll taxes for hospital insurance. disability 

insurance. unemployment insurance and survivors under age 60. 

Under ollr proposal. tax deferred accounts will no longer be needed. Returns on investment and 

savings will be tax free umil spent for the vast majority of households. Households who do pay 

the income and inheritance surtax will need no incentive to save (they already do) and none 

should be granted to them in the tax code. jo.·lore importantly forrefoml is Ihe question of the 

transition from the CUTTellt patchwork system of tax deferred and pre-taxed retirement accounts 

10 a system witholll them. 
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Some VAT proponems take the position that if the I3X replaces I3xes paid by employees and 

shareholders. introduction of a VAT will be price neutral while others contend that it will result 

in an increase to price levels whenevcr the rate in increased and upon imroduction. As many 

VAT adoptions occurred in Europe during times of high inflation. the matter is eminently 

debatable. 

Our detailed propos,11 to the Fiscal Commission in 2010 assumed that there would be a one-time 

price increase of some level and th31 during the transition. net pay would be allowed to rise for 

most wage e;'lmers by the same rnte as the VAT by adjusting tax withholding t3bles by that 

amount. If prices did not increase by the same pereentage, this would be a one-time bonus for 

most workers and an inducement to either save or to increase consumption. Other analysts are 

also of the view that the pereeption that VAT introduction wil! raise prices in thc futurc will 

result in imnwdiate spending in the period just before introduction, In either scenario, VAT 

introduction may just kick-stan the economy. 

An argument against VAT introduction is that it would impose additional taxes on Social 

Security recipients and individuals who have already invested in Roth Individual Retirement 

Accounts with funds that have already been taxed. 

In order to hold Social Scrurity beneficiaries hannlcss. there should be a one-time Cost of Living 

Allowance increase by the same pereentage as the I3X. as well as an additional increase whenever 

the VAT mte increases. Additional increases to the base benefit would result to ofTset any 

increases to Medicare Pan 13 and l'an D premiums. Both of these would be paid for by our 

proposal to shift the employer contribution from an income capped IXlyroll tax to 3n uncapped 

Net Business Receipts Tax. 

Roth holders would get a one-time I3X rebate on their income I3xes cqualto the VAT rate based 

on their account size. Assuming a 10"/0 VAT and a Roth IRA of$loo.000. the reb-1te would be 

$10.000. This rebate could be paid out over a period of years. as most accounts have been 

accumulated in that fashion. Holders of tax deferred accounts would obviously need no rebate 

and would simply pay consumption and incomc taxes upon withdrawal. with income I3xes due 

only if the additional income pushes total income above the income tax floor. 

No adjustment to incomes for workers or retirees will be made to ofTset the NBRT. as this tax is 

replacing a variety of taxes including IXlyroll taxes for disability insumnce. unemployment 

insurance. Ilospital insurance. survivors insurance for non-retirees. the employer contribution to 

old age and older survivors insurance, the corporate income tax. business taxes collected through 

the personal income tax system and a portion of personal income taxes. Transition to this tax will 

reduce gross income. but not necessarily net income. Additionally. some families will recei"e an 

increase of income due to the introduction of an expanded refundable child tax credit. while 

others may experience a salary decreasc if they have a smaller family size as base wages are 

reduced within companies to account for the expansion of this credit. 

Thank you for the opponunity to address the committee. We are. of course. available for direct 

testimony or to answer questions by members and slafT. 
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Conlael Sheel 

Michael Bindner 

Cenler for Fiscal Equity 

4 Canlerbury Square, Suite 302 

Alexandria. Virginia 22304 

571-334-8771 

fiscalcQuily@\·crimn.nS"1 

COlllmittee on Ways and Ml'ans 

Hl'a ring on Tax Rl'form and Tax-Fa\'orl'd Retirement Accouuts 

Wednesday. April 17,2012, 10:00 AM 

All submissions must include a list of all clients, persons and/or organizations on whose behalf 

Ihe wilness appears: 

This testimony is not submined on behalf of any client, person or organization other than the 

Center itself, which is so far unfunded by any donations. 
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The Honorable 0;,.,1' Camp 

The Honorabk' Sander Levin 

l'louse Committei.' on Ways and Means 

1102 Longworth Hou$(> OffiC(> Building 

Washington, D.C. 20515 

May 10,2012 

RE: Corporation for Enterprise Dewlopment, leiter of RffOrd for the April 16, 2012 hearing 

on "Tax Reform and Tax-Favored Retireml'nt Accounts" 

Dear Chairman Camp and Ranking Member Levin, 

The Corporation for Enterpri$(> Developml'nt (CFEO) would like to thank the House 

Committee on Ways and Means for holding its hearing on retirement savings and tax 

reform. The retirement security of American households is imperative to the long·tenn 

stability of the American middle class. We appreciate that the Committee is exploring 

options within comprehensive tax reform for improving retirement savings options for 

Americans. 

CFED advocates for tax policies that encourage and enable all Americans, rega rdless of 

income, to save for retirement. It is a welt-known fact that most Americans put aside too 

few resources for their retirement, des pite the importance of retirement savings for financial 

security during thl'ir senior years. According to the Employee Benefit Research Institute 

(EBRI), just 14 perO'nt of Americans are very confident that they will have enough money 

to live comfortably in retirement'. Those without savings set aside for retirement tend to be 

the most vulnerable populations: poor health, lowe r educational attainment, Latino and 

African-American workers and parHime employl'CS. [SRI reports that 60 pen:ent of 

workers report that the total value of their hou".,hold's savings and investments is less than 

$25,000, '-""cluding the value of their primary home and any defined benefit plans. 

These figures are dismal and discouraging; however, there are plans in place designed to 

help Americans save for their retirement. Employer-sponsored retirement plans are often 

the easiest way for workers to save, with pTl.~tax contributions and employer payrolld .. ><111ctions. These policies have gr<>atly contribut(>d to families incr<>asing their r<>tir(>ment 

plan participation and savings rat(>s. CFED would like th(>$(> accounts to be maintained; th(> 

ability for Americans to save for retirement is imperative. Unfortunately, these policies 

, Ruth Hetman. Mathew C ..... nw.td .nd Associ.t .... C .. ig Copet.nd .nd Jack Vano..rhei, TI" 2012 

fIr!iFf''''''! Cmifid",cr Surot):}ob I,,>«urity, De~! W,igh 0" fIr!i"",,,,! CO"fid'''fr. S<lI'i"g$. EBRI Issue Brief 

'369, M.rch 2012 (Employee Benefil Research Institute, 2012). 

Corporation ror Enterprise Devetopment t200 G St",", NW.Sul'e.OO. W •• hlnglon. DC WOOS 
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e~""odi", economic oppoI",u.nity 

CQuld use reform; in their current design they disproportionately go to the top percent of 

earners and largely miss middle and lower-income families. 

In fact, the overwhelming majority of tax payers who bendit from federal incentives for 

retirement fall disproportionately in the higher tax brackets. Roughly 70 percent of workers 

who earn $50,000 or more participate in an employer-retirement plan while only on ..... 

quarter of workers who earn between $15,000 and $19,999 partiCipate. Th05C who earn k'SS 

a"':' even less likely to participate>. This is critical because every dollar not saved for 

retirement reduces post-retirement inCQme or e~tends the number of years that must be 

worked. A median worker who is 35 years from retirement will have to work an additional 

year for every $2,350 not saved for retirement. Insufficient retirement s<wings increases the 

likelihood of income poverty and a dependence on public assistance during an individual's 

senior years. The retirement ta~ policies that an~ in place that benefit the wealthy and skip 

the middle class and working poor are not only unfair but unproductive. They miss the 

savings capability and needs of low- and moderate-income individuals and hurt the 

economic security and mobility of American households and the American Economy. 

The discussion around how to improve the participation and savings rates for all 

Americilns through comprehensive ta~ reform is incomplete without a fair and honest 

discussion on installing II truly univers.,1 savings and investm('nt infrastructure and 

incentive for low-income families. The best way to effectively incent retirement savings for 

working claso; AmeriCilns is to creale a refundable ta~ credit for those who set aside money 

in ta~-preferred retirement plans. 

As you know, ther(' is already a tax credit that is designed to incent retirt'm('nt savings, 

called the Saver s Credit. which was designed to provide a modest retirement saving 

incentive for 10w- and moderate-income households. However, the current Saver's Credit is 

highly undcrutilizcd. This is oc'Cause the credit is only available to offset a taxpayer's 

incume tax liability, thus making credit unavailable to the 50 million working households 

who pay payroll taxes but have no income tax liability'. In a universe of more than 50 

million eligible tax filers, only 6 million Americans claimed the credit in 2009. More could 

be done to expand the Savers Credit and tax credits similar to it in order to reach the 

majority of low- and moderate-income households. 

'Ilo>adsie Woo, Id a RademacMr and Jill;"" Meier. Up,jdr Down: TN $400 Bjll;,,,, Frdrral "'ssrl BudS., 

(CFED and Annie E. Casey Foundation.. 2010). 

J Splil ~Ju"d Q",/ $a, ... ', C,rdit: Tiro Ikll~' WaY" 10 s.., .. jar Rrli""'CIII, The Ro:lir ment Serurity Pr<lje<:I. 

Februa ry 200s. 

Corporation ror Enterprise Development t200 G Str .... ' NW,Su i'e .OO, W •• hing<on, DC WOOS 
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e~""odi", economic oppoI",u.nity 

CFED supports the <x,mc.;,pt of a rdundabl(> lax (redil d~igned for savings, wh(>th"r Ihal lax 

cr(>dil is an opand(>d Sav(>r's Credil or proposals lik" Ih" Frt'(>dom Savings Cr(>dit', 

d ... sign ... d by the Aspen Institute lnitiativ ... on Financial Security. Th(>r ... are multiple bmdits 

of installing a refundable credit for savings into th ... U.s. Tax Code: 

Asset-building subsidies are primarily emb •. ·dding in th(> U.s. Tax Cod(>. The 

Presidenl's Fis<:al Year 2013 Budget proposed a total amounl of $548 billion in 

r(>sourc"s 10 promote fed"ral asset-building Opportunities, including $165 billion for 

retirement security; of the $548 billion, fully $508 billion will consist of tax subsidi"s' _ 

The lax filing process is an ama~ing opportunity for the majorily of low-inoome 

households. Many households do not have a oomplete review of their finan<:es until 

thiS nitkal tim(> of year. Through payroll withholding and rdundabl(> tax n(>dits, 

families rffeive an average r<'fund of approximately $3,000, according to 2008 tax 

data. Some portion of this lump sum of money, sometimes the largest sum of funds 

thai American families will rect'ive all year, oould be saved and used for assetdevelopment, like funding a ROTH IRA or another retirement savings vehicle. 

Creating a rdundable tax credit for savings that reaches the oollom 60 percent of 

households that are asset-poor (e.g. households without sufficient savings to survive at the 

fede ral poverty lev(>1 without income), would allow families to slowly improve their 

financial se£urity through our already estab!ish~><l federal tax code. build savings and invest 

in assets, which would help households become mOre financially r(>silient and successful. 

CFEO also supports policies. lik ... the Automatic IRA Acl of 2012 (H.R. 4(49) introduced by 

Congressman Richard Neal (O_MA). that support automatic enrollment as a method of 

in(reasing retirement participation. Automatic enrollment is a Simple, cost-effective way to 

help Am(>ricans S<1\"e for relir(>m(>nl through payroll doouctions for most workers who 

currently do not have an employer-provided retirement plan. Acoording to th(> Retirement 

Security Project (RSr), automatic enrollm(>flt dramatically boosts 401(k) parlicipation ra tes 

from a national average of aoout 75 percent of eligible employees to betwe..-n 85 and 95 

percent". In addition, RSr estima tes that automatic IRA initiatives oould increase net 

national savings by nearly $8 billion annually. Automatic enrollment would provide a 

• Lisa M"" .. h, Raymond aM .. " tit, Colby Fa rber. Robert Weinberger. TM Frmiom 5o:,';"S' Credit: A 

Practical 51<7' 10 Build A",t1"ira,," I!ou",',o!d Ba/a"cr Shuls. The Aspen tn stitu!e. lni!ia!i"e on Financiat 

Secu rity (Fcl>ruary 2012). 

' Reid Cramer, Rachellltack and Justin King. Th' A ..... " Rrp"" ,,/2012. A" Assrss''''nt of''''' Fn/mll "11.<",,-

Bui/I/inS' BudS-I. Apri120l2 (New America Foundation. 2012) . 

• Aulom.,ic IRA. : &,,"d;"8 &1;"",, "1 5o"'-"g O,'parlulliliN'o 78 Millio" Mo" A ,,, .. rica,, Workrrs. The 

Retirement Security project (Augu.t 20(9). 

COrpOralion for Enterprise Devetopment t200 G SI' .... ' NW.Su l'e .OO. W •• hlngton. DC WOOS 
157 

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""odi", economic oppoI",u.nity 

St!cure r(!tir(!m(>nt option for workers, leSSl,'n d(>pendence on Social5e<:urity and p .... St!nt an 

opportunity to lift low-inrom(> working families out of poverty during rt'tir(>m(>nt. 

W(> would Hk(> to thank the Committee again for bringing to the tJble the important issue of 

retirement savings and participation for American families during this important 

dis<:ussion of comprehensive tax reform. W(> ask the Commitk"(> to consider proposals to 

establish .... fundable tax c .... dits dl'5igned for saving5 for low-inoome households as well as 

policies that would simplify the proceSS of saving for retirl!ment. 

Sincerely, 

Ida Rademachl'r 

Chief Program OffiC(>r 

Corporation for Enterprise Devetopment t200 G Str .... , NW.Sul'e.OO. W •• hlngton. DC WOOS 
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, .1, 

-Custodia 

FINANCIAL 

STATEMENT FOR TilE RECOR!) 

TonA. RUBLE 

C Il .. :F EXECUTI VE OFFICER, 

CUSTODIA FINANCIAL 

FOR T ilE H EAIWo;G O N 

"TAX REfORM AND T Ax-F AVOREV RETIREMENT A CCOUNTS" 

OHORE 

TilE U.S. HOUSE OF REPRESENTATIVES 

CO.\lMITIEE O N WAYS & MEANS 

APRIL 17,2012 

80 70 Park L ane, Suite 100, D allas. T exas 75231 

2 14-393-35 11 truble@eustooiafinaneial.eom 
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Thank you for the opportunity to submit this statement for the record. We applaud the 

Committee for its leadership on tax reform and retirement security issues. 

Retirement security is an importam policy objective. Done properly, comprehensive tax 

reform offers the opportunity to achieve the goals of simplification, efficiency, and 

strengthening retirement and financial security for American families. 

In the interim. we want to ensure the Commillee is aware of an issue that reqlrires more 

immediale allention. As other sources of credit have become scarce for American 

families, more and more are turning to their defined contribution plans and accessing 

their retirement savings to meet emergency cash needs. American families lose billions 

of retirement savings armually due to defaults on these loans as a result of death or 

disability. This easily avoidable loss of retirement savings is growing rapidly and is the 

result of the CUlTCnt policy framework that docs not ensure access to insurance or dcbt 

protection options to plan participants. 

TilE PHOHLElII 

Approximately 90 million Americans participate in dctincd contributions plans. including 

40 I (k) plans. I More than 8S pereent of these plans allow participants to borrow from 

plans.1 Plan loans arc preferential to an early withdrawal and allowing participants to 

borrow from such plans has had a positive effect in inefCasing participation levels and 

contribution amounts. 

However. due in large measure to recent economic evenls.the incidence of participants 

borrowing from their accounts has dramatically increased.) The borrowed funds afe 

largely being used by plan participants to assist in meeling emergency financial 

obligations. such as to mitigate the impact of unemployment. to make mortgagc payments 

and prevent foreclosure, or to pay medical cxpenses. 28 percent of all allowed 

participants have clected to take loans.~ Howevcr. the borrowing rate is higher for those 

of more modest incomes and among minority groups.' Additionally over a quartcr of 

borrowers have multiple loans outstanding.' 

I U.S. DEPARTMENTOl' LABOR. "MP~OYEE BENCFITS SF-CURITY ADMINISTRATION. AFlSTRACTOl' 2009 

FORM 5500 ANNUA~ REPORTS (Dc<:. 201 t ). 

1 CONGRESSIONA~ ESEA~ClI SE~VICE. AN ANA~YSIS 01' Bo!t.ROWING ~OM DEFINeD CONT~IIJlJTION 

RETIREMEi'IT I' ~ANS. R40828 (Scpr. 22. 2(09). 

1 A~ llrJAON I( r:WITf. LEAKAGEOI' I' TICIPANTS' DC ASSf:TS: How LOANS. WITIII)~ WALS. Mil) 

CASIIOUTS ARE ~OOING RHIRHIENT lNCOME(20 11). 

, /d. 

l Loun frequency peab among Ihose with incomes belween S30.000 and S89.m. Ncarly SO pereenl ofatl 

African·Americans and 40 pi:rccnl of Hispanics. compared 10 aboul U quar1crofwhilCS and Asian· 

Amcricans. carried 3 ptan lnan balance in 20tO. A~IErJAON ]lICWrTf. 401(K) PLANS IN trVIN"COI O~: 

401(K) I'LANS IN lI VINGCO~OK: A STUOY Of' 40t(K) SAVINGS DISPARITIES ACROSS ACI ~ ANO ETIINIC 

G~oups(20t2) . 

• A~jt:l AON Hr:WllT. LEA KAGE OF I' TICIPANTS' DC Assm. supra nnte 3. 

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Outstanding loans present a considerable risk to retirement security, as thc consequcnces 

for an unprotected borrowcr arc significant. Thc unfortunatc rcality is that. from time to 

timc, participants with outstanding plan loans die and become disabled. If a borrower 

docs dic or become disabled without this type of protection. the borrowcr would be 

required, within 60 days, to pay back the outstanding balance or have the entire amount 

treated as an "early withdrawal" from the plan. This forced early withdrawal immediately 

becomes a liability for the borrower at the state and federal income tax levels. 

Regrettably, in most instances. borrowers or thcir beneficiaries are left with no alternative 

other than using their remaining account balances to cover thc resulting tax liability. thus 

eliminating the pre-tax accumulation of the plan for retirement. 

Exacerbating this problcm, defined contribution plans are tax-advantagcd and are 

governed by the Employec Retirement Security Act ("ERISA") which. under present law, 

cffcctively dissuades plan sponsors from embracing private market solutions for fear of 

litigation. Providing legal certainty would ameliorate this issue. 

THE SOLUTION 

Insurance or debt protection could mitigate the leakage of retirement savings that occurs 

as a result of borrowers' death or disability. Unfortunately, the current policy framework 

docs not ensure access to such coverage. 

However. H.R. 3656 presents a solution to this problem. Mirroring the auto-save features 

oflhc highly successful and bipartisan Pension Protection Act.' this legislation would 

amend the Internal Rcvenuc Code ("Codc") so that defincd contribution plans may elect 

to provide automatic enrollment for plan participants into loan life and disability 

insurance or similar protection. n,e bill also provides plan sponsors with an incentive to 

incorporate auto-enrollment options by affording greater legal certainty as a safer risk 

path than what currently exists. I f enacted. this modification to the Code would create a 

mechanism to assist millions of plan participants by providing the option to protect their 

retirement savings from the adverse consequences of loan defaults. 

Undcr thc proposal, if a plan chooses to automatically enroll participants into coverage, a 

borrowcr may clect to dccline ("opt-out of') this protcction. This protocol cnsurcs 

guaranteed coverage at the most afTordable cost available and is issued at the timc the 

emergency loan is initiated. With coverage in place. in the unfortunate event of death or 

disability of the borrower with an outstanding loan. the insurance provider would repay 

the full amount of the loan balance as well as an amount sumcient for the borrower or 

beneficiary to pay any accompanying Fcderal tax liability as a result orthe decmed 

distribution or carly withdrawal. Upon a participall\'s amnmllive decision to borrow and 

1 Rcscurcn has widel)" dcmonS(r\ltcd that plan par1icipation I1MS havc increased signiflcantl)" as a result of 

the auto-enrollmcnt provision COf\t\lincd in the Pcnsion Protection Act. Enrollment in pt~ns has incre~scd 

significanli)" among younger and lo"cr-paid cmploy~-e$ and the panic ipalion gap has d~",....,ascd among 

raciat groups among emptoyees suhjecllo 3Ul!>-<.'1lro1tmCnl. For these reasons. SOme cOmmentcT"S na"c 

r«ommcndcd buitding on this succc'ls and cxpanding auto-cnrollment in\o othcr areas. See. e.g .. 

ARIEUAON HEWITT. 401(K) PLANS IN LIVING COLOR. SliP'" nOle 5. 

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acccss covcragc, thc protcction affordl-d would provide repaymcnt and avoid loss of 

retircment savi ngs, This repayment would avoid loss of retirement savings by effectively 

replenishing the borrower's account balance. Thereafter the borrower or his or her 

beneficiary would have the same options currently available to them under current law 

(e.g., a rollover of the plan balance to an Individual Retirement Account ("'IRA"». This 

legislative solution is budget neutral in that it docs not require nell' fedeml spending to 

implement. Moreover, it provides a private market "backstop" provided by an efficient 

market with various providers that would ensure taxes are paid on the loan proceeds 

deemed to be a distribution. 

The proposal would also encoumge plan fiduciaries to take the costs of protection into 

considemtion when dcternlining thc interest rate to be charged on loans. Allowing plans 

to ot"Tset the cost of the optional coverage to borrowers would still deliver a healthy mte 

of return on a protected loan. This solution docs not create any undue imposition on plan 

sponsors and aClUally maintains current operational and distribution protocols. In 

addition, this broadly supported solution would create thousands of nell' jobs and providc 

an estimated $5 billion plus of new overall economic impact. 

CONCLUStON 

Current policy fails to include a provision for loan insurance or debt protcction options, 

exposing plan participants to significant risk of loss of retirement security. As 

recommended in the 20 12 Ariel/Aon Hewiu Study, in recognition of the stress faced 

during difficult economic times, public policy should "allow retirement plan participants 

to weather short-tcnn economic hardship without compromising their financial future.'" 

We strongly urge Congress to consider I"I.R. 3656, which would provide a solution to this 

problem and strengthen retirement security. 

We greatly appreciate the opportunity 10 submit this statement. We arc pleased to be a 

resource to the Congress. the Commillee, and the Subcommittee on these and related 

mailers. We look forward to our continued work together on these important issues. 

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April 20,2012 

n.e ESO~ """" ... "" 11l6 SIt~" "" 

S."" SOl 

W ....... _ OC 200J6 

.. -""'I'!!!OS;"""""" 

~~""""""";;"""'bIos&<J 

.~"'" <lot """. f.S()p ,_."q 

I'louse Ways and Means Commillee 

1102 Lungwurth Huuse Office Building 

Wa5hington DC 20515 

Fullowing is a statement frum The ESOP Association for the Ways and Means Commiuee's 

April 17, 2012 hearing: H<'aring un Tax Refurm and a)(~Favured Rctir<'lIlent Accuunts. 

The statement is bcingsubmined by 

The ESOP AssociatiQn 

1726 M Street, NW 

Suite 501 

Washington. DC 20036 

2021293-2791 

www.esop'associaliun.urg 

The author of the Slalcmel1l is J. Michael Keeling, presillent of The ESOP AssociatiQn. He can be 

reached 31the address and phQne number provided abo\'e or by email at 

M iehael@;esopassociation.org. 

The ESOP AssociatiQn is Ihe nalionallrade associatiQn fQr eQmpanies wilh employee stock 

ownership plans (ESOPs). The Associatiun's primary members are U.S. corporations Ihat 

sponsor ESOI's. The mission QfThe ESOP Association is simple: TQ ad"ocate fQr. and educate 

about. employee ownership throogh the ESOP model. 
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Statement follows: 

Chair Camp, Ranking Member Levin. and distinguished members of the House 

Commince on Ways and Means, I am J. Michael Keeling, Presidcnt of The ESOP Association. 

the national SO l(c)(6) trade association for U.s. corporations that sponsor employee stock 

ownership plans. or ESOPs, with nearly 1,500 U.S. corporations that sponsors ESOPs as our 

primary members. and just under 1.000 persons who provide specialized services to ESOI' 

sponsors as seeondary members. 

Today's hearings arc pan and parcel ofthc Commince's eommitmcnt to study our entire 

Federal income tax laws. in a systematic process. before launching a detailed re-write ofthosc 

laws. Clearly, the tax eodc's provisions that encourage private seetor cmployers to fund. wholly 

or partially a "savings" vehicle to provide income for employees when they retire from work. or 

become disabled, are major provisions of current tax law. Not 10 review these laws, in terms of 

impact on Federal revenue compared to why prior Congresses put these laws into place would be 

a huge dereliction of duty; it is pleasing to see thm this Committee continues to meet its 

obligations as it has since the income tax laws were first enacted in the second decade of the 20'~ 

cemury. 

Today, I do not dwell on the reasons why Federal tax law encourages both retirement 

savings growth and more widespread owncrship of productive assets through the ESOP model of 

ownership. as 1 know the ESOP community will ha"e ample opportunity to present to the 

Commince mcmbers. and their stalTs reasons that the ESOP model has created in the vast 

majority ofinstances more retirement s.·wings for ESOP participants in companies that are more 

productive. more profitable. and more sustainable. white providing locally controlled U.S. jobs. 

We have the macro data to b.1ck up these statcmcnts, such as the recent GcncrJI Social Survcy 

2010 that evidenccs that during the Great Recession 0(2008/09. employees of employees stock 

owned companies were four times less likely to be laid olTthan employees of conventionally 

owned companies. The percentage to be specific were employees of employee stock owned 

companies were laid otT during the Great Recession at rate of less than 3% whereas employees of 

conventionally owned companies were laid otTat a rme of just over 12%. 

Again, we will dig into the track record of ESOP companies when the COlllmiUee begins 

to dig into the details of what to do. if anything, about current ESOI' laws in the tax code. 

What I wam to share with Ihe Committee today is history of how ESOP laws developed. 

and how lhey were supported by leading polilical figures of both those holding S<K"alied 

conservative views of govemment. and those holding so-called libel1l1 views. 

Clearly. the Ways and Means Commil1ee of the 21 " Cen1ury does not have 10 do what the 

Ways and Means Committee of the 20'~ Century did with regard to ESOPs and employee 

ownership. But knowing what your colleagues of this oldest Committee in Congress did over 

nearly 100 years will assisl your review. 
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Interestingly. the first time the Ways and Means Committee undertook a major review of 

Federal tax law. in the 1920 and 1921 period. in reaction to the first tax laws aftcr the ratification 

of the 16'" Amendment of the Constitution. a major point of debte and discussion was how to 

trem company stock thm U.s. corporations wcre putting aside for their employees. 

Yes. using company stock to help employees meet their retirement income needs pre-date 

the Federal income tax law. and Social Security law. 

For you sec. back in the last ha lfofthe 19'" Century. as the Industrial Revolution took 

hold in our n3!ion. corporations grew and their work forees grew. Leaders ofthesc corporations. 

such as Railway E~pre ss. Montgomery Ward. Scars and Roebuck. Procter and Gamble, to name 

a fcw. came to sec thm loyal cmployees were reaching agcs when thcir acti,'c working days wcre 

coming to a close: but these employees had nothing to support them once their jobs temlinated. 

So. the leaders ofthesc "ncw" national corporations begin 10 set aside company stock for the 

employees to have when they retired. 

The basic premise of the first income tax law was, and it still is the basic rule, thai all 

income of whatever nature and from whatever source is subject to the Federal income tax. 

So the debate in 1921 was the value of the stock these corporations were setting aside for 

employee's taxable income to the employees the year it was set aside, and was the value of the 

stock a compensation cost that was a deductable cost of business for the corporation? 

After much back and forth. it was decided that the stock value was not current income to 

the employees, and was a COSI of compensation. The law arising in 1921 labeled the scheme as 

tax qualified deferred compens.1tion, and it was what is now labeled a "stock bonus plan". 

Frankly. the slock bonus plan is an ESOP Ihat has not fin30ced its acquisition of 

employee stock for the employee's retirement savings. 

So. literally, the first rctirem<.'nt savings plan recogniZ<.'d in the Federal tax code was a 

siock bonus plan. 

Whik the Ways and Means C0111millee added muny rules about how a tax qualified 

deferred compensation plan should be managed in the JOs, 40$, 50s and 60s, really today what is 

considered the defining law for tax qualified deferred compensation plans an: the tax laws in 

what is known as the Employee Retirement Income Seeurity ACI, or ERISA, passed in the mid70s. 

But important to note is that in the late 40s, and here details arc a lilll<.' fuzzy as private 

letter rulings were not public until a tax law enact<.'d in 1977, an Alaskan company asked the IRS 

if it could borrow money to obtain the assets for ils stock bonus plan, which was holding 

employer securities. The IRS said yes, and the -'Ieveraged" employee siock ownership plan was 

born, though nOllab<.'led an ESOP. 

2 
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From the late 40s umilthe early 70s, a small number oflhese leveraged stock bonus plans 

were established, as it was easy 10 see how it presented an execllclll way for an owncr 10 exit his 

or her business without abandoning loyal employees, while enabling the exiting shareholder to 

eash our her or his "chiIS", withom selling to competition, or liquidating his/her assets. 

I know other witnesses will go over the general history of ERISA. and how ERI SA had 

TOOts in concerns over investments by cerlain large defined benefit pensions seemed to be 

helping organized crime, all!! how the collapse of several large defined benefit plans heavily 

invested in company stock left unionized work forees without any retirement income. 

The Congressional and White House push to address these concerns of the 19505 and 

19605 led to the creation of ERISA. which of course began in the House. 

The fiTSt version of ERISA was drafted by your House Commi1t~"e . Education and Labor 

in the carly 70s, and bluntly was foc used almost entirely on defined benefit plans. A key rule 

adopted by the Commiuee was any retirement savings plan. or tax qualified deferred 

compensation plan, could not hold more than 10% of its assets in company stock. 

When the Ed and Labor version was sent over to the House Ways and Means Commiuee, 

American businesses. many of whom had sponsored stock bonus plans since the 19'h century, 

woke up. and persuaded Ways and Means to a make distinction between a plan that promised a 

benefit, or a defined benefit, and a plan that made no specific promise 10 the employee as to the 

level for the benefit, but did promise to make a certain contribution each )'ear, if ccnain business 

results were reached- in other words, profit sharing plans, of which stock bonus plans were one. 

So the defined contribution plan was born, and it was permiucd to hold company stock 

beyond the 10"10 limit on company stock imposed on defincd benefit plans. 

The legislation moved on. alld reached a Conference between the House and Senate. and 

there decisions were made to permit, under cenain very regulated circumstances. a stock bonus 

plan 10 borrow money to acquire comp.lny stock for the plan. And the name "employee stock 

ownership plan", or ESOP was codified into the tax code's ER ISA section, 3S well as the labor 

se<:tioll of ERISA, 

This is just a brief history of how ESOPs were creat..-d fonnally under ERISA that lays 

out that Ihe idea of rewarding employees with company stock did nOljuSt fall from the sky in the 

mid·70s, but was actually a most time honored method of providing retirement income for 

employces. 

Let us fast forward to the last quarter of the 20'" Cemury. when the work oflhc Ways and 

Means Committee on ESOP issues became quite intense. especially in the period from 1987 

through 2001. 

While many of the early laws in the 1976 through 1986 period promoting retirement 

savings alld ownership through ESOI's werc driven by the leadership of the late Senator Russell 

B. Long, the legendary top Democrat of the Senat..- Committee on Finance. the truth is that he did 

3 
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not have an unfenered pathway. as Ways and Means members in Conference often altered and 

even pushed back on some of his ESOP proposals adopted by the Senale. But today. the focus is 

on what Ways and Means has done over the years with regard to ESOl's. not whm the Senme 

Finance Comminee did. 

Before looking althe 1987 through 2001 period. a shon detour is in order with regard to 

the last time Ways and Means refomled lhe lax laws in a major lax refonn elTon- lhe 1985 and 

1986 1ime frame. 

While Ihe Democrals of 1985 and the Republicans of 1985 could hold differing views on 

details orwhat should be in the tax laws, in 1985 there was a major, obvious coming logether of 

PresidenT Ronald Reagan and Ihe Democrals who controlled the House, to rewrite Federal lax 

laws, 10 make them more simple, and 10 lower tax rates. 

After this general agreement, the Reagan Administration developed a comprehensive tax 

refoml proposal. labeled by Ihe pundits, members of Congress. and lobbyists as "Reagan ]" , 

Reagan I was a trial balloon, and the Administration weleomed lhe private sector, or 

bener put. private sector interest groups also known as lobbyists, 10 interact with the Treasury 

Dcpanmenl where the heavy lifting was done to draft Reagan l. 

Interestingly, Reagan I did not have any provision about ESOl's. The tax expens al 

Treasury knew Ihat President Reagan, dming back 10 his days as a radio commentator. was a 

huge fan of ESOI's, as was Ihe imponant Louisiana Senalor Russell Long. So frankly they 

punted on ESOl's. waiting 10 hear from lhc White j'louse and Senator Long on what was an 

acceptable way 10 handle ESOPs. 

Now. keep in mind. after jusl nine years ofESOPs as a forma! tax qualified deferred 

compensation plan, there had been some conlroversy among retirement income gurus in both the 

public and private seclor. as the data showing the slrength of ESOP companies as providers of 

jobs and relirement income was nOl as obvious in 1986 as il is today. The slrongesl voices were 

candidly among Depanment of Labor ERI SA experts: in a rather odd twisl. Ihe Treasury officials 

asked the Department of Labor people 10 comc up with a recommendation about ESOl's in what 

was released in 1985 as Reagan II. 

Here is what Reagan II said about ESOl's: It proposed that aU the lax benefits Ihat were 

added for ESOl's in Ihe 1984 lax law kl1OwI'I as DEFRA be retained, not reduced orelimil'lated, 

bmthal ESOl's no longer be an ERISA plan. While purely speculation on my part. I assume Ihe 

DOL thinking was Ihe strength of ESOl's in thc tax commiuccs was too slrong to unra\,cltax 

preferences for ESOl's, but since ESOPs were concentrated in company stock, ESOPs should nOI 

be reliremcl'lt savings plans. 

Nexl. Ways and Means had long and lengthy hcaril'lgs on Reagan II, that somc calk'll 

Treasury II. 

, 
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What did the ESOP community say, or more specifically, what did The ESOP 

Association say about the ESOP provisions ofTreasury/Reagan II? 

Interestingly, the ESOP witness bcfore Ways and Means said that the Associmion had no 

underlying problem with ESOPs not being ERISA plans. but that if the Committ~ agreed with 

Reagan II, the Committee should include in the ESOP laws of the tax code provisions relmed to 

vesting. discrimination, fiduciary obligations orthe trust, limits on contributions for highly paid. 

distributions ruit:s etc thm were all p.ln of existing laws in ERISA. as these were provisions Ihat 

protecled employees_ 

In no surprise, Ihe stafT of Ways and Means. and the Joinl Commil\~ on Taxalion, said to 

themselves~"what the heck. why move ESOPs OUI of ERISA legal and regul310ry schemes, bill 

then impose on ESOl's the very same legal an!.l regulalory schemes?" 

So. when the chair of Ways and Means made his proposal to the Commin~. the late Dan 

Rootenkowski. he left ESOI's in ERISA, but eliminated most of their tax preferences in what was 

known as Rostenkowski I. or "Rooty ]". 

Tlte Ways and Means Committee then sal down for days marking up whm was known as 

"Rosty [". Chair Roslenkowski had a rule, primarily driven by the then Budget Act, that any 

change in Rosty [ ofTered by a member had to be revenue neutral. In the many hours of mark up. 

rc.:all is that only three amendments were adopted by the full Commin~ amending Rosty I that 

were not ofTset with increasing taxes elsewhere !O pay for the amendment. 

One oflhe thrc.: rel'elUle losing amendments was an amendment restoring the ES01' tax 

preferences adopted in 1984. ofTerc!.l by fonner Congressman Beryl Anthony: it was adopted on 

a voice vote. with no public declamtion of Opposilion. 

(Note, to fit into the revenue matrix. Congressman Anthony's amendment sunsel1ed the 

ESOP tax preferences after five years; bUI still. other similar proposals. e.~cepl for two. were 

defeated by voice or roll call VOle during the mark lip ofRosty I.) 

(Also note. while tweaking some of the 1984 and earlier tax preferences for ESOPs in 

Conference, Ihe majority of lite 1984 preferences for ESOl's were made pern13nem inlhe 

Conference Commill~ work on the 1986 Tax Refonn ACI. with lillie or no debate.) 

Senator Long retired at the end of 1986. an<! in the period from 1987 through 1994. the 

Ways and Means Commillee. bolh the ful! comminee. but primarily ils Oversight Subcommittee. 

held at]east .~ hearings on £SOl's. Nearly all were in the context orreviewing ESOPs as 

takeover dcfcnS<! lactics during the hey day of hostile corporate takeovers in the late 80s. Two 

hearings did review an idea Ihat an employer could not sponsor a defined contribulion plan such 

as an ESOP as a primary fCtirement savings plan. but only as a S<!eond plan. so to speak. to a 

defined benefit plan. 

5 
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In 1995, Ihe Senme Finance Committee repealed a ESOP lax benefil relaled 10 lenders 

gelling a brcak for loans 10 ESOPs, and Ihm provision was adopled by Ihe House Ways and 

Means Comminee in a 1996 bill, which was included in Ihen Chair Archer's mark in a lasl 

minule effort 10 have a revenue neulral reduclion in small business laxes 10 offscllhe COSIS of an 

increase ill the minimnm wage. 

Now we come closer to current hislOry. as since 1986. when the individual tax rate 

became lower Ihan Ihc C corporal ion lax ralC. Ihcrc has becll a push 10 open up more rules 

pcrmil1illg S corporations. or P.1SS Ihrough emities. Part of the agitation was 10 have S 

corporations for the first time to sponsor an ERISA plan, such as an ESOP, thm could hold 

cmployer stock. 

In 1998. il was the Ways and Means Commitlee lhal adopted a workable provision of tax 

law Ihat permitted an S corporation to sponsor a leveraged ESOP. The amendment was offered 

by former Congresswoman Nancy Johnson, and was adopted b)' the Ways and Means Committee 

with no opposition. 

Since 1998. approximatcly 5,000 U.S. corpomtions that arc S corpomtions sponsor an 

ESOP, Approximately 1,000 belong to The ESOP Association. 

As it is not unusual with tax law provisions that are unique, the first S ESOP law was 

abused by flim flamers. [n Ihe ESOI' case il was primarily actors and athleles setling up one 

person or two persons ESOPs. 

In its 2000 budget proposal for FY 2001, the Clinton Administration proposed a major 

reduction in the benefit for being an S ESOP corporation. 

The ESOP community came to the Ways and Means Commillee with a proposal to stop 

the flim flamers that was not as drastic as what the Clinton Administration had proposed, and the 

Ways and Means Commillee. adopted as set fourth in Chair Thomas's mark. a proposal put 

forward by former Congressman Jim Ramstad. The Ramstad amendment, a very light antidiscriminatory rule related to Ilow much key people could have in their ESOP accounts, ended 

the flim flannery. 

So, what is my poillt Mr. Chairman and Ranking Member Levin, and others distinguished 

members of tile Committee? 

The point is that the Ways and Means Committee has a long, and complete 1'C(:0rd of 

reviewing ESOP law, and has always come down in support of ESOPs as a retirement savings 

plan, and as the Federal courts have said over and over, as nn ownership plan. 

The ESO)' community only asks that you do thc samc kind of serious review of ESOP 

companies and their providing of retirement savings benefits, and their contribution to 

sustainable jobs, and higher perfOmling companies that your predecessors did in puning together 

primarily the 1986 Tax Reform Act, an other tax laws after 1986. 

6 
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We look rOTVo'ard to your questions. your review aud lhe dialogue that will mke place 

during your work on laX rc fonn over lhe neXl 18 momhs or so. 

Thank you for pcrmining lhe submission Oflhis 51alcme111. 

7 
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I

-I INVESTMENT f - COMrANY 

~ ~,,; INSTITUTE 

,..) ~ 5" • • ,. NW, W."'ln,'.n. OC 2Ooo~ ,,,a . USA. 

'O'/)'6 ~800 www.It • .o<. 

Statement of the Investment Company Institute 

Hearing on Tax Reform and Tax-favored Retirement AccountsH 

Committee on Ways and Muns 

United States House of Representatives 

April 17, 2012 

The Investment Compimy Institute' is ple3sed to provide this written statement in 

connection with the hearing on April 17, 2012, in the U.S. House of Representatives Committee on 

Way<; and M<!ans litled "Tax Reform and Tax-Favored Retirement Accounts," The Institute strongly 

supports efforts to promote retirement security for Amentiln workers. We th,mk Chairm,ln Camp 

and Ranking Member Levin for their past support of retirement savings plan improvements, 

including provisions in the Economk Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and 

the Pension Protection Act of 2006 (PPA). Reflecting these improvements, Americans currently 

have about u8 tril lion saved for retirement, with more than half of that amount in defined 

contribution (DC) plans and individual retirement accounts (IRAS) , About half of DC plan and IRA 

assets are invested in mutual funds, which makes the mutual fund community especially attuned to 

the needs of retirement savers. 

As noted by this Committee, "the major components of retirement se<urity are Social 

Security, employer-sponsored plans, and personal savings.-J While Social Security is outside the 

scope of this hearing, no assessment of employer-sponsored plans and IRAs can avoid a discussion of 

the significance of Social Se<urity in ensuring retirement se<urity-or retirement income adequil"l:yfor American workers. In this respect, Social Se<urity is the primary element forthe majority of 

American retirees' and replaces Significant portions of income forlower-income retirees. Social 

Security replaces 71 percent of average annual lifetime household earnings for the lowest lifetime 

household earnings quintile; 43 percent for the middle lifetime household earningsquinti le; and 30 

'Tho _ ....... n' Compo .... '"" ~uto" ,.,. .... ioftol ... "' .. """ of u.s. _ .... n' {om~ ir><Wog """001","",, ,!oiotd·ond 

funds, ' '''''-9<.".,;.0 fund>lH •• ~ .......... -.,.,. .. , ..... " 1UIhl.1C10Hk. to ""'''''''9< _. '0 hogh .. 1Oc0i ,,-.. ... _ . pubIO: ............ odo<>g. .<>d_.-w;,. odY..-.:. tho ........ " oIfund>. 'hoi, .,....-..., ....... ,,,,,,.nd _ .... M.m ..... 01 

OCI """'9" '01., ...... 01 " 1 .• ttiIion onO ...... -9"..-..,.,.hoIdo«. , s... '_",6,"'" u .. In .. "......,' Com;>o .... ""''''''', "f.,. U.S. R ..... .,.n' """".~ fourthOu.ln .. ,o,,"1o\priI ,out ..... _ 

"!!ww ... ·oro/!nIo!rol \I q~, 

's.. Committ ...... ''''''l """"""' ....... ,tIN>Od April w, '0", 

-sw.:. '~ s. tho,.,.., boon , ",, ' ..... in tho impon_. ofS«ioI Socurlty b.".'Min P'.,.;,iino;J """". O>comt. S«ioI Soc";<y 

bonof"",,"bnu. to ......... ,ho found""",!of ",'.....,.n' """'''Y'' ,ho liMo<! SII' .. onO """OW" , .. Ior9"" compone .. 0/ 

, ..... ;<K""",.nd ,ho p''-''''omt """" !of_, .... ""'" ,oti ...... 1n l OW, S«OoI_'y t>t".~,,_. 51 ~" .. of ,otaI 

"''' .. ""om<.nd 8, po«'" of"'om< !of,.,,~" ,ho ~t 40 po«o" 0/ ,ho""om< dO>tr'hut"",. Ew. fo< ... ~ ..... tho 

"'IJho><""""'" """" ... Soo.i5o<uri<yt>tnof;" "'P''''"''' ono·, .... of""""", " '010, s..""'9""']"' 9<o<\y.od 1Iogdon, "A ,001< .. _ ... ·SOctor R.'.....,..' PI.n """"'" Alto, U ISA, '010,· In _fChi'Mp«liY .. ,. ""_ g (0«"" .... ",,1); ",lilol>lo II 

ww.I~I!!!!/po~. 
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dkrause on DSKHT7XVN1PROD with HEARING79935A.129

percent forthe highest lifetime household earnings quintile.

l Since the enactment ofthe Employee 

Retirement Income Security Act of 1974 (ERISA), increasing numbers of retirees also receive benefits 

from private· sector pension plans (defined benefit (DB) and DC) and receive more in benefits from 

these la ns.~ Moreover, it is projected that more than 60 percent of 401(k) partkipants in their late 

30S to mid·4OS, who will turn 65 between ~030 and ~039, will accumulate enough in t heir 401(k) 

accounts to replace more than half their salary! These statistics speak to the success of t he changes 

implemented over t he past 35 years. Acrucial component of this success is the current retirement 

savings tax incentives, including the contribution rates, that motivate saving and encourage 

employers to maintain <lnd contribute to employer·sponsored plans. While it is important to 

consider how the retirement system can be improved, Congress should nOt t hrow out decades of 

progress by taking away t he ability of American workers to make full use of the retirement vehicles 

they value so strongly in supplement ing their SOCial Security benefits. ConSistent with the views of 

the overwhelming majority of Americans, I we urge Congress to maintain the current retirement 

savings tax incentives, including the contribution rates, and allow our soccessful employer·provided 

retirement system to flourish.' 

CONTRARY TO CONVENTIONAL WISDOM, INCOME FROM EMPLOYER-SPONSORED PLANS 

IS INCREASING 

Retirement policy discussions often start from the premise that retirees· pension income has 

fallen overtime. Looking at the entire period from 1975 to 2010, the data show that, contrary to 

conventional wisdom, private·sectorpension income has become more, not less, prevalent over 

time. Across all income groups, retirement income from employer·sponsored retirement plans is 

more prevalent among retirees today t han in the mid·1970S, when sweeping new retirement plan 

regulations were enacted under ERISA.'" In l010, 31.5 percent of retirees received in<om~ithe r 

directly or through a spouse-from private· sector retirement plans, compared with n ·3 percent in 

1975 (see figure below)." The median income received byth05e wit h private·sectorpenSion income 

• Fig.>re> ,,_", ,I>< med;.., ..... , '<!>Io<"""'" ,., •• fOf ,.,_ work ... in ,I>< '<)40> binh ,ohort, s.. E.<_ ,. in c""ll''''''''''' 

iIudgo' Off~ . C80·, ,.u Long.''''''' P'*<''''''' ...... $0< .. , 5«"",,>", AddiiOOMI "'jotma"""IAugu<". ~ .,,_ .. 

~Hldtflultlf"!J<boIi~.d.(1bl3,,"':!ommlo8=o,.!ong.,WMO<"!«<yri!YP'ooes'ioM.odf. 

• s..Il<Jdy.od 9ogdo<1. ·A Loo< II _.,. _$e(tor R . .... ..,...., PI .. ""_ AI,., ERISA, ,.><>: 1(' R~ Ptnp«'''" '1 .... 9 

(Oc<embo. ,. at ." .... bIe It ..--.'9,9'Wl1df/pc", .... _odf. 

, _ .... in '-"")0< ,. mid·o<>< ,.",.~,,, ,I>< J;n, "'9'M"' oftl>o J><>PAItion 'M' ,ouId ~'.n';' 1ty ~lcipot. in . 40' lk) ~ 

durir>SI\Mi,o .. "" workin9CO<Hr>, To<Ioy"> I!oIby 800m Go .. ,. ,.", typIclly ... ,.,od ,I>< -'<f .. ,. in ,I>< •• <Iv ' 910>-01_ 

bofOf' tI>o ""0<1"".,,, of .. >lkl pIoM. s.. -., "'" VlnDo-, ""(In <.'Ik) A«um"";on. G .......... sq.;f ...... , _lor r ......... R .. "'" .... I(I P""Pf<'''" fI. no. ). one! f8RI~ .... 8rio/l_' >00», "I~ I' www-~.P.t. Tho 

EaR",,' "".(1< ) I'roj«tion _ ....... j>IorW , .. ""' ... ',01 .......... of ."",mo,,,, .~"","", on ",,>(I<)><,um""ioM. s..HoI6on.nd 

VIODorbti ·r"lnft ...... 01 Aut"""';': E_n~ <."h-Up .• n4 IRA Con,ribu\ioM on ... (k)A" ........ '.",. It R....--.. • 1(' 

Rno.m~ Pmpoctiv<.1, no. ' . "'" £S '~ .... Srio/(Iuly >OOSI; .".i_ .. www ~~~.pdI. 

• s.. Fig.>re>6 ...... ,1n HoI6on "'" 8>«, A"""'Q~ c.""";",,",,, to /Iot,,-, 5«<'6'Y' 1t1w<IO< AtMud« <HId M' ....... 1nYo.1mOn' 

Compon11n.Muto (Ionuory ,o,,~ .. _ .. www,;n"'9fpdf/pp<_".ftI~ ___ updG" ,pdf one! dis<:1Mod "'0< in ,hi> ".'.mont. 

• In ,ru. ,...,.,~ tt>o inuo .... 1n ," '~m<n' pion ".'''<~ .", ' .. .., '.""""'l l,om ,I>< ;"'1>'<""',,''''' oI ~ ... -'.od 

... " ....... <_,."' ... _ .""" "" .. dr. """Ic ........ ",.., ... n ...... ,h .... ~.pontt>o.x>sting ..... ,_, ........ on 

...... .,.;ng <eIi,"m<"' """'90 for A_worl«<;.. s.. not. '" W, •. 

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lOo<~bo, ' 0"), I •• dlbl< .. ,,--jd.orgI~-Mf_ 

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S ....... y (CPS). s..f;gu.-•• in Il<ody ond B09d>n, "A LOO< .. _ .. o-5e<,or R . .... mo"' PIon """"'" "-fI .. ERISA, ' . ' 0: 1(' R......w. 
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increased to ,6,000 per person in 2010 from '4,538 in 1975 (in 2010 dollars). Fuother, because the 

surveydat~ used to analyze retiree income do not fully capture payments from DC plans and IRAs, 

the increase in pension income since ERISA is likely understated." 

Retirees Receive More Income from Private· Sector Pensions (DB and DC) 

On a percapira basis, median, 2010 dol/ars, se/Krell years 

Shaore 01 r~ti~ with 

private-sector pension 

,- 21.3~ 24.nI 28.1~ 12.nI 14.1~ 11.S~ 

Sourc~, ICI tabulations of the March (urr~nt Population Survey; see Brady and Bogdan, "A Look at 

Pri_ate·Secto. Retirement Plan Income Afte. ERISA, 10'0· 10 Resea,ch Pe,sp«tive (Decembe. 1011) 

This rise in private-sector pension income likely reAectschanges in the pensions offered. 

Since ERISA, an increasing share of private·sectorworkers has worked for employers that sponsor 

DC plans, offsetting a decreasing share that has worked for employers that sponsor DB plans.'l This 

rio;e in DC plan {OVerage has resulted in a rising number of households with retirement assets. In 

addition, accelerated ~esting requirements and other rule changes haul' led to more DB plan 

participants receiving benefits .... 

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TobW! lot A Looi< .. _ .. .!>K'QI" R ..... .....,' PIon I""om< Aft .. U,s.o.. '010;" •• oiIoble .. ~I!!:''' ''''' <lo, •• "". 

" Tho CPS "' ..... " .... DC pion ~", ..... '""'ond IRA withd,.wol$. W ond ... d«v$""" and F"ogo... '. In s.~I>0", ond SCh' .... "n.. E"""""9 Rolo 0/ IRA< In u.S. R<tl .. .....,' PIaon,.;"g. " ....... ,.,.,,'{""'po1I)'lmlh"'.FuMQ"""'.~ '50 ... lIN ...... _ '''''91; 

.. oiIobi. ot ",; "!WI!fil1S.uS:.tiol'£f. 

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ond _onda'l' " .... for pI..-... For ..... '~ISd" ..... U.S. Dopart.....,'o/ labor. ~n_ nd W.W ... _.., AdomO"Ik" .. "" (<lOW 

EO'IfIIoy" ~nef~. Se<vrity ~" .. ",,~ _ .. p......" Pion ~ ""'_'of '99' r""" 55" """"II Rtpqm. no. 5 twin,., 

,!196). So<...., U.S. 0.,,"""'".' of L.lbo<, Ponsion ond w.~.,. knof..,A_,,,;on I<IOW Employ .. knof.., !>K";OY 

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Sottor R .. .......", pt., IIK<>rrMI AfI. .. E~r.; .... " K:I ~hP<r>p«'"", ,6, no .• (NClW'nbo-r •• w); ........... www.i<~I!!!!/p'''6. 

a~. 

~ SNd;s<""'orl('" _.0(&"", Ond!lo¢on, -A look .. P"'''.·Se<'or R.' ~.mon' PIaon 11K ..... M,., ERISA, >o,e: K:III<-.m. 

~No >1. "_910e<ombef.o");0. _"~Jl!lflP.W1;;I9,¢f. 
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DB plan coverage does not always translate into receipt of pension income. Many retirees 

may have worked for companies that offered DB plans. but, because private· sector workers change 

jobs often, the combination of long vesting periods and back·loaded benefit ac«ual resulted in many 

retirees receivingli\lle or no retirement income from the plans. The belief in a golden age of 

pensions-a time in our history when most private,se<:torworkers retired with a monthly pension 

check that replaced a significant amount of their salary-is not supported by the facts. Furthermore, 

the typical amount of private-sector pension income observed in the historical data can be 

generated by relatively modest accumulations in DC plans or IRAs. Indeed. Congressional Research 

Service (CRS) analysis of pre·retiree households' balance sheets finds that the median accumulation 

in DC plans and IRAs is uoo.ooo, which is estimated to generate $8.400 per household per year in 

retirement income." 

THE DEFINED CONTRIBUTION SYSTEM IS WORKING FOR MILLIONS OF AMERICAN 

WORKERS 

With most households having accrued DB promises, retirement assets. or both by retirement 

age.,6 and with the overall pension income of retirees risin9, the data suggest the shift to DC plans 

has been beneficial to American workers." Nevertheless. DC plans continue to attract criticism and 

unfavorable comparisons to DB plans. As noted earlier. the reality is that workers neverwere 

universally covered by the DB s~tem, and even those who were <overed did not accrue si9nificant 

benefits unless they stayed at one employer for an entire career. In contrast. because of their 

portability. DC plans are well-suited to a mobile workforce." DC plans also serve households across 

all ages and incomes. There are a number of other indicators of the success of the DC plan system. 

401(k) plan design provides discipline to save for retirement paycheck·by·paycheck and a 

range of investment options. On average, research conducted in a collaborative effort with 

EBRI finds that 401(k) plan participants have age-appropriate asset allocations .'~ ICi research 

finds that 401(k) investors have concentrated their mutual fund investments in lower·cost 

funds. '" In recent years, the availability and use of target date funds have expanded." 

~ c s """"",,01 S<xwy 0/ C"""-,,,,« f;".,.. •• do,., "l'0f.' ......... ~tho mod ...... ,,,-,,, ",coun' t.oIo",. 0/ ,,,,,,.ooo.mong housohoId> ~d by PO""'" II '06 .. 1"'000oid" ' 00/_ .. "'''''I.nod '0.., ............ ~ """""" ~. mon'hIy""om< ""/00 pol" 

month (. 8 ... "" .....,...,.) '0. mon "'IrIng" og<6s" ,~.' _ """01, "Rot ___ '" 'iovIt>9> and _ W .. ~h., '''''1." (lIS 

Ropoll.jotc~ .. Rl)<l9" (.o.p<iI8. ~) . 

.. _ <hsws ....... ,e.,on p.", 0/ ...... ttte~ 

~ ~ is. '00""'" , ......... Mlyti>o Omp.c' 01 r,o. I~ ) ~ bo< .... , .... y'. , ....... hove "'" hod Ful Wee<> w;'h""h .,......, _ '. 

, ..... rd'o f""" , .... lui wee<> wi'" DC ~'" _, ... oig<I<f~.." .." <99'""" '''''''' ..... n' ,.'n. s.. <k<.....,., 10,..,. .. ' his. 

.to,......." aod ""'e, ,,_,§, inl"'. 

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_ , ................ and .. ....,. ,."..., .... age 'S ",oIde, hod a' 'he~ ",,,.n' employe" w .. S .• year> aod tong.e.l from l.')'HI' 

""""'9 , ..... og< 'S to l<o to 7_8 YO'" """"'9 those O9O ' S '0 S<o '" at>o., ,0 ye'" """"'9 , ..... age IS '" _ . s.. U_S. Dopa" ....... ' 

~~~~ 

0/ Labo<. a ......... 0/ Lobo< is.' " "'E~ r .... "' ... '0 ••. " ....... R.I .... USC>L "' "]6(~embe< ... ,."'t ...... bIo .. 

. .. 50< Fi9<J<e' " .nd l"" Haidee. V..,Oomol "lonoo •• nd Bo.~ ~o>(k) ............. , Alloattion • .t.(" ... "" 1I0I0,,,, ... aod Lwn ActMt-;., 

.0.0."1(1 R..-."h ~,~ '/. no, '0, and URI I.",. SMj(Decemlle< '0'0), a .. ;!able.' ~ . 

.. _ Haidee, Hadley. aod l<ItZ. "r he E,_.aI P""'""i<19 ~""~) PIMIo, 50"""0\ FH<, and b p ...... ~ ""","1(1 Ro>eordt 

Pe"l'fClive '7. no. . (.0 ..... ,o .. ~ ... ;If ... .. www ",L"~1.: H!II!_ 
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dkrause on DSKHT7XVN1PROD with HEARING79935A.132

Even though 401(k) plans have been around for about 30 years-not even a full working 

career-Americans have accumulated more than S3 trill ion in these plans." This figure does 

not include hundreds of bill ions of dollars saved in 4o.(k) plans and rolled over into IRAs.'l 

Median 401(k) account balance statistics are often cited as evidence of inadequacy, but these 

statistics <Ire misleading bec<luse they tend to ignore other <I"ounts th<lt an individu<l1 might 

have, including other 401(k) plan aCCOunts and IRAs. It is important to judge the retirement 

system as a whole. Not all workers have the same need to save in DC plans, as some will 

receive higher repl<lcement rates from Social Security and some will have DB pl<ln benefits. 

DC plans have the potential to replace a significant share of income in retirement. In lOO~, 

EBRI and 1(1 projected what 401(k) plans could a(Cumulate across a full career." The EBRI/IO 

401(k) Accumulation Projection Model moves 401(k) participants through their careers, with 

decisions as they age t hat reflect actual participant behavior on contributions, asset 

al lae<ltions, job ch<lnges, rollovers, withdraw<lls, and loans. The study focuses on 401(k) 

p<lrticipilnts who will turn 65 between 2030 <lnd 2039 (now aged 38 to 47). For more than 60 

percent of this cohort, t heir 401(k) accumulations are prOjected to replace more than half 

t heir salaries. Accounting forSaeial Security, the m<ljority of the lowest income quartile of 

this cohort is projected to fully replace their salaries. 

Other studies have come to similar<anclusions. In a recen tl y published article, e<anomist 

Peter Brady oflO illustrates that most workers can achieve adequa<y by supplementing 

SOCial Security benefits with in<ame from a 401(k) plan funded with moderate contributions 

and invested conservatively. 'S Economists Andrew Samwick and Jonathan Skinner of 

Dartmouth compared typical DB plans and typicaI401(k) plans under a variety of possible 

labor market and investment return scenarios <lnd concluded that "generally, 401(k) plans. 

are as good or better than DB plans in providing for retirement."" Economists James Poterb<l 

of MIT, Steven Venti of Dartmout h, and David Wise of Harvard examined current and 

projected 401(k) accumulations and concluded, ' Our projections suggest that the advent of 

.. 5ft _, V. no<<II<i "-100"' ...... h.~ ·~>(k)PIM\ "" .. , "'!Ioa,*" oO,c" ..... " hlM>< .... . n<! l .. n oO,ctivity In '010," /0 Im<o/"<h 

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-

" A, y ......... 'OI~ ~Ol(kl """.1...:1 0].' ,_ .. . ... " . s.. Tobie .. 'n ~ ......... , C""'P¥'y I""""'., "The u.s. R ..... .....,' .... rlc.~ 

roo.onlo Ouo" •• , ",," (Aj>riI '01», ...... 1>10 .. ........ ~1<'IIuI ot " qU.'",!>. 

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(ompo.yIM'~ut'I_'Y,o ," •• il.lbIo" ~O<I /po< II tt~. Q] 19.0<I1. 

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,ho p"".,iollmpo<' of out""",,;,; ._., on ~oll~I.':<umo.olotion>, s.. _ .00:1 v""Do<hoi, "Tho 'nIiuon<o of Aut_.,;,; E"'_.~ C .. ,h·Up, and ,R" eon,,;but"""on 40111<) ""' .......... _ .. Rot._.,," '" _,,~ PO<fp«tivo 1~ 1"10 . .. and CaRl 

I,..,. so.J(/uIy 'OOI~""~" www;';i. .. o/WfJw.l-Oi,WI, 

., 5ft B<ody, -Co. 40'1') PIon. Prov.do Meq .... R ..... .".., R......-.: •• r" _ FinoIIu_, vol. ~o, no,,, m ·'06I .... rdI '"1>1. 

" s.. Somwk. and Sk...,.." __ Wi! ,0'lk, P • ...", PIon. Afl",' Rotiromon' I",,,,,,,,]""" A_nEe""""';': _. vol, 94< 1"10, " 

l'9·0) ( .... «h 'oo~l . 
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personal account saving will increase wealth at retirement for future retirees across the 

lifetime earnings spectrum.·" 

DC plan participants and traditionallRA·owning households are responsible stewards of their 

retirement nest eggs. A common criticism of DC plans is that retirees relying on this type of 

plan could run out of money before death.'s Anecdotally, many believe most distributions 

from DC plans are lump sums that are spent, which contributes to this popular belief that 

people will run out of money. Research shows that a majority of individuals do not spend 

their lump-sum payments upon distribution, but rather roll over these funds to IRAs or other 

tax-deferred plans." At the juncture of retirement with a DC plan balance, households 

indicate that they consult multiple sources of advice and information when making the 

distribution decision."' TraditionaIIRA-owning households typically postpone withdrawals, 

take withdrawals b<>sed on life expectancy, and use withdrawals to pay for living expenses.)' 

AMERICAN WORKERS SHOW STRONG SUPPORT fOR THE DEFINED CONTRIBUTION SYSTEM 

AND ITS ASSOCIATED TAX INCENTIVES 

Americans highly value their DC plans and t he features typically associated with them. A 

2011 household survey demonstrated American households' strong support for key features of DC 

plans, including their tax benefit, and their appreciation for the investment opportunity these plans 

provide.!' 

Overwhelming support for preserving the tax incentives for retirement saving: Eighty·five 

percent of all U.S. households disagreed when asked whether the tax advantages of DC 

accounts should be eliminated. Eighty·three percent opposed ilny reduction in employee 

contribution limits.U 

Many oppose altering key features of DC plans: Nearly 90 percent of all U.S. households 

disagreed with the idea that individuals should not be permitted to make investment 

decisions in their DC accounts. Nearly eight in lO disagreed with the idea of replacing all 

retirement accounts with a government bond.

34 

"s« Po,.,"'. v .. " .od w .... "111< c~ ___ . pe oIP._",~ u .. td s, ...... N8E~ WO<li"Ig "-. No .• )8. 

1Stp< ....... ' ''''I~ •• _., www "~I!SQiW....lll~ . 

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9"""""" fo< u,.lftol ,,,. po"><ipon' doo. "'" m .. " ,h .. ,,,. POyrTlO"' ".uffi<iom ,., _ ,,,. po"><ipo",·. , ..... ,.,.." ""'''''''' 

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" In _,",". ~ ... ... moylt_ ,,,. "" .. "" • ., ,,,. OC pion '""It~. Io' t< do, •. f o< ... mpIt. ott tI>t .>.pentn<. 01 111< v""'lW'''' 

G<oup " ,,,. OC pt. .. ,h .. ' hoy t<ord~ .. p (f~ ~S" """' A""",,, So .... ,",,; .,.i ...... '

l!!!Jl11lin" "u, ....... .". .,~M!I . 

.. 5« 501>< ... "" 8ogdon. one! IioId<fI, "Dfl1Md Contfibutioo PIon Dis"ibu<"," Choic •• " R. tiromo,,~ " Su<wy of Empolo"fH. Rotiring 

_~ >00, . 0<1 '001: mwttmM' Coml""'ylm''''''< R....at< ~ s.n.. (F •• ,008), . ..... 1>1<., www.kl.<>«IlD<!fkpt 08 dcdO.pdI. 

~ Sf< Ho!d<n.od S<h< .... "1". Rolf 01 LIlA' ... O.S. _.·S.....-.g for R. ' ".",....,. •• ~ "'" Rnt<>t</I.....,..., .... >1. no. 6 

IN_mbto" ""~ •• 0;10 ..... ' ......... Os;i 9<Q/~""'.I1!t . 

.. s.. _" tnd s.... -O:Q.' C_,,.,.,,, .. 1'<,1<0,.,.", Soc"';!)': In .... ,"'" ~"' ,O<ksQT><j ""ions. lrw<",.,.n, C.,....,."y In,,;,",. 

(Jonuo'l' , .,,); ... ;IoI>l<.twwwJill!o:9/J1!!f[I'I!!:" m. In ~ ... pdI. 

-1ttid(f0gv«1). 

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Investors like choice and control of investments: Ninety-seven percent of all DC accountowning households agreed that it was important to have choke in, and control of, t he 

investment options in their DC plans_ Seventy-nine percent said their plan offers a good 

lineup of investment options.)' 

Most households continue to have positive attitudes toward the 401{k) system: Si><ty·five 

percent of all u.S. households in 20U had favorable impressions of 401(k)and similar plan 

accounts, similar to 2010.J' Nearly three-quarters of households expressed confidence DC 

plan accounts t hat could help participants reach their retirement goals." 

ICI's household surveys during the past three years find t hat even in the depths of a bear 

market and despite a broad economic downturn, Americans continue to be committed t o saving for 

retirement and value the characteristics, such as the tax benefits and individual choice and control, 

that come with DC plans. 

EFFECTIVE POlICYMAK1NG REOUIRES A BETTER UNDERSTANDING OF THE ~COVERAGE 

GAP" 

While t he current retirement laws and policies are working well and are helping tens of 

millions of American workers accumulate savings and generate retirement income, some argue that 

the system is a failure in that not all Americans have access to an employer·sponsored plan. This 

perceived failure is referred to as the so-called ·coverage gap." The fact is that the majodtyof 

private·sectOr workers needing and demanding access to pensions as part of their compensation 

have pension plan coverage.'" Discussions about coverage, however, often relyon misleading or 

incomplete coverage statistics. Household surveys, such as the Current Population Survey (CPS), 

typically show lower rates of pension coverage than surveys of business establishments, such as the 

National Compensation Survey (NCS). For example, t he CPS data show that more t han half(or n.7 

million) of all workers were without pension coverage in 2010.l'I The March 2011 NCS, on the other 

hand, shows that 64 percent of all private-industry workers and n percent of all full-time privateindustry workers have access to a pension.'" 

However, even if one uses the CPS data for analysis, looking below the aggregate statistics 

paints a significantly different picture. Of the n.7 million workers who report that theiremployer 

does not sponsor a pension plan, 17.9 million are either federal workers, state and local workers, selfemployed, or work wit hout pay." This leaves 59.8 million workers who are private·sector wage and 

·1IIoid(F;g"",~). 

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J&jd(F'9"'e8) . 

~. 

" SHllrody ... 809<I,n, "WhoGots Rotamon' PI.oM ond wny, '0>0, · ICI R....".,h i'<t>p«'_ '7, 00. 7(0<'_, 'Olt~ ",",1>10 .. 

- J&jd Ifigo.o. \). _ '''''"'"'1'""'< ........ 06 ondio< DC .,... •. 

.. 5« Tol>lo , "' u.s. De.,.",,,,.,,,, oflobo.-, S .... uol Lobo.- Sto,;,,;,,, "Employ .. 6_" in ,.,. U"" .. S, .... _ Mi«h ,.tl, - Now> 

R .... ,. USOL_,,..,,, IJuIy .6, ,o,,~ .""IobIt., www.bk. ... _l!!gi!!1!I! .. l!i!!!l!~!H!!!: P ........... OVO.".1." ".<..-.dO< De ."d/OI" DC 

•'"" • F""oI, ,to" , ..... 10<. 1_""" .... ' .m~ ..... xdu<IoO r""", Iho ..... ry... ~ ,.,. If)('" of ~ ~1YP;C~ty .... _ 

t. 0>0-_ .. , ... to P<"_-..ng ~" •. se<to< _ .... s. .""'pIoy .. _ ......... ,Iu<\td t>o< ...... , be;"g _ .... 

.", pIo~. they U " ..:,n . on ornpIoye,.""""" .. pion by '''''ioinoj tl..troption ,on tobli>h, p!or>. 5« r;g...-.. ;., B'ody , nd 809<1 .... 

, 
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salary employees. Yet this still overstates lhe number on which to focus. Oflhese, S.9 million are 

under age 21 and 2.8 million are age 6S or older. This leaves Sl.0 million pr va e-sectorw ge and 

s~lary employees age 2110 64 who report that their employer does not sponsor a pension plan (set' 

figure below)." Of these, 1l.6 million are part·time, part·year workers') and7.0 million are ful l-time, 

full·year workers age 21 to 2g .... This leaVf's 22.4 million full-time, full-year private· sector wage and 

salary workers age 30 to 64 who report that their employer does not sponsor a pension plan. Of 

these, 6.S mill ion earn less than nS,ooo a year's and 4.1 million earn nS-ooo to '44,999 a year and 

are age 30 to 44.'" The result is 11.8 million private·sector wage and salary employees who are like ly 

to desire to save in the current year and whodo not have access to an employer plan. But 2.2 million 

of these have a spouse whose employe r sponsors a plan. The final result is 9.6 million private-sector 

wage and salary employees who are likely to desire to save in the current year and who do not have 

access to an employer plan through their own employer or a spouse. 

""Who Get> ~. ' ...... n' PIon> o""Why, '010,· '" R<JKG«h P..-.p«fN< 'I, no. I (0.:,_ 'Oil.}; .. .;Iobl<., ........... .iWI!~ 

w.1!!!!. P_ pIon .... 1vde DB oodIOfOC pion>. 

"1b.od( ~ig<It.S ). 

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"".em.n,", ,t.<.",,,,,,,,.", ~ tI>oy_ hJII·, ..... ory .. ' ·_"' .. t.<, , ..... II>i<I (f"_ Sl. 

~ row", ''''19< I/'oup"" porimonIy f", ",' ~ ..... n'. wool<"" _ .. '0 ~ .... ~ f", od ..... , .... ,ho i><"<'-< of. t.om., '" / .... «..".",.,.,. "' • .."... _(_IC'tobulo,.,.,. /,om III< '00/ Sorwyof Con .......... f"""' •• , fiop" ••• ot><! ~~ "' Srody""" 

BogdAn, "WhoGo .. R .. a ......... PIAn.""" Why, An Updo'.: IC,_h P"'P"-' I, no.) (Mor<h '.'1); o.Hob!< at 

www.i<'.org/pdflp<nl·Oj.pdi.) . 

• , 111< primoty <on«'" I",_ken •• ming In, ,lIon "5_ PO' _;,. ,hoy"" not h .... ~h 'ospond .. Iood, <Iothmg.nd 

_ ..... 'OCt mooy ..... t;gibI< 10< _"' ............. ,..,.. "",ho, ,....,. w;li I>< obi< 'osponO """" thon wh., ,hey ._on 

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WP>oG.,.R ..... ,.,..,' '''"n> .... WI>y, 'olO; · ...... bIo .. )VWW~~ • 

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<u<h .. """"'9 0 _hold ond hoItIr.g ct,*" ••. G_n ''''' ti>o19'" 0 _,."' ..... pIo< ........ " to from Soc ... 5o<urity,Ihfy' or< 

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• 
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A Closer l ook at Workers Whose Employer Does Not Sponsor a Retirement Plan 

Mil/jons of private-sector wage and salary workers age 21 to 64, 2010 

~cIot<noI_ 

• ,fI;'_pIon 5I.Oml __ h" 

rcf·tomt.fIoII·1N' _ko<sOllfll JOto&.- ..... fIIIPIO'ItI_noI _ • ..,,,..,..,,,pIon 

11..1 ""n ... wO<kef< 

~.= ,::,'i},oeo ''' '~.ooo''I''._ ""'_lO"" 

, ... llS.ooo .. U",H ... _,1 .. ", ,,,,,,,,.oeo .. _ ... _lO"", 

IIOIIliI:fflto_ 

.. __ II'''''' """""'_001_ • 'fllI......,t pion 

tU_wort." 

~0It litoh to ........... .., ......... _11· ..... .. ~"" ............... "'" -~~-' • ..,.omtnt pion 

UmDNon_h " 

, Full·time, full·ye .. worke" wl>o.am '45.000 0/ mo,e nd a" ag<"<l 30 to 64 or earn "5.000 to ' 44,m Ind." 

aged 45 t064· 

, "'mo"9 full ·ti ..... , full.yeo< WOlke" ~d 35 to 44, "5.000 "p"esents the top u,nir>g' 01 tn. ,00h percentile 01 

annu. I • • ,nings and '41.000 "p,,,. n,, ,ho to!' •• ,ning. 10' tn. soth po".n'ile 01 onnu.I .. ,nin<p. 

Not., Compon. n .. m~y not add to the tota l btco ..... of ,ounding. 

Source: In" ........ nt (emp.ny In .. it",. tabulation. of Mitch 2011 C""ent Population Survey; 5H Brady .nd B09d~n, 

"Who Ge .. ~et; "m.nt PI,,,. Ind why, '0'0: /(1 R ... atch P~t~ (October '"111 

Many more workers have access to an employer plan at some point during their working 

careers than is implied by looking at a snapshot of coverage at any point in time. This can be seen by 

examining data on households approaching retirement age. The figure below shows tabulations 

from the Federal Reserve Board's 2007 Survey of Consumer Finances (SCF) for households 

appro"ching retirement (I.e., households with a working head age 5S to 64), including both private· 

and public ·sector employees." Eighty·four percent of these pre·retiree households hOld DB benefits 

and/or retirement a((ount assets, and such retirement resources are spread across the income 

distribution. More than 90 percent of pre·retiree households in the top three income quintiles (with 

total household income over 555.500) had such retirement resources; three·quarters of pre·retiree 

households in t he second income quintile (with income of 532,900 to 555,500) had such retirement 

resources; and almost two-thirds of pre-retiree households in the lowest income quintile (with 

household income of 57,200 to '32,900) had such retirement resources. Although lower·income 

households are less likely to have both DB pl"n promises and retirement account assets, this group 

~Iso h~sless of a need to supplement Soci~1 Security with workplace or pr v~te s~vings to m~int" in 

t heir pre-retirement standard of living. 

"fi9U<o<lf1O ICI_"". 0/ .... '001s ....... yol e ""......., 1""'0<0<. R .................. " IrK""'" oc ....., I«aun" I • . g., 40'(kL 

.o)(b). ' 51. !llnll pI.n'I"'" ,It.'.>. 

• 
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Percentage of Pre· Retiree Households with Retirement Assets andlor OB Pension, 2007 

HOlisehoids with working head age 55 ta 64, by incame quintiie, excludes topond bot/om one 

percent oj the income distribution 

_ .... 

• 9othrel_~&C>I! 

.R<.I . .........r~cnIy 

~"~ ()Jntil\! 

" 

.... 

()Jnbl\! 

" 

Source: 10 tabulations of de,al es~~ Board Su"'ey of Consume, nanc~s 

It isalso important to rememb.erthat households with eamed income have access to IRAs to 

save for retirement on a tax·advantaged basis. Forexample, Congress designed t he traditional IRA 

with two gO<lls in mind: (1) to create a contributory retirement account for workers without access to 

plans at work, and (2) to provide a rollover vehicle to preserve assets accumulated in employer· 

sponsored retirement plans (both DB and DC). Although a small share of individuals contributes to 

traditionallRAs in any given year,..a the majority of those that contribute make repeat contributions 

in succeeding years." In addition, many of those IRA investors contributing to traditional lRAs 

contribute at the limi ~ 

• • • 

The promotion of retirement savings--whetherthrough employer·sponsored plans or IRAs_ 

has long been one of Congress' top priorities and legacies. More recently, Congress strengthened 

the private'sector retirement system by raising contribution limits in 1001 (EGTRRA) and making 

those provisions permanent in 2006 (PPA). We welcome this Committees' continued leadership in 

..... ...,..,..,.ofl..,,,,,,, m.y .,:<""'" ,'" '1V<,.10'~ iowwn";b,,,;"" '''e. Two"" ... _ j", ikt.,.,..,.ouof ~u.~· 60<"""". t" , .. ,Obut. , .. "0<1;",,,,01 ~"" or. , ... ~ .......... '" of ,11ft _ for 0<1<1<,...,.1 ,.., ............ ~..-.d , ..... . bi" y , .. dod"", 

c .. ,Obutions from .~ , ... bio 'oncom<. _ .. I> ,,1\0 ore '0_,"" b'\' "','or ..... "' pion." wor'< ....... ~"d U," ''''y "" m<fl. , ..... 

<1'""9 _. ''''ougI> ,...,.. pIooM. In oddri""". '''''"''9'' b'\' ouch pion. may 'u,1I.1l>H '9~ity to m. 1« " , ·dodur.,;bIo 

,.,.",.",,""" •. for .."...,.Ito: ....... ~ Sod.1 S<;:urriy ,<plA<: ... m..:h hog/Io' " .o<:1iM of pro., .. ;,......." el<flin9>, "'fW.h ....... 

~..:. , ... ~ _ foo odOri..,.oI ",IO-. men< ,,'""9>-r.....,.,..,.,., •. , ...... "......,. ._. ,"" ''''' u,;'''' . bo.l IlIA ....... moy ~nt 

>om<"-""" f<Qm wn,ntoutOng . 

.. 5«_ •. Soboll .. " ... ,.nd I!-it ~ ,I>ofRA "''''''",Pro{oIo, '",d.,_ ORA """"""'C""mbo""" A<tMfy, ,,,.I><I ~ 

W ..... ngton. 0(, "' ............ , om~ In.tit",. (,,, .. j; . ...... t>!< It www.Ki.O<9IpdIi.P! •• 'or. <on!ribu\ionudf. 

" ISO. 

,. 
180 

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pursuing policies to improve our Nation's retirement system. But any changes should only build 

upon our existing system th~t, through tax incentives and other features, successfully encourages 

millions of Americans to accumulate savings during their working lives and therefore generate 

adequate income in retirement. 
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WRITI(N COMMENTS OF 

KEVIN A, WIGGINS 

TOTHE 

U.S. HOUSE OF REPRESENTATIVES COMMITIH ON WAYS AND MEANS 

HEARING ON 

TIlX REfORM AND TIlX-FAVQRED RETIREMENT ACCOUNTS 

HEARING HElD ON APRil 17, 2012 
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Chairman Camp, Ranking Member Levin, and Members of the Committee, thank you for the 

opportunity to submit the!>e written comments on Ta~ Reform and Ta~ Favored Retirement 

Accounts. I am an ERISA attorney and a former member of the ERISA Advis.ory Council, appointed 

to that position by the U.S. Secretary of Labor. This statement should be attributed to me alone. 

For the sake of brevity, I will limit my comments and submit them in a bullet point format. 

Most Americans need to save more for retirement. 

At least two persons who testified at the hearing may have suggested that deferrals 

under a retirement plan qualified under !.R.C. § 401(a) et. seq. are tax-deferred only, 

and that such deferrals do not escape or evade taxation because all benefits are taKed 

upon distribution from the trust. At least two well-respected law review articles 

indicate, however, that trust earnings in a qualified plan can be considered permanently 

exempt from tax. See Daniell. Halperin, Interest in Disguise: Taxing the "Time Value of 

Money, N 95 Yale U. 506, 520 - 24 (1986); William D. Andrews, A Consumption-Type or 

Cash Flow Personal Income Tax, 87 Harv. L. Rev. 1113, 1126 (1974). 

As the ERISA Advisory Council concluded in 2010, there appears to be a great need to 

bring more members of traditionally under-served segments of the population, such as 

women and minorities, into the private retirement system. see 2010 ERISA AdviSOry 

Council Report, Disporities for Women and Minorities in Retirement Savings, available at 

htlp:l/www.dol.gov/ebsa/publications/201OACreport3.html. To address this and 

similar issues, the Office of the President has proposed auto-IRAs. A far more efficient, 

and far less costly, approach would be auto-supplemental wage withholding. 

Sincerely, 

Kevin A. Wiggins 

, 
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~~~~ ~ National Association of Government Defined Contribution 

Administrators, Inc. 

TESTIMONY SUBM1TI'ED TO THE 

HOUSE COMMllTEE ON WA YS & MEANS 

ON 

TAX REFORM AND TAX FAVORED RETIREMENT ACCOUNTS 

April 17.2012 

WASHINGTON, D.C. 

JULIA DURAN D 

PRESIDENT 

NATIONAL ASSOCIATION OF GOVERNMENT DEFINED 

CONTRIBUTION ADM INISTRATORS, INC. 
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The National Association of Government Defined 

Contribution Administrators (NAGDCA) appreciates this 

opportunity to submit its comments for the record on this 

most important issue that touches so many Americans who 

mayor may not have adequate income for their retirement 

needs. 

Chairman Camp has indicated that the hearing is to 

explore whether, as part of comprehensive tax reform, various 

reform options could achieve the three goals of simplification, 

efficiency, and increasing retirement and financial security for 

American families. 

He said in announcing the hearing, 

"Retirement security is one of the most important 

long-term policy priorities we face as a Nation. While 

many argue that the existing menu of tax-favored 

retirement plans provides choice and flexibility for 

families and employers alike, others have questioned 

whether the ad hoc development of retirement savings 

incentives has led to undue complexity and inefficiency 

that reduce the effectiveness of these incentives. The 

general principles of tax reform apply to retirement 

security as well: American families trying to save should 

have options that are simple, fair, and economically 

efficient." 
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NAGDCA was founded in 1980 and is the leading 

professional association representing public employer 

sponsored deferred compensation and defined contribution 

plan administrators. NAGDCA represents administrators from 

all 50 states and over 150 local governmental entities, as well 

as private industry plan providers. These states have, under 

their auspices, over 5,000 local government deferred 

compensation plans. NAGDCA also represents nearly 100 

industrial members that provide services to public plan 

sponsors. 

NAGDCA is an organization in which its members work 

together to improve state and local government defined 

contribution plans including §457(b), §401(k), §401(a), and 

§403(b) plans through a sharing of information on 

investments, marketing, administration and laws relating to 

public sector defined contribution plans. 

Our members administer state and local government 

defined contribution plans that are regulated under the 

Internal Revenue Code (IRe) and available to public employers. 

These plans, which supplement state and local defined benefit 
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plans, provide a convenient vehicle for public employees 

across the country to save for retirement. In all cases, full time 

employees of the entity offering the plan are eligible to 

participate (and, in many cases, part time employees are also 

eligible to participate). Altogether state and local defined 

contribution plans administer approximately three trillion 

dollars in assets across the country. 

Since the inception of public employer defined 

contribution arrangements as supplemental retirement 

savings plans, there has been tremendous growth in access to 

these plans, employer sponsorship, employee participation 

and assets at every level of government throughout the United 

States. 

The data collected by NAGDCA from our membersh ip 

demonstrates that, over the years, there has been: 

increased participation in the plans, which 

demonstrates that more individuals are taking 

personal financial responsibility for preparing for their 

retirement, 

increased deferrals made by state and local 
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government employees, 

greatly improved satisfaction with the benefit payment 

process, and 

increased consolidation of retiremen t assets. 

The numerous changes that have been made to the laws 

and regulations that govern public-employer defined 

contribution plans have been essential to these increased 

participation rates. We appreciate your continued support of 

these improvements. 

NAG DCA believes tha t to achieve retirement secu rityand to ensure that millions of public employees will be selfsupporting during their retirement years-it is imperative to 

maintain a shared responsibility between employers and 

employees. Thus, defined contribution plans should not be 

viewed merely as supplemental savings plans but as a critical 

componen t of an individual's overall retirement security. 

It is in this spirit that NAG DCA advocates for policies 

that enhance defined contribution plans. State and local 

governments are proud of the supplemen tal retirement savings 

plans that have been created by working jointly with the 
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federal government. The existence of these plans has resulted 

in higher savings rates and increased retirement 

preparedness. The goal of any proposal to alter or significantly 

change employer-sponsored retirement savings plans should 

be to enhance or simplify the current procedures, and to 

ensure that the administrative costs to employers and 

participants are reasonable. 

We at NAGDCA applaud Chairman Camp for initiating an 

educational process to establish a basis for tax reform. We 

appreciate that the review of tax favored retirement accounts 

should be part of the process. We agree with the Chair's 

stated goals: simplicity, fairness, efficiency and increased 

retirement and financial security. 

NAGDCA believes that the defined contribution plans, 

including §4S7(b), §401(k), §401(a), and §403(b), that its 

members administer across the nation meet these goals. 

While there is always room for improvement, the record of 

these state and local government sponsored plans is 

extraordinary . 

The plans are operated with extreme efficiency in costs to 
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both the state and local governments and the participants. 

Even without the application of non-discrimination rules 

there is little or no indication of inequities between employees. 

In most cases where a state or local government offers a 

457 or 401(k) plan there is little complexity. The complexity, if 

any, that lies in all defined contribution plans is in the 

investment decisions that must be navigated by each 

participant. Here NAGDCA would urge Congress to address 

how participants can access fair, honest and effective advice in 

retirement planning and investments. 

As our statement indicates, defined contribution plans 

administered by NAGDCA members have an excellent and 

documented record of administrative transparency, increased 

participation rates, increased deferrals, greatly improved 

satisfaction with the benefit payment process, and increased 

consolidation of retirement assets. 

Of particular importance to the participants in the plans 

administered by NAGDCA members is the continued 

availability of section 457(b) plans. These plans have been 

available to government employees for some time preceding 
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the broad availability of section 401(k) plans. A unique feature 

of the 457(b) plan is the lack of a penalty for withdrawal at 

employment termination when it occurs before the departing 

employee has reached 59 and one half years of age . Should 

there be a consolidation of defined compensation plans, 

NAGDCA strongly believes, without question, that this feature 

should be preserved for state and local government employees, 

current and future , as an incentive to save and adequately 

prepare for their retirement. 

lt is well known that many state and local government 

employees retire before they are 60. Many state pension plans 

allow for and encourage early retirement. The features of 

457(b) plans are an important incentive to encourage savings. 

We thank you for the opportunity to comment and look 

forward to working with you as the Committee reviews these 

issues. If we can ever be of assistance or serve as a resource, 

please do not hesitate to contact us. 
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Statement for the Record 

To The House of Representatives Comminee on Ways and Means 

Hearing on Tax Reform and Tax-Favored Retirement Accounts 

Held on April 17, 2012 

Submincd by: 

Robert L. Reynolds 

President and Chief Executive Officer, Putnam Investments, and President of the 

Putnam Funds 

I would like to thank Chairman Camp, lI.lcmbers of the Committee on Ways and Means 

and Congressional staff for allowing us (0 submit this statement about an issue that has 

been elevated by the ongoing debate about our federal deficits and national debt: the 

ne<.xl (0 preserve and enhance incentives for retirement savings in America. 

Surging federal deficits and a national debt growing faster than our economy truly do 

pose a national security issue. To ensure the stabilit), of our financial system and 

maintain global competitiveness. it is vital that we get our national debt on a sustainable 

tmck. America needs (0 b'Ct our economy growing faster than our public debt or risk a 

slide to\, ... ards insolvency and debt-dril'en financial crisis such as we see playing out in 

Europe loday. 

As we slnlgglc 10 bring federal deficits down and get our national debt back onto a 

sustainable path to solvency, sal'ings, and retirement savings in particular, have a \'ital 

role to pia)' in a tmnsition that America absolutel), has to make. Simply put, our nation 

needs to move away from rising public spending, surging debt, and excessive. dcbtdriven consumption to a new economic model, grounded on higher savings, and grealer 

incentives for invesunem, business formation, and job creation. Ultimately, the best ,.va), 

to deal with our deficits and debt will be to outgrow them. And a robust retirement 

sadngs structure will be key to spurring such growth. 

Regrettably though, there is now a real risk that tax incentives for companies 10 offer 

workplace sal'ings plans and for individuals to participate in them could be undennined 

br ill-considered poliq' changes ainled at reducing the budget deficit. Proposals to cap or 

roll back tax deferrals for retirement sadngs, which have emerged from ongoing deficit 

debates, arc particularly dangerous. 

If adopted, such proposals could hal'e the effect of reversing a b'Cneration's worth of 

congressionally dril'en progress on retirement savings. 'nley would undercut ineenti"es 

for thousands of smal! and emerging companies to offer their workers retirement plans 

and cOI1M thus deprive millions of fllUlrc workers access to workplace sal'ings plans. 
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~[oreover, potential CUtS to curren! retirement saYings initiatives would likely return far 

less r,,'enue to Treasury than their proponents estimate - e\'cn ovcr the short-tennwhile placing millions of fUTUre retirees at risk. 

National solvency and personal solvency, we beliL'Ye, arc mutually reinforeing. Our tax 

and economic policies should never pit one against the other. Strong personal and 

workplace savings are essential to restoring America's long-term soh-ency because tme 

solvcnc)' includes strong household balance sheets as well as a sustainable federal budget. 

After all, e,'C£}' dollar that retirement savers set aside is one less dollar that wiD be asked 

from the government in the fUTUre. 

The benefits of savings - and the m:gaove impact of exccssi,'c household debt on 

national economics arc both highlighted in a reccnt International Mone!"lll)' Fund study, 

"Dealing with Household Debt." In it, the 11\·[1' found that, " Housing busts and 

recessions preceded by larger run-ups in household debt tend to be more seyere and 

protracted." , 

This suggests that personal solvency, which is grounded primarily, though not 

exclusively on retirement sa"ings, is a key part of the solution to our national debt 

concerns -- not part of the problem. \Vhate\'er actions we take to curb federal deficits, 

we should preserve and indeed enhance incentives for the personal and workplace 

sadngs that enable mitlions of working Americans to secure their own retirement 

futures. 

Savings Inccntives Meet A Clear National Need 

The need for enhanced savings in our count£}' is clear and indisputable. Americans today 

live longer, more active Ii\'es. lbe cost of health care, especially in later life, is increasing 

stcadily. Trnditional defined bcnefit pension plans ha,"e declined in number and scope, 

and only a declining minority of toda),'s workers, primarily in the public sector, have 

access 10 them. l\[eanwhile, Social Security's projt'c{ed abili£}' to replace pre-retirement 

income is declining, even under current law, as a result of rising eligibility age and the 

costs of l\'[edicare deductions, This "perfect stonn" in the retirement income arena 

makes incentives for saving C\'en more essemi~1. 

To supplement dwindling sources of assured retirement income, working Americans 

ha,'e come to rel)' on a broad spcClnnn of voluntary, private retiremem sa\'ings 

progrnms that Congress has created over the p~St several decades. These include 

indi"idual retirement accounts (IRAs), defined contribution savings \'ehicles including 

401(k), 403(1)) and 457 plans, and tax-advantaged variable annuities. 

, In .. rn~,i(Kl.1 Monet.,y fund. "Dealing" itb Ilou",hold [kbo.- April 2011. p.3 

, 
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These progmms have enahled mi!lions of workers and their families to save for more 

secure, dignified retirements. While the), can -- and should -- be improved, these 

programs represent a major, made-in-America success story. 

Defined contribution workplace savings plans, and the incentiHs and programs that 

support them, have proven successful, enaMing OI'er 80 million Americans to 

accumulate more than 54 trillion. And with the passage of the Pension Protection Act of 

2006, Congress significantly improved these plans by endorsing several key plan design 

clements which already show signs of enauling millions more participants to replace a 

greater share of their pre-retirement incomes for life. 

These key elements include. automatic enrollment of participants (who remain free to 

"Opt our' '), automatic esulation of participants' deferral rates and legal safe harbor for 

plan sponsors to default participants to qualified default invesllllents (QDIAs) that 

include balanced funds and target-date "lifeercle" funds (str:l!egies that srsrem:uicaUy 

reduce investment risk as retirement dates approach). Numerous srudies have illustrated 

the success of such automatic featu res in lifting workers' capacit), to replace worklife 

incomes when they do retire. 

Putnam's own research suggests that there is - already - a significant success Stof}' 

underwa), for millions of workers within the c."isting 401(k) structure. A survcr of the 

retirement readiness of nearl)' 3,300 working Americans sponsored by Putnam 

hll"cstmenrs and Brightwork Partners las1 rear found thai working Americans o\'cmll 

were on track in calendar 2010 to replace 64 % of their current income in retirement. 

This is somewhat short of what the), arc likely to need, but close enough so that most 

people, though not all, can still achieve secure retirements if they act now to raise savings 

rates. 

'nle details of these surn .'Y findings have major policy implications - and disclose "best 

practices" -- that policy-makers should seek to spread across the whole workplace 

sadngs system. For example. when you include fmure Social Seeurit), benefits, rhe beStprepared quartile of working Americans arc on track to replace 100"10 of current income 

in retirement, The least-pn'pared (luartile arc on t.rack to replace just 46% of preretirement income even with their Social Securit), benefits. Yet the mean household 

income of both groups in our 2010 survey was identical: 593,000. 

Scyetal factors account for this \"aSt difference in retirement readiness, but one in 

particular appears crucial: '!1lC very best-prepared Americans - roughly 19 million 

workers according to Bright\\'ork estimates - both enjoyed access to a 401 (k) or other 

defined-contribution plan at work and contributed 10% or more of their income to their 

plan. 

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In shon, toda)"s existing 401(k) plan stnlCt\,re can deliver solid reuremen{ security for 

those workers who make the decision to take part and who also defer 10% or more of 

t.heir salaries. In effec{, we have diseo,"ered an antidote to the risk of elderly poveny ~ 

and it has three simple ingredients: access to a workplace s31'ings plan, the decision to 

sa,"e, and willingness to defer at rates of 10% o r more. 

Today's retirement savings programs were given the advantage of deferring feder:ll 

income taxes prccisel)' because they could delil'er results that are elearly in the public 

interest. Tax defefr:lls offer a powerful incentive fOf workers to maximize their savings 

and have contributed greatly to the success of these plans. Today, roughly 70<'/0 of 

American families have tax-ad,'antaged retirement savingsz and assets held in emplo),ersponsored retirement plans, IRAs and annuities to taled 51 7.9 trillion at year end 2011.j 

Tax incentives He imponant to wo rkers saving for retirement. t\ recent sUfl'ey by the 

Im'es{ment Company Instiw{e found {hat 85% of households supponed maintaining taX 

incentives for retirement savings. '111e sUfI·ey also found that 45% of respondents 

reponed the)' probably would not be saving for retirement if they didn't have access to a 

defined comribution plan.' 

Limiting or eliminating these incemil'CS could have a detrimental affect on workers' 

ability to save sufficiently for retirement and the propensity of employers to offer 

workplace plans, Recent analysis by the Employee Benefit Research Institute (EBRI) 

demonstrated that "modifying the fedetal tax treatment for 401 (k) contributions would 

result in an average percentage reduction in 401 (k) babnces of between 6% and 22% , at 

Social Security nonnal retirement age for workers currently ages 26-35." "111e study also 

found that "smaller employers were more likely to respond negati"ciJ' to the proposed 

changes {han larger employers." Emu cit<.xi other recent sUfI'eys which reported that 

small companies mal' "have less desire" 10 offer a 401 (k) plan to their employees if the 

tax incentive s[rucmre changed.J 

Indeed, some smaller business owners and companies are motivated to offer workplace 

sa\'ings plans 10 their employees because of the S50,OOO pear rear maximum that these 

owners can set aside for themseh"cs under current law. If that amount is capped at a 

lower level, some business owners mar become more selecti"e about offering workplace 

savings programs or simply decide to save onl), for themseil'es and keyemplo),ees_ 

' Inl·o.lmonl Company InSlilulo. 2011 In,·e'lmen, Compa ny Facl Book. p. 102 

' tCI.2012 

'ICI. ~" m~'io" , CO<llmilmOnllO R~i",monl ~"';IY: In'·o>lOl" "!litude • • nd "olion.:· 20t2. p. t4. 17 

• EIIRI. ··Modifying ,he Fctkral T.x Trea'm<n' of40 1(k) Plan Con,ribu,ion,: Pr<>jc<l.d 1m!>",,' on p.nicipan, "<coun' 

B.la"""s. ~ 20 12 

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Changes 10 sa\'ings tax incentivcs would impact worken; of all income levels. But the 

worst impact would likel), be on low- and mooerate -income workers. In a study 

published in)ul)' 2011, EBRI found that proposals to cap tax deferr.lls would "most 

affect the highest-income workers, bUl it also would cause a very big rC<!uction in 

projected retirement accumulations for the lowest-income workers."" 

Without incentives, workers reported they would probably save less. In its 2011 

Retirement Confidence Surye)', EBRI found that lower income workers - even those 

earning between $15,000 and S25,000 -- wouM be negati\·cly impacted if tax deferr.lls 

were eliminated. A full 76.2% of workers in this household income category cited the tax 

deductibility of contributions as "vcr)' important." Also in that same cohort, 56.7% said 

they would reduce Ihe amount the)" would sa\'e if the tax deferral were eliminated. 7 

One frequentl y-citC<! argument in favor of limiting these tax incentives is the contention 

that the deferrals benefit the wealthy morc than average workers, But, workplace-based 

retirement progr.lms arc particularly beneficial for lower- and middle-income workers, 

Research bl' the American Society of Pension Professionals & Actuaries found that 

households with annual incomes below $100,000 pa), 26% of income taxes but rcceive 

62% of the benefit from the tax ad\'antages of 40 I (k) pbns. In comrn:it. families earning 

more Ulan $200,000 per year pal' morc than half (52%) of incomc t;lxes, but reccive just 

II % of the tax advantage benefits from these plans.' 

Indeed, sl\\·ings deferr.lls for the establishment of workplace plans are uniquely 

"progressive" becausc under thc provisions of ERISA law. busincss o,-vncrs and plan 

spo nsors must meet non-discrimination rules that ensure that the benefits of savings 

deferrals arc widely shared among aU employces of a flfm - not limitcd to top eXl."cmives. 

I f similar rules werc applied to, say, mortgage or charitable deductions, then affiucnt 

taxpa)"crs could Ix: required somehow to assure that lower income employees also had 

access to homeownership or were somehow subsidized in giving the chacitil."s of their 

choice. Seen in that light, retiremcnt savings deferr.lls under ERISA represent a majo r 

policy success: effectively harnessing business owners' legitimate sdf-inrerest to the 

public good of retircmenr Sl."Curity for aU . 

• EBRI. ''Cappin, Tax·rn.fern Reti",ment Cont,i""t",n" P",limin.ry E"idenee of the In\pact of the Nat""",1 

ConImi""," 00 Fiscal ReSf>O/l,ib ility and Refonn Recommendations. - July 20 II. 

'EBRI. ~The Impacl ofMooif}'inll lhe E,du.ioo ofEmplo)« Conlribulioo. for Reti",ment Sa,ing. PI.ns From 

l 'llXable h>com~: Rewlls f""" 1M 201 I Reliremenl Confidence $u,,·,,)':· Ma",h 201 I. pp. 3. ~ 

• A$$PA. "A$I'PA TeSlifie$ in Oden« of401(k) S)"SI<m.- September 15,201 I 

, 
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Savings Deferrals arc not true " tax expenditures" 

The core ralion31e behind proposals 10 cut or curb retiremen! sa\'ings incentives is Ihal 

the tax deferrals at the heart of 401 (k) plans and similar sal'ings I'ehicles represent tax 

"expendimres" that significantl)' r,·duce needed tax n:venue. Thus, in 2011 t(sUmon), 

presented 10 the Joint Select Committee on Deficit Reduction br C130 Directo r Douglas 

E.lmendorf. retirement savings deferrals were calculated as tax "expenditmes" 

comparable to employee health costs, mortgage interest deductions and charitable 

gil'ing.9 

\Xie disagree with this assessment. Retirement sayings deferrals, dead)', arc not 

pennanent tax expendimres -- only temporary postponements of tax obligations. When 

retirement savings are drawn down. Ihe mone)' is Taxed as ordinary income, el'en Ihough 

the retirement accoums themselves are typicall), composed mosu)' of long-term capital 

gains. 

futuall), misleading, the Congressional Budget Office uses a IO-year "'~ndow for 

analrzing the cosrs of lax deferrals. As a result, it neither accuratdr measures the [rue 

COSt of tax provisions that arc incurred O\·er the periods of decades that make up the 

typical worker's career, nor calculates the substantial tax flow-backs 10 Treasury decades 

into the fumrc. Todar's lax deferrals arc counted as [el'enue losses, but the taxes that 

will be paid beyond a decade forward arc not counted at all. ·Ihis practice distorts the 

true "full-lifecyde" costs of these incentives, understates their social and economic 

benefits, and overstates the COSt of the tax deferrals to the Trcasury and the revenue that 

would be generated hr cutting back on them. 

In a recent report analyzing the challenge of individual income tax refonn, the 

Congressional Research Service again included savings incenti,'es in calculating revenue 

loss due to tax expenditures. But the researchers did note some obstacles facing 

proposals 10 cut savings inccnti,'cs. In the [cport the), found, "l\Iodification of many of 

the savings incentiyes face significant technical or administrati,·e barriers. n'losl of these 

tax benefits are associated with unrealized incomc (pension benefits, including those 

associated with defincd benefit plans, unrealilcd gains at death, am! inside buildup in 

insut:1nce plans), which can be difficult or impossible to value properly."'o 

• Coogrt"iooailludget OfflC~. -Confrontin g the Nation's Fis<.II'oHcy Ch.llenb"'s." Statement ofDougl.s W, 

Elmendorf. Di=!Of. Scplcmbc, 13. 21)11. p. 46 

'·CoolI."'ssioo31 Rc<ord s.,,,,ic<,"n.c Cllalkngc oflndi,·idual Ta~ RcfOll'n An F./;"""",i< Analysis ofT" llase 

Bro.1oi.Icning:· March 12. 2()12 

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There arc also man)' valuable economic and social benefits of the tax incentives that arc 

not captured by government accounting methods - but which definitelr should be taken 

into aCCOll1ll b)' policymakcn;. Tax deferrals t.\lat SUppOf1 and strengthen our retiremelll 

sa\'ings system help: 

• Fuclthe rise of a robust American financial services industry, centered on capital 

markets. which. in rum. help finance ulIlo\'ation and thereby economic growth. 

• Enable parents 10 provide for their own retirement without burdening their children. 

which is a foundational clement in offering dignity and self· respect for older people, 

• Free governments from possible demands for aid/welfare for elderly indigents - at 

least untillhcir sa\'ings arc exhausted 

• Offer a cOllnter-C)"dkal, smoothing influence on consumption panern. by capturing 

somewhat higher savings flows in boom times and enabling continued consumption by 

retirees rightlhrough economic downturns. 

• Give all holders of reriremen! sadngs a material slake in political smbilily and in 

growth-oriellled economic policy. 

• Allow )'Ollng and middle-aged people, who know Ihey arc on track to adequate 

retirement incomes. 10 take greater risks wilh other assets, including making the choice 

to pursue skills Training or launch a business. 

Congress should avoid any radical shift in savings policy 

In the wake of the Great Recession, Americans are alreadJ' struggling 10 save. As EBRI 

reported. twO thirds of all workenl saving for retirement report total assets under 

S50.000. Onl)' about one quarter of U.s. worken; have assets of $1 00,000 o r more. II 

Access to workplace savings is vital to workers' ability 10 save. Indeed. \'ef}' little 

retirement savings b)' low 10 moderate income workers takes place outside the workplace 

syslem. ,\n ~nal)'sis b)' EURI found that morc than 70% of workers with annual incomes 

of between $30,000 and $50.000 do save fo r retirement if the), have access 10 a 

workplace plan. Yel [",'cr than fj\'e percent of Iheir peers who lack ~ccess 10 a 

workplace plan save through lR.t\ S.I~ 

" ERRI.""The 201 1 Reliremenl CQIlfodenoe Su,,·<y.- /\I'<il 2011 

" EIiRt 2010 <Slimate USinll 200$ rand of Sil'l' (<x>,·cr<d 1»' an employ« plan) aoo EIIRI <$limate \n(ll COHn:<! by .n 

<mploy.r plan ~ IR/\ only) 

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Absen{ access W ,,'orkplace·based savings, then. most American workers simply fail w 

accumulate any serious savings with which to fund their retirements or supplement their 

Social Security benefits. Reducing the incend"e for rerircmem phn sponsors to offer 

workplace savings plans, then, could force millions of low- and moderate-income 

workers to face retirement with little or no savings. Building on these retirement savings 

programs, improving them and extending them to the tens of millions of Americans 

who still lack access w on-the-job savings plans should he among our most important 

national goals. 

Tha{ is why we bclie,·c that Congress should not only presetYe aU existing savings 

incentives, but also support solid, bipartisan ideas such as the Auto-IRA, which could 

extend access to workplace sadnb'll coverage for millions of workers who lack such 

plans. 

Capping or eliminadng incentives for workplace savings would have almost the exaCt 

opposite effect. Indeed, cutting into tax advantages for retirement accounts would be far 

more than juS{ a marginal revenue measure. h wo uld mark a fundamenta l shift aw~)' 

from highl)' successful programs that Congress has supported for the past several 

decades. Long-teml it would inflict compounding harm on millions of fut'ure retirees 

and by reducing investment flo~ to the capital markets, migh{ also limi{ future 

economic growth. 13)' reducing the ineenti,'e for millions of small- and medium-sized 

businesses w offer such plans w their cmployees, such a policy shift could send millions 

of low and moderate-income workers toward retircment with essentiall), no savings. 

\Ve li,'e in a globalized c<:onomic and financial world. \Vllcther we like it -- or not -- the 

United States, like every country interested in guarding its fiscal health, is caught up in a 

global "race to solvency." Nations e,'erywhere ~re struggling to ~chic\"c fiscal balancc 

and growth policies that will st:eure and sustain access to global capital markets and 

in,"cstmenl Ilows. The altemative is to lose global market confidence and risk thc kind of 

debt-driven crisis Europe is struggling with today. \X'e belie,'e that strong national 

savings policies arc viral to success in this competition. For that Reason, Pumam 

InvestmcllIs supports policy choices that will sustain and strengthen all of America's 

retirement savings systems - public and private. 

\X'e do also "iew skyrocketing fedcral debt as a genuine threat 10 our nation's long-tcon 

prosperi!)'. Bill attempting 10 reducc federa l "dis-saving" by clllting incentives for 

personal sa\'ings is a bizarre and shon-siglued policy option lhat would takc our na{ion 

in the wrong dirt'Ction. 

\X'hate,"cr limited tax rt,"Venues we might realize toda), from reducing sa,'ings incentives 

would be imtnedi~tclJ" offsct by the loss of capiralllows for im'estrnent in new business 

foonation, job creation and cconomic growth. And such losses would compound, o"er 

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timc, by the loss ofin\,cstmem gains in \\'orkers' retirement portfolios and by the risk 

that many of these less-well-off workers ma), need public assistance in their later years. 

Policy changes that could diminish retiremcnt security for future gencratio ns of wo rkers 

and increase poverty among elderly Americans would erode public confidence and 

betray the optimistic vision that has drivcn Americans for generations. For all of these 

reasons, we urge all members o f Congress to oppose any poliq change that would 

undermine incentives for employers to o ffer workplace savings plans or for individuals 

to usc them to save for their retirement. 

##### 

Sec attachcd page for comact infonnarion. 

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COlli act information 

SubmiUcd b)': Roben 1_ Reynolds, Chief Excculh'e Officer, Putnam hl\'CSlmcnts 

Contact Leonard Glynn. DircelOr of Polier 

Organization: Putnam Invcstments 

Address: One Post Office Square, I3oslOn. I\lassachusetts 

Phone: 617-760-1074 

Email: eo rd ).l lll ~ulnam .c om 

to 
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STATEMENT OF 

KATHY HAMOR 

EXECUTIVE DIRECTOR 

THE SAVINGS COALITION OF AMERICA 

2111 WILSONBLVO 

SUITE 700 

ARLINGTON, VA 22201 

703-351-5096 

I N CONNECTION \VITti TilE 

U-S_ HOUSE OF REPRESENTATIVES 

COMMITTEE ON WAYS AND MEANS 

H EARING ON 

TAX REFORM AND TAX FAVORED RETIREM ENT ACCOUNTS 

HELDON 

APRIL 17,2012 
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1M Sa"ing. Coalition 01 Ame rka 

April 27. 2012 

emcn l 

of 

Kathy Hamor 

The Snings Coalition of America 

SU8M rlTE DTOTHE 

Committee On Ways and Mean. 

U.S. Il olI ~ of Repr nt ti \"($ 

April , 7, 2011 

On behalf of ii, 4S member org,mi7.alions. the Savings Coalition of America 

(""Coalition··j is pleased 10 submillhese commenls and commends the Comminee on Ways and 

Means for its efforts to ma~e it easier for American 10 save for their relirements. Currently. tens 

ofmi!!ions of Americans are saving for retircmcm because of the enhanccmems made to 

reliremcnt savings vehidcs. The Coalilion believes Ihal mOre people wi!! sa,·c iflhese ,·chides 

are easicr 10 understand. 

While there are many as~1S of the current system to be addressed. Ihe Savings Coalilion 

brings to your attention the pmvisions orthe tax code that concern income limits and required 

minimum distributions from IRA •. Thcse areas ofthc law are unneccssarily complex. unfair and 

distort pcrsonal linancial dccisions for Americans. 

The Savings Coalition of America was eSlablished in 1991 10 suppon incenli,·es 10 

increase the le,·cl of personal savings in thc Unilcd States. 11 has acti'·cly supportcd thc 

expanded Individual Retirement Account (IRA) provisions thai increased contributions to 

spousallRAs from $250 to $2000 in 1996; the increased income limits for IRAs and thc 

eSiablishmem of the Roth IRA in 1997; and the increase in contribution limits for IRAs and the 

creation of caleh up contributions in the 2001 ta~ bill and making these pmvisions pennanent in 

2006. Savings is 3 kcy component of economic policy. Treasury Secretary Tintoth)· Geitner. in 
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an Oclober 2009 inlerview wilh German weekly Dic Zeit, staled," If the U.S. SlaMS saving more. 

mal changes the whole world's economic re.lily." he said. according to the German text of the 

interview. 

In 2001. the Congressional Joim Committee on Taxation made recommendations for lax 

simplification in which il recommcnded the elimination of income limits on alilRAs and the 

elimination of the age requirement for minimum required distributions and described the 

comple~ity surrounding these sections of the ta ~ code. The Coalition shares the view thai these 

sections of tile lax code are complex and confusing and urges the Commince on Ways and 

Means to review them. 

Uni"cn a lly Auila blc IRAs 

Currently the tax code has a number of income limits for eligibility to contributc 10 lRAs. 

In addition to different income limits fOT single and married Americans. there are different 

income digibilitks fOT Ihe traditional, deduclible IRA. the ROlh IRA. and Ihe nondeductible 

IRA. The les!;On that we leam~'<l in th ... early 1980s. when IRAs were universally available to all 

Am ... ricans. is that mOT<: Am ... ricans saved. The uni,-ersal eligibility led to maSS marketing of 

these savings vehieles. which increased participation and more savings. something essential to 

our economy. When income limits were imposed aner the Tax Reform Act of 1986. there was a 

precipitous drop in contributions to IRAs. The 1986 e-xperience teaches us that limiting IRA 

eligibility based OIl income confuses people and scares them away from establishing a pauem of 

savings lhal IRAs would otherwise promote. One of the most importam effects of tile IRA 

cutbacks in the Tax Rcfonn Act of 1986 is Ihe facl that IRA contributions for those who 

continued to be eligible for deductible IRAs dropped by more than 400;. in the first year and have 

since dropped by o>-er 650/ •. 
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1M Saving. Coalition 01 Amerka 

Mcmbers ofthc Savings Coalition belicvc thm ciiminating iocome limits and cn:ating a 

uni"ersally available IRA will help mon: Americans saw. An IRA that is universally a"ailable 

to all American wori<crs would leave no doubt to their understanding of their eligibility. 

Universally a\"ailablelRAs will be marketed and ad,wtised on a massive seale and this 

advertising will ha,'''' an ancillary bencfit of educating peoplc aboutth ... need to sa,'",. I~i story 

demonstrates that the simpler it is to save. the more Americans are inclined to do so. 

Under current law. deductible IRA and Roth IRA eligibility is delCnnined based on 

whether a taxpayer falls under or between certain income thresholds. and for deductible IRAs. 

whether the taxpayer or the spouse. has access to an employer-sponsored retirement plan - a SO 

called active participant. The 2012 income thresholds for Ihe deducting IRA contributions are 

$58.000 _ $68.000 for single taxpa>'ers and $92.000 - SI12.000 for malTied couples filing ajoint 

return. [fth ... taxpayer docs nOi ha,· ... acceSS to a plan but the spouse does. the phaSll-Dut mnge is 

$169.000 - SI79.000. ROIh eligibility thresholds are $110.000· SI25.000 for single individuals 

and SI73.000 - $ 183.000 for married cooplcs filing ajoint return. No income limits apply to 

single taxpayers and married couples where neither spouse is an active participant for deductible 

IRAs. Taxpayers making excess contributions arc subjcctto penalties. 

The confusing array of income limits and perceived lack of benefits diseoornges many 

workers from establishing and contributing to IRAs. Taxpayers who coold make IRA 

contributions do not bother to establish a rcgular contribution sdedule hKausc they arc 

concerned about income fluctuations and the fcar that they will be "penalizcd" for making exccss 

contributions that arc OOt deductible. Further. the taxpayer could alw establish a payroll 

deduction sch~-dulc or din.'Ct deposit sch~-dulc with his financial institution. Being able to 

establish a periodic contribution deposit schedule carly in the ycar w;thoutthe worry of a 
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possible ineligible contribUlion or penally is critical to facil itating IRA contributions because il is 

a challenge for mOSt individuals to come up with the funds necessary to make a lump sum 

contribUlion at year end. 

This simplification will lead to less confusion for taxpayers and likely encourage more 

marketing oflRAs by financial institutions. Taxpayers need additional options to shore up their 

financial position be.:ausc of the market downturn - easy to understand options will boost 

panicipation with confidence that contributions Ihey make will not laler be rendered ineligible. 

Another area of confusion with income limits are Ihe reslriclions. for joint filers. around 

contributing 10 an IRA and deducling it is limited by panicipating in an emplo)"er plan in 

addition 10 income. If one spouse is co'·ered by an emplo)"er plan and the olher is no\. as long as 

their income is below 5169,000. the non-covered spouse is eligible 10 make a deduclible 

traditional IRA contribution. Iflheyarc both co""red, then the phase out is in place which is 

bctw~..,n 592.000 and 51 12.000. Income is also conside .... ..:l for making a Roth IRA 

contribution. Ifincome exceeds the limits. the person simply can't make 3 contribution. Also, if 

a person is nol co,'cred. or both spouses arc not co,'ered by an employer plan. then there is no 

income limil10 making a deductible tradilionallRA conlribution. This adds a layer of 

complexity and confusion 10 already complex eligibility requirements which can ha'·e the result 

of reducing Americans savings in these impol"t3nl savings .-chicles, 

To add to the confusion, there were income limits for conversion from a traditional. 

deductible IRA to a ROlh IRA umil 2010 wh"n the law changed to remove irn;ome limits for 

converting from a traditional IRA to a Roth IRA. I'Tior to that time, American sa,·ers' eligibility 

to change from a traditional IRA to a Roth was bas....:l on having an adjusted gr(!Ss income of 

5 100.000 or less. Now Americans wanting to save more for their retirements can make IRA 
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T~ SavinB' (Oillition 01 Ameriu 

contribUlion, in a nondeductible IRA and con,·cn the account to a Roth IRA the following year 

and incur the tax On itthcn. The Savings Coalition feels thaI it would be much Icss confusing 10 

have IRAs that arc universally available to lessen the confusion and cncournge mOTe ,..,liremcnt 

savings. 

Members ofthc Savings Coalition of America f~'C1 strongly that tax refonn should 

encourage Americans to take more responsibility for their rclirements. One way in which this 

can be achieved is to promote values that we all share; such as savings and thrift. When it comes 

10 savings. our lax code should encourage Americans to sa,'e for their fUlures and make it easicr 

10 do so. The variety ofincomc limits for cu""n! lax-favored IRAs arc cumbersome and 

confusing and we encouragc Ihe Comminec to recommend sub,tantial simplification in this area. 

Provisions that encourage individually responsible beha"ior such as savings should apply to all 

Americans. Our cll""nt tax-favored savings ,'chicles already limil thc amount Ihal can be saved. 

We should not limil eligibilit)· ofthc pc<lple who can saw through them. ThaI just makes them 

mOre confusing. 

Rftlui."d Minimum Di tribution s 

Under prescnt law. Americans who reach age 70 Y; are required to begin taking 

distributions from Iheir IRAs. This is one of the most eomplc ~ areas ofta ~ law aflCcting 

relirees. For this reason. the staff of the Joint Comminec on Taxation has recommcndl-.:lll\at the 

age lim;t for minimum required distribulions be eliminated. One unintended consequence ofthc 

requiremenl is thaI individuals may be forced to takc a distribution al a lime when their 

im'cSlmcnt has declined in value. Owr the past scvcrnl years. many relirees and wori<crs about 

10 rctire havc seen a drop in the value ofthcir retirement ncSI eggs. Those subject 10 the 

r~-quircl11cnt may be forced to realize losses On part of their investments at a time " 'hen they ean 
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least atTord to do so. The minimum requ ired distributions ",Ies merely detennine when taxes 

will be imp<)SCd on retirement savings. not if. When the IRA owner withdrnw$ funds. it will be 

taxed as ordinary income. 

In addition. tax refonn should take into account such things as a long<'r lif..- expc.:tancy 

for most Amcricans. U.S. life expectancy rates have increased substantially since the minimum 

distribution ",Ies were first extended to all types of retirement plans. According to the Social 

Security Administration (SSA). in 1974. the year in which lRAs were created. the life 

eXpc<:tancies for males & females wen: 6g.3 years and 76.0 years respc<:tj,·ely. In 2000. SSA 

projected life expc<:tancies of almost 74 years for males and 80 years for females. With such 

substantial increases in longevity, it is importanttltat the minimum distribution roles be updated 

10 ensure that American workers are not foreed to take distributions prematurely. 

Crilics also overlook recent trCnds in Ihe numbers of seniors working past the age of65 

and into their se"enties. According to the U.S. Bureau of Labor Smtistics. mOre than 7 million 

,,"'orkers are age 65 and o\'er - an increase of more than 100 pen:ent since 1985'. With the recent 

market downturn. more and more seniors are pulling off their retirement. According to a 2002 

survey. 1.9 million households will be delaying retirement. contributing funher to the numbers of 

seniors in Ihe workfol'l:e. It is shoT1sighled policy to fo",e distributions from retiremenl accounts 

whell seniors are pushing back retirement dates to ensure they will have enough to live 

comfonably Ihroughout their rcti",meni years. As Americans live longer. we have leame<llhal 

Ihe minimum required distribution ",Ies have become more burdensome and need to be 

eliminalcd or at the very leaSI. changcd 10 reflect ga ins in life expectancy. 

, us 8u,"'u of lobo, Sto!i1'i<>, lobo< f a,," S, . ' I,tlc, f,om , 11<1 Cu""nt poput.tl"" s.,rn y D. ,.w , . 
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The Saving. Coalition 01 America 

The Savings Coalition suppons the CommillCC on Ways and Means' goal towards lax 

simplification and oITers itS assiSlance in Ihis elTon. We look forward 10 working wilh you on 

Ihis imponanl iniliati,"e. 
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Statement of Gerald E. Scorse 

This st31ement rt-eommends new rules for mandatory distributions from tax-advantaged 

retirement accounts, and for the taxation of such distributions, They should begin mage 65, nO! 

at age 70 112, as is now the case, The pereentage amounts of the diwibutions should be 

increased across the board, In addition, so-called "stretch I RAs" should be prohibited, 

The reasons for these recommendations are spelled out in an article which I wrote, "Retirement 

Taxes Shield the Affiuent, Short·Change th(' Nmion." The current system is inherently 

inequitable, The benefits flow entirely to affiuenttaxpayers, and they cost the Treasury untold 

billions a )'ear, The Commillee is well aware of America's large and growing federal deficit. 

Refonning the rules for mandatory distributions could make a significant contribution to deficit 

reduction, 

Here is the text of the article noted abo\'e: 

For almost 40 years, starting in 1974, Uncle Sam has gcncrously subsidized retirement accounts 

for the golden years, Annual contributions are commonly tax-frec, Gains accumulmc ta'l:-

deferred, usually for decades. Only on the back end do taxes enter the picture. They're due and 

payable when withdrawals begin, starting al age 59 112 (if desired) or al 70 112 (mandatory each 

year from then on). 

The time for l11andmory tax payback is exactly when the affluent-with help from both sides of 

the aisle-begin to welsh on their end of the retirement bargain. New ways are dreamt up, 

legislation enacted, and rules adopted to avoid, delay and minimize taxes on retirement account 

withdrawals. Ironically, it's the affluem who enjoy the lion's share of the subsidies all along. The 

Treasury foregoes $52 billion a year for high-contribution 401(k) accounts, making them the 

third largest tax break in America. 

Let's look at some of the ways that Uncle Sam's generosity has been rep.lid by outright welshing 

and systematic nickel-and-diming. Then Ict's adopt John McCain's 2008 campaign mantra. Let's 

put "Country First," and see how retirement taxes could help CUI OUf record federal deficit. Tens 

of millions of baby boomcrs will begin to hit the mandmory retirement account withdraw31 age 

in 2016--enough tinte for Congress to make new rules that more fairly enforce the tax payback 

portion ofthc retirement account bargain. 

A bi-pa"isan Congress twicc crafted laws specifically inviting well-hecled taxpayers to ",ncgc 

on the tax p;lyb.1ck. For 2009, in a move that could only benefitthc affluent,lawmakers 

suspended mandatory distributions. Any taxp;lyer who actually nccdcd the distribution had no 

choice but to take it and pay taxes; those who didn't need it took a pass and saved thousands, 

adding those thousands to thc federal deficit. Earlicr, in another deficit-hiking mo\"c, Congress 
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allowed up to $100,000 per-year in retirement distributions to be signed over to private 

charitics--denying the Treasury thc taxes it had coming, and st3le and city treasuries as well. 

Both laws rested on ultra-flimsy rationales, and both have lapsed. There's plenty more that still 

needs fixing, smning with the mandatory distribution age itself. Who benefits, after all, from a 

tax payback that doesn't even have 10 begin lImil 70 112? UllCle Sam doesn't benefl\. Those who 

depend on retiremCIlI accounts to help them gct along don't benefit; they're drawing down wcll 

before tha\. The only real beneficiaries arc those who simply don't need the money. 

The same can be said for the withdrawal formulas. which stan out low and creep up ever so 

slowly, The fonnula that applies to most people calls for a staning minimum required 

distribution of under 3.7 pereent. Twenty-five years later, at age 95, the required distribution is 

justll,6 percent. While the fomlulas apply to all taxpayers, the benefits flow solely to those in no 

need and no hurry. 

Now let's apply McCain's "Country First" to retirement taxes. First, let's move up thc 

mandatory distribution age from 70 112 to 65: when it's Medicare time, it's also time to stan 

paying back Uncle Sam for those retirement tax breaks. Second, let's increase the minimum 

withdrawal pereentages to bring them more in line with actU311ife eXpci:tancies. Third, let's 

forbid so-called "stretch lRAs". These are multi-gener:ltionaltransfers, now pemlined, which 

can string out distributions (and the taxes on those distributions) into the next century. Multigenerational transfers are fone, but America deserves its full cut fors\. 

It's the least the affiuenl can do (or anybody for Ihat maller) 10 square accounts with a generous 

uncle. 

-30-

In closing, I want to thank the Committee for the opponunity to make this statemen1. It's a gre31 

country where an ordinary citizen can speak directly to the highest legislative body in the land. 

As I hope the statement makes clear, it's the country's interests that J have in mind, 
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Statement of Susan Crase 

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April IS. 2012 

To: Congressman Dave Camp, Chairn13n oflhe Commi!!",,,, on Ways and Means 

Re: Hearing on Tax Refonn and Tax·Favorc>{i RClir~menl Accounts. April 17,2012 

Congressman Camp, 

I listened. intently. to your discussion regarding how you, the government. would handle We The 

People's retirement savings. I" of all. Congress cannot manage it's own money; I do nOlthink you are 

qualifIed to dictate how much and through whom I must automatically contribute my retirement 

savings. If[ choose to save through my employer (an employer contribution is a benefil), anolher 

Wnue or put my ntOIl!.,), in a quart jar, this should be my decisioll. All people are not the same. We 

have different goals. rn..>cds and dreams for retirement, therefore. each individual will saw differently. 

The more levcls. rules and savings plans you make. the more complex you make it to understand. We 

The PL'Ople see this as more government interference in our lives. 

I lost my full time job at the beginning of the recession in 2007. I rolled my retirement into a savings 

venue in my bank. Since I am over SS and have been out of work for S years, I am deemed 

"unemployable". My Vietnam Veteran husband has nearly 20 years in al his employer. but the pay is 

so low. we have a hard time making ends meel. (2011 gross was $33,739, but after taxes we had 

528.6Q.I to survive on). We do nOt try to Jive a life of luxury. We Were forced to retrie"e my entire 

retirement savings 10 keep our home. I paid ta,xes on thai ineonle when I earned it. When r took the 

money out. I paid taxes On it again plus I paid the government a penalty to take it OUl early. The 

governmenl also dictated whal l could take it out for. This is where Ik problem lies. Your policies 

are set up to give the government my retirement. It's not yours, ii's MINE! Now you want to make 

morc policies to dictate the amount of money a person pa~ s into a savings account. then make it 

automatic (I vicw Ihis as mandatory) to make sure wc have enough funds to supplement the Social 

Securily ta~es we have paid in order to live comfortably in retirement. Who are YOU to decide the 

le\'el of my retirement existence? 

Your opening statement says your three goals are simplification, efficiency, and increasing rctir~ment 

and financial Se<:urity for Am .. ri,an families. Simpli .. r would be to eliminale the lilieS 401(k), 40J(b), 

4S7{b), IRA. SIMPLE IRA and SEP IRA. Call it what it is. a Long-Term Savings Aecount. More than 

S years is long-tem1 and less than 5 years is short-tenn. I would hope lhe tax brackets also gel 

revamped so as not to penalize a person for making more money than his neighbor. The vast majority 

of U.S. Citizens have worked for lheir money. If they want to invest in the slock market. a CD or a 

local business. il should be up to the saver/inveSler. An effieenl way for the government to ta.\ the 

savings and encourage financial security in our lalcr years would be to lax it ot 50% of the federal, 

state and local rales. combined. If I paid a lolal combin~>{i tax of 10"/0, then tax my Long-Tenn Savings 

at 5%. Out. don'ltax il again when 1 take it out and don't fine Inc for taking it OUI when I need il. Tax 

it as a deduction on my yearly tax return. All of the above current savings plans force We The People 

to invest in the stock market. Evidenee has shown there is CQrruption within the stock exchange, )'et 

YOU the govcmment want We TIle People to contribute our hard earned money to the hedge fund 

managers, speculators and other market crooks who arc only out for their own financial gain ... and at 

OUR expense! If a saver/investor chooses to invest in stocks. there are plenty of advisors in evel)' 

town to whom we can tum for guiden ..... Tk last company I worked for provided such an advisor to 

explain options for saving. This is the right place to educate the population on savings venues. Not 

Ms. Miller's idea of anolher govenllnent entity de<:iding for the masses. 

In closing. I encourage your committee to lake this opportunily to reduce government waSle. R~'<luce 

the paperwork. confusion and the creation of another govenment dcpartmentthat wreaks of 

interference in We The People's life aller work. 

Respectfully, 

SUSHn CrHse