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SIMPLIFYING SECURITY: ENCOURAGING 

BETTER RETIREMENT DECISIONS 

HEARING 

OF THE

COMMITTEE ON HEALTH, EDUCATION, 

LABOR, AND PENSIONS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON

EXAMINING SIMPLIFYING SECURITY, FOCUSING ON ENCOURAGING 

BETTER RETIREMENT DECISIONS 

FEBRUARY 3, 2011 

Printed for the use of the Committee on Health, Education, Labor, and Pensions 

( 

Available via the World Wide Web: http://www.gpo.gov/fdsys/ 
COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS 

TOM HARKIN, Iowa, Chairman 

BARBARA A. MIKULSKI, Maryland 

JEFF BINGAMAN, New Mexico 

PATTY MURRAY, Washington 

BERNARD SANDERS (I), Vermont 

ROBERT P. CASEY, JR., Pennsylvania 

KAY R. HAGAN, North Carolina 

JEFF MERKLEY, Oregon 

AL FRANKEN, Minnesota 

MICHAEL F. BENNET, Colorado 

SHELDON WHITEHOUSE, Rhode Island 

RICHARD BLUMENTHAL, Connecticut 

MICHAEL B. ENZI, Wyoming 

LAMAR ALEXANDER, Tennessee 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

RAND PAUL, Kentucky 

ORRIN G. HATCH, Utah 

JOHN MCCAIN, Arizona 

PAT ROBERTS, Kansas 

LISA MURKOWSKI, Alaska 

MARK KIRK, IIllinois 

PAMELA J. SMITH, Staff Director and Chief Counsel 

LAUREN MCFERRAN, Deputy Staff Director 

FRANK MACCHIAROLA, Republican Staff Director 

(II) 
C O N T E N T S 

STATEMENTS 

THURSDAY, FEBRUARY 3, 2011 

Page 

COMMITTEE MEMBERS

Harkin, Hon. Tom, Chairman, Committee on Health, Education, Labor, and 

Pensions, opening statement ............................................................................... 1 

Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, opening 

statement .............................................................................................................. 3 

Bingaman, Hon. Jeff, a U.S. Senator from the State of New Mexico .................. 48 

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

Murkowski, Hon. Lisa, a U.S. Senator from the State of Alaska, statement ..... 51 

Franken, Hon. Al, a U.S. Senator from the State of Minnesota, statement ....... 53 

Blumenthal, Hon. Richard, a U.S. Senator from the State of Connecticut, 

statement .............................................................................................................. 54 

Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode Island, 

statement .............................................................................................................. 56 

Merkley, Hon. Jeff, a U.S. Senator from the State of Oregon, statement .......... 57 

Isakson, Hon. Johnny, a U.S. Senator from the State of Georgia, statement .... 65 

WITNESSES

Chatzky, Jean, Financial Journalist and Author, New York, NY ....................... 5 

Prepared statement .......................................................................................... 7 

Lucas, Lori, Executive Member, the Defined Contribution Institutional Investment Association, Washington, DC .................................................................... 8 

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

Agnew, Julie, Ph.D., Associate Professor of Economics and Finance, William 

and Mary Mason School of Business, Williamsburg, VA .................................. 14 

Prepared statement .......................................................................................... 16 

Brown, Jeffrey R., Ph.D., William G. Karnes Professor of Finance, University 

of Illinois at Urbana—Champaign College of Business, Champaign, IL ........ 37 

Prepared statement .......................................................................................... 39 

ADDITIONAL MATERIAL 

Statements, articles, publications, letters, etc.: 

Women’s Institute for a Secure Retirement (WISER) ................................... 65 

The American Council of Life Insurers ........................................................... 67 

Larry H. Goldbrum, General Counsel, The SPARK Institute, Inc., letter ... 71 

(III) 

(1) 

SIMPLIFYING SECURITY: ENCOURAGING 

BETTER RETIREMENT DECISIONS 

THURSDAY, FEBRUARY 3, 2011 

U.S. SENATE, 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 2:03 p.m. in Room 

SD–430, Dirksen Senate Office Building, Hon. Tom Harkin, chairman of the committee, presiding. 

Present: Senators Harkin, Bingaman, Hagan, Merkley, Franken, 

Whitehouse, Blumenthal, Enzi, and Murkowski. 

OPENING STATEMENT OF SENATOR HARKIN

The CHAIRMAN. The Committee on Health, Education, Labor, and 

Pensions will please come to order. 

I want to welcome everyone to the latest in our series of hearings 

focusing on retirement security. This is our first hearing looking 

specifically at how to make retirement plans work better. 

There is no question that it’s getting harder and harder for the 

average person to retire. Families are facing unprecedented challenges. Saving for retirement is just not an option for many. Wages 

have been stagnant for about 20 years, and people are working 

longer and harder than ever before, yet they still do not seem to 

meet the costs of basic everyday needs like education, transportation, and housing, let alone save enough to support them in their 

old age. Even people who want to prepare for retirement often find 

it difficult to do so. Over a quarter of workers do not have any 

meaningful retirement savings at all. Zero. And only a small percentage of people have a traditional pension. 

These days the vast majority of people with any retirement plan 

at all have a 401(k). But 401(k)s often do not provide real retirement security. They, of course, leave workers exposed to the vagaries of the market and do not necessarily provide workers with a 

guaranteed lifetime income stream like a traditional pension plan. 

That means families relying on a 401(k) have to roll the dice and 

pray that they do not outlive their retirement savings. 

We’ve taken some important steps to improve the 401(k) system 

by requiring more transparency, but we still have a long way to go 

before the 401(k) system works for everyone. Just recently I heard 

from a carpenter who told me that when he tried to sign up for his 

plan, his employer handed him a list of investments two pages long 

and a 5-inch binder full of prospectuses. Well, if you’re working all 

day, trying to raise a family, you don’t have time to pour through 
2 

all of that and try to figure out what to do. There has to be a way 

to make saving for retirement simpler. 

Automatic enrollment was a good first step. There’s a considerable amount of evidence that people are more likely to participate 

if they are automatically enrolled. The Pension Protection Act of 

2006, which we all worked on and Senator Enzi was very much involved in, helped encourage automatic enrollment by removing 

some of the barriers and giving employers some peace of mind. 

Now more and more plans are using automatic enrollment, and 

that has gotten more people saving. 

The question today is whether we can do more. Can we apply the 

lessons of automatic enrollment elsewhere? Can we do a better job 

getting people the information they need to make better financial 

decisions? 

One way to encourage people to boost savings is to give them an 

estimate of how much monthly retirement income a person can expect from their 401(k). Now, people already get that kind of estimate on their annual Social Security statement. I just got one several days ago. It tells you exactly how much you get when you retire. It’s very helpful. Of course, I commend Senators Bingaman, 

Isakson and Kohl for the work they have already done on this 

issue. 

Another way to encourage people to save is to allow for more financial education, especially among young people just entering the 

workforce. Every day we see people coming up with new and innovative ways to educate people about personal finance. And when 

people are engaged, they tend to save more. One study found that 

18 percent of people that use an online retirement calculator increase their contribution rate. Well, that’s going to have a longterm positive effect. How can we promote that? 

As we look at ways to improve 401(k) plans, it’s important to remember that making plans simpler and more automatic does not 

always mean that they are safer or more secure. Target-date funds 

are a good example. Those funds show considerable promise as an 

easy way for people to manage their retirement accounts. But the 

effects of the Great Recession highlighted that there is a still a lot 

that needs to be done to make target-date funds safe for workers 

and retirees. 

Going forward, any steps that we may take to make 401(k)s simpler must be accompanied by protections to insure that participants 

are being treated fairly and getting the best possible value. We also 

need to remember that a simpler 401(k) is not going to help the 

millions of American families barely scraping by. Those people deserve a secure retirement, too. And I plan to address the challenges 

they face and the need for improved access to the pension system 

in future hearings on this subject in this committee. 

Retirement issues have always been an area of great bipartisan 

interest, so there is a real opportunity to work together to improve 

retirement security for families all across America. 

I am confident the hearing today will give us all a lot to think 

about. I look forward to working with my colleagues to find practical solutions to solve this retirement crisis in America. I thank 

you all for being here today, and I will yield to Senator Enzi. 
3 

STATEMENT OF SENATOR ENZI

Senator ENZI. Thank you, Mr. Chairman. It’s my understanding 

that one of our witnesses is stuck in Chicago. 

The CHAIRMAN. That’s right. We are going to have a video hookup for him. 

Senator ENZI. That’s a terrible place to be stuck. 

[Laughter.] 

The CHAIRMAN. I didn’t say that, did I? 

[Laughter.] 

I go through Chicago all the time. 

Senator ENZI. Oh. I’ve never made it through yet, so I’ll have to 

get some advice from you. But it’s been over 2 years ago that you 

and I held some very successful hearings on the 401(k) fee disclosure. 

The CHAIRMAN. That’s right. 

Senator ENZI. At that time, the Department of Labor had issued 

a proposed regulation on how to disclose fees, and I believe that 

our hearing improved the outcome of the final regulations issued 

by the Department last year. That’s why I’m grateful we’re holding 

another hearing on the 401(k) system, to see what’s working and 

what may need to be improved. 

One of the hallmarks of the Pension and Protection Act of 2006 

was the provision to allow companies to automatically enroll their 

employees in a 401(k) plan and to allow companies to match contributions. Statistics have shown that automatic enrollment is a 

tremendous success, with a great number of new employees being 

automatically enrolled. The surge took place from 2006 to 2009. 

But since then, the numbers leveled off. While some of the leveling 

off can be attributed to the economy, it may be that we just caught 

the easy fish and still haven’t caught the hard ones. It appears that 

the large companies took advantage of automatic enrollment. However, automatic enrollment may have been more difficult for smaller sized companies to adopt. According to Fidelity Investments’ 

analysis of 17,000 retirement plans, more than 50 percent of the 

companies with 5,000 workers or more adopted automatic enrollment, but only 15 percent of the companies with fewer than 500 

employees adopted automatic enrollment of employees. 

A friend of mine, in Sheridan, who has multiple companies 

throughout the United States, has a 401(k) plan that he matches 

very generously for every employee, and he has tremendous success 

signing people up. But it’s because part of their orientation as 

being part of the company is that if they don’t put in the amount 

of money that it takes to get it matched, he’s not sure they’re smart 

enough to work for him. And people should take advantage of those 

things. I, being a former small businessman, my wife Diane and I 

had shoe stores in Wyoming, and consequently, I think we can do 

more to help small companies. I’ve done accounting for a number 

of small companies, and some had 401(k) plans, and some didn’t. 

So, I’m interested in introducing legislation this spring that would 

simplify the 401(k) system even more for small business owners. 

Getting the small businesses and their employees into the system 

is a critical step toward ensuring a strong retirement for more people. 
4 

Another key group of individuals who need to become invested is 

Generation Y, or, the Millenials, who are just entering the workforce for the very first time. All experts agree that having workers 

start investing early in their careers will save them from catch-up 

investments later in their lives. Hewitt just released a report on 

the 20-something generation, and they found that, due to lack of 

participation in defined contribution plans, low savings rates, and 

high rates of cash-out, 8 in 10 Generation Y workers will not meet 

their financial needs in retirement unless they significantly improve their savings and investing behaviors. 

Now, with tuition at an all-time high, Americans now owe more than $875 billion in student loans. I can sympathize with students 

entering the workforce trying to pay off their student loans, while 

they pay rent or buy a house, and starting a family, and then have 

to save for retirement as well. Many entering the workforce are unprepared for this new financial reality. I’ve also noted that a lot of 

them make more money than their parents did, but they’re not 

sure what to do with it all. They know that their parents have a 

car and a boat and a house, and a snowmobile, and other things, 

and what they don’t realize is that they accumulated those over 

time while they took care of some of their retirement things. And 

so, they run out and buy all those things, and then they get in financial trouble. 

I’ve been involved in financial literacy for a long time. When I 

was mayor, we had to find somebody that could provide financial 

literacy to these young people that were making so much money. 

The group that was most interested in doing it was the church. But 

people didn’t see that as a relative place to go because they’re always asking for money. Fortunately, the credit union stepped up 

and provided a program, and that had some credibility to it, and 

that’s been expanded in the meantime. There’s a Jump$tart program now in Wyoming and much of the United States that helps 

to provide that kind of advice to young people. It’s a tremendous 

help. Dave Ramsey also has some courses that people on my staff 

have taken a look at, and it does help them to get out from under 

their credit card debt. I know of a couple of instances where they 

not only have done that, but they followed the whole plan. They 

have no debt, own their home, and have six months worth of finances in the bank. They’re taking financial literacy very, very seriously. I have been sponsoring and passing legislation that would 

improve Federal Government literacy programs. 

But one of the concerns I have now is that for young workers, 

the best one, and the program they’re most likely to hear about, 

or, hear little about, especially from the newer employer, is this 

401(k) opportunity. That’s because when they go to work there, 

they’re dumped with this pile of papers that they have to make decisions on and wander through, not just on the 401(k), but all the 

other Federal forms that we force them to fill out as well. I think 

that takes away from the big decision they have to make about retirement. 

The people that are doing the plans are a little reluctant to do 

them because there is some liability that we placed on them now, 

too, because they have to help these people make the right decision, and nobody knows what the right decision is until after the 
5 

market is done. They have to make all their decisions before the 

market. So, I do think there are some things that we can do, and 

I’m pleased that we have some experts that can give us some advice on what can be done to make these more workable for business, more workable for the employee, and more workable for a 

lifetime of security. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Enzi. You’re right. We do 

have a great panel of distinguished witnesses and experts. 

First we have Jean Chatzky, the financial editor for NBC Today. 

If she looks familiar, that’s because you’ve been watching the 

Today Show. Ms. Chatzky will provide a general overview of retirement savings in America and focus on the fact that people do not 

save enough. 

Next we have Lori Lucas. She is an executive member of the Defined Contribution Institutional Investment Association, and is the 

executive vice president and Defined Contribution Practice Leader 

at Callan Associates. Ms. Lucas will summarize some of the research regarding automatic enrollment and escalation, and give 

some recommendations. 

Dr. Julie Agnew is an associate professor of Finance and Economics, and the co-director of the Center for Interdisciplinary Behavioral Finance Research at the William and Mary Mason School 

of Business. She is going to discuss the role investor psychology 

and financial literacy play in making retirement decisions. 

Finally, we’ll hear, I hope by video hookup, Dr. Jeffrey Brown, 

the William K. Karnes Professor of Finance in the College of Business at the University of Illinois. Dr. Brown will discuss the ways 

to shift the way people think about retirement saving away from 

asset accumulation to a broader concept of retirement security. So, 

I hope that hookup works all right. 

We’ll start with Jean Chatzky. 

Thank you very much. 

By the way, all of your statements will be made a part of the 

record in their entirely. We’ll just go from left to right, starting 

with Ms. Chatzky. If you could just sum it up in 5, 7, 8 minutes, 

something in that neighborhood, I’d appreciate it. 

Ms. Chatzky, welcome. Please proceed. 

STATEMENT OF JEAN CHATZKY, FINANCIAL JOURNALIST 

AND AUTHOR, NEW YORK, NY 

Ms. CHATZKY. Thank you so much. Good afternoon, Mr. Chairman. I want to thank you and the members of the committee for 

taking the time to address this crucial issue. 

Magazine covers and television ads show us a consistent picture 

of retirement. They show us a couple lazing on a beach and another 

on a golf course. Unfortunately, for most Americans these are fantasies. Data from the Employee Benefits Research Institute shows 

us that even for good-earning Baby Boomers and Generation Xers, 

there is a 50 percent chance of running out of money in retirement. 

That means they’re not going to have enough to pay for the basics, 

let alone added health care expenses that can run six figures, even 

more. 
6 

According to the research, 4l percent of the people in the lowest 

25 percent of American earners, the lowest quartile, were likely to 

run short of money after 10 years in retirement, and 57 percent 

after 20 years. Of course, those percentages continue to shrink as 

earnings increase, but 5 percent of the highest 25 percent of American earners are likely to run short of money after 10 years in retirement, and 13 percent after 20 years. And I have to say, as I 

watch Willard Scott wish a happy birthday to what seems like 

more centenarians every single week, that is not a comfortable 

proposition. 

Fortunately, we now have at our fingertips other research that 

points the way toward solving this problem, or at least getting a 

jump on it. The passage of the Pension Protection Act in 2006 

brought down those barriers for those employers who wanted to 

auto-enroll people, as you said, into their retirement plans, and it 

has been hugely successful. In companies that have automatic enrollment, 80 to 90 percent of people are in the company retirement 

plans. In companies that don’t have it, only half that many people, 

particularly younger and lower income workers that you were talking about, participate. And 401(k) participation alone reduces the 

risk of running out of money to 20 percent. That’s huge. 

But it’s not enough. Going further to solve this problem, to encourage even more Americans to put more of their hard-earned dollars away for tomorrow, is a matter of doing three things. 

First, using the incentives at your disposal to encourage more 

employers, particularly the small ones, to offer plans and to put an 

alternative in place for those that don’t. Workplace retirement savings works because it’s easy. By taking the money out of employees’ 

hands before they have a chance to spend it, it’s as if it was never 

there to begin with. For that reason, the Auto IRA proposal that 

was raised last fall needs to be revisited. By requiring employers 

who don’t sponsor plans to auto-enroll workers into individual 

IRAs, you cross the first hurdle. You make sure individuals have 

retirement plans. Of course, employees will always have the right 

to opt out. But inertia will win, and they won’t. 

Second, you need to encourage workers to save more. The financial community and the media have led workers astray when it 

comes to successfully achieving retirement savings goals. First, 

Americans were told that investment selection, that picking the 

right stocks and mutual funds, was the key to success. Next they 

were told it was all about asset allocation, deciding how much of 

your retirement pie you wanted to put in stocks and in bonds and 

in cash. Neither of these things solves the problem. The only thing 

that will get most Americans to a comfortable retirement nest egg 

is saving more money. I attached in my written testimony an analysis by Principal Financial that compares the three approaches. 

You should take a look, because it’s eye-opening. You encourage 

saving more, again, by letting behavioral finance work its magic. 

Automatically escalating workers’ contributions until they hit that 

maximum contribution levels is key because, again, we don’t miss 

money when we don’t see it in the first place. 

But the third component—educating workers—is also crucial. It 

also works. The SMarT savings program, an approach which is 

short for Save More TomorrowΤΜ, developed by behavioral econo-
7 

mists Richard Thaler of the University of Chicago and Shlomo 

Benartzi out of UCLA, the SmarT program is an auto-escalation 

program which requires annual contribution increases of 3 percent 

until you max out. It was recently offered, accompanied by financial counseling, to every employee at a company with 300 workers. 

One-hundred sixty of them took advantage, and after 3 years, the 

savings rate of these employees jumped from 31⁄2 percent to almost 

12 percent. It tripled. Other companies have seen even greater success. 

As Baby Boomers age, we will continue to see a shift in the message emanating from Wall Street. There will be more talk about 

annuitizing, managing retirement income, and making your money 

last. That’s all well and good. But it’s useless if we don’t tackle the 

accumulation problem first. We need to make sure that Americans 

have enough money to begin with. 

Thank you so much. 

[The prepared statement of Ms. Chatzky follows:] 

PREPARED STATEMENT OF JEAN CHATZKY

SUMMARY

Data from the Employee Benefits Research Institute shows us that even for goodearning Baby Boomers and Generation Xers, there’s a 50 percent chance of running 

out of money in retirement. Fortunately, we now have at our fingertips other research that points the way toward solving this problem: The passage of the Pension 

Protection Act in 2006, brought down the barriers for those employers to auto-enroll 

people into their retirement plans. In companies that have automatic enrollment, 

80 percent to 90 percent of people are in the company retirement plan. In companies 

that don’t have it, half that many people are in. And 401(k) participation reduces 

the risk of running out of money to 20 percent. That’s significant—but not enough. 

We need to do three things. 

First, use the incentives at your disposal to encourage more employers—particularly small ones—to offer plans. The Auto IRA proposed last fall should be revisited. 

By requiring employers who don’t sponsor plans to auto-enroll workers into individual IRAs, you cross the first hurdle. You make sure individuals have retirement 

plans. Second, encourage workers to save more. A successful retirement does not depend on investment choice or asset allocation, it hinges on saving more money. 

(Analysis attached.) Automatically escalating workers contributions until they hit 

the maximum contribution levels is key. And third, couple both of these initiatives 

with education to explain to workers why they need to do the right thing. 

As Baby Boomers age, we will continue to see a shift in the message emanating 

from Wall Street. There will be more talk about annuitizing, managing retirement 

income, making your money last. It’s useless if we don’t tackle the accumulation 

problem first. We need to make sure Americans have enough money to begin with. 

Good afternoon. I want to thank the committee for taking the time to address this 

crucial issue. Magazine covers and TV ads show us a consistent picture of retirement. A couple lazing on the beach. Another on the golf course. Unfortunately, for 

most Americans these are fantasies. Data from the Employee Benefits Research Institute shows us that even for good-earning Baby Boomers and Generation Xers, 

there’s a 50 percent chance of running out of money in retirement. This means 

they’re not going to have enough money to pay for the basics, let alone the added 

health care expenses that can run six-figures or more. 

According to the research, 41 percent of people in the lowest 25 percent of American earners ($0—$11,700 a year) were likely to run short of money after 10 years 

in retirement, and 57 percent after 20 years. Those percentages continued to shrink 

as earnings increased, but 5 percent of the highest 25 percent of American earners 

($72,000 and up) are likely to run short of money after 10 years in retirement and 

13 percent after 20 years. As I watch Willard Scott wish a happy birthday to what 

seems like more centenarians every week, that’s not a comfortable proposition. 

Fortunately, we now have at our fingertips other research that points the way toward solving this problem. The passage of the Pension Protection Act in 2006, 
8 

brought down the barriers for those employers who wanted to auto-enroll people 

into their retirement plans. It’s been hugely successful. In companies that have 

automatic enrollment, 80 percent to 90 percent of people are in the company retirement plan. In companies that don’t have it, half that many people (particularly 

younger and lower income workers) are in. And 401(k) participation reduces the risk 

of running out of money to 20 percent. That’s significant. 

But it is not enough. Going further to solve this problem—to encourage even more 

Americans to put more of their hard-earned dollars away for tomorrow is a matter 

of doing three things. 

First, use the incentives at your disposal to encourage more employers—particularly small ones—to offer plans. And put an alternative in place for those that don’t. 

Workplace retirement savings works because it’s easy. By taking the money out of 

employees’ hands before they have the chance to spend it, it’s as if it was never 

there to begin with. For that reason, the Auto IRA proposed last fall should be revisited. By requiring employers who don’t sponsor plans to auto-enroll workers into individual IRAs, you cross the first hurdle. You make sure individuals have retirement plans. Of course, employees will have the right to opt out. But inertia will 

win—and most won’t. 

Second, encourage workers to save more. The financial community—and the 

media—has led workers astray when it comes to successfully achieving retirement 

savings goals. First, Americans were told that investment selection, picking the 

right stocks and mutual funds, is the key to success. Next, they were told it was 

all about asset allocation, deciding how much of your pie to put in stocks and bonds 

and cash. Neither of these things is true. The only thing that will get most Americans to a comfortable retirement stash is saving more money. (I have attached an 

analysis by Principal Financial that compares the three approaches. It is eye-opening.) You do this, again, by letting behavioral finance work it’s magic. Automatically 

escalating workers contributions until they hit the maximum contribution levels is 

key. We don’t miss the money when we don’t ever see it in the first place. 

[Note: Attachment(s) to this statement may be found at www.principal. 

com/retirement/docs/other/h2317.pdf]. 

But the third component—educating workers—is also crucial. And it works. The 

SMaRT savings program (an approach, short for Save More Tomorrow, developed 

by behavioral economists Richard Thaler of the University of Chicago and Shlomo 

Benartzi of UCLA) is an auto escalation program, which requires annual contribution increases of 3 percent until you max out. It was recently offered—accompanied 

by financial counseling—to every employee at a company of 300 workers. More than 

half, 160, took the bait. And after 3 years, the savings rate of these employees had 

gone up from 3.5 percent to 11.6 percent. It tripled. Other companies have seen even 

greater success. 

As Baby Boomers age, we will continue to see a shift in the message emanating 

from Wall Street. There will be more talk about annuitizing, managing retirement 

income, making your money last. That’s all well and good. But it’s useless if we 

don’t tackle the accumulation problem first. We need to make sure Americans have 

enough money to begin with. 

Thank you. 

The CHAIRMAN. Thank you very much, Ms. Chatzky. Now we will 

turn to Lori Lucas. 

Ms. Lucas, welcome. Please proceed. 

STATEMENT OF LORI LUCAS, EXECUTIVE MEMBER, THE 

DEFINED CONTRIBUTION INSTITUTIONAL INVESTMENT ASSOCIATION, WASHINGTON, DC 

Ms. LUCAS. Thank you. Good afternoon, Mr. Chairman and members of the committee. 

Thank you for this opportunity to testify on this very important 

topic. 

My name is Lori Lucas, and I’m the Defined Contribution Practice Leader at Callan Associates, one of the largest investment consulting firms in the country. I am also the executive chair of 

DCIIA’s research committee, that’s the Defined Contribution Institutional Investment Association, and they are a non-profit organi-
9 

zation dedicated to enhancing the retirement security of American 

workers. 

Like Jean said, the passage of the 2006 Pension Protection Act 

provided valuable safe harbors that allowed plan sponsors to more 

freely offer automatic enrollment and automatic contribution escalation in their 401(k) plans and other DC plans. That was a huge 

way that plan sponsors saw the ability to increase the prevalence 

of these features in their plans, so that going from a very nominal 

amount of plans offering them prior to the Pension Protection Act, 

we now see that about half of DC plans offer automatic enrollment 

and automatic contribution escalation. 

Research shows that these auto features greatly enhance saving 

levels for American workers. They are very effective in getting people to save more. However, we can do more with automatic contribution escalation and automatic enrollment. That’s because what 

we’re finding is that they tend to be very conservatively implemented by plan sponsors. To give you an example, they may have 

as their initial contribution rate under automatic enrollment a 

mere 3 percent or 4 percent of pay as the initial deferral rate. Then 

they might automatically escalate people up to just 6 percent of 

pay. Because of the inertia among plan participants, participants 

are likely to stay at these levels for many years and not increase 

them on their own. To put that into context, the typical financial 

planner will tell you that you need to save between 10 and 15 percent of pay every year during your working life in order to have 

sufficient income at retirement. You can see the disconnect there, 

and the need to improve how these are being implemented. 

However, a recent EBRI–DCIIA study showed that just by 

tweaking the way that automatic enrollment and automatic escalation are implemented can have a very profound and dramatic increase on retirement income savings levels. What DCIIA found was 

that by increasing the cap on automatic contribution escalation to 

levels of, say, 15 percent, and increasing the initial deferral in 

automatic enrollment to, say, 6 percent, the majority of workers 

were able to save enough to replace 80 percent or more of income 

in retirement. This is a pretty dramatic increase and really shows 

the importance of robust implementation of these auto features. 

Policymakers can help. How they can help, first of all, is by revisiting the safe harbor for non-discrimination testing on automatic 

enrollment that was implemented in the Pension Protection Act. 

This safe harbor requires that the initial deferral under automatic 

enrollment start at at least 3 percent of pay. We ask that that be 

increased to at least 6 percent of pay to get people started on the 

track faster. We also note that the automatic contribution escalation cap under the safe harbor is 10 percent. We ask that that 

be increased to at least 15 percent, noting that when people actually choose on their own what they want their cap for automatic 

contribution escalation to be, that they tend to choose at least 15 

percent or more. And remember, people can always opt out. 

The second thing we ask is that policymakers make it clear to 

plan sponsors that it is a good thing to robustly implement automatic features, albeit in a prudent and reasonable way, but to 

make it a robust implementation. Unfortunately, what we’re seeing 

happening is that plan sponsors are looking at the non-discrimina-
10 

tion testing safe harbor requirements and inferring, even if they’re 

not doing the non-discrimination testing safe harbor, that those are 

the proper way, or, those are the proper defaults that they should 

be using under automatic enrollment and under automatic contribution escalation, and that’s one of the reasons these are being 

so conservatively implemented. We ask that it be clear that there’s 

no fiduciary safe harbor, or no fiduciary guidance implied outside 

of the non-discrimination testing safe harbor for those that use 

automatic enrollment and automatic contribution escalation. 

Finally, we ask for a fiduciary safe harbor for monthly income 

projections in retirement, so that people can actually see how much 

their savings will translate into when they get to retirement. We 

believe that this will help them to save at higher levels and discourage opt outs from these auto programs. 

In the past, participants might have relied on the stock market 

to fill in the gap of poor savings habits. Certainly the last decade 

has shown us, if nothing else, that the stock market will not bail 

us out if we’re not saving enough and we’re not saving early. 

The auto features are a tremendous boon for retirement savings, 

but they really do need to be properly implemented. What we ask 

is that the proper implementation be taken into consideration as 

a key goal for policymakers. 

Thank you for this, the opportunity to testify. 

[The prepared statement of Ms. Lucas follows:] 

PREPARED STATEMENT OF LORI LUCAS

SUMMARY

Since the 2006 passage of the Pension Protection Act (PPA), which provided valuable guidance and safe harbors to plan sponsors seeking to implement automatic enrollment and automatic contribution escalation, prevalence of these features within 

401(k) plans has increased dramatically. 

Research finds that such features greatly improve the expected level of savings 

that workers can achieve in retirement. However, research also concludes that many 

plans implement auto features in a way that is too conservative—reducing the probability that workers will succeed in saving enough to retire comfortably. 

A study by EBRI and DCIIA finds that more robust implementation of auto features—such as increasing the automatic contribution escalation rate cap—can dramatically improve savings outcomes for American workers. Yet, policies such as the 

PPA non-discrimination testing safe harbor, actually discourage plan sponsors from 

robust implementation, and in fact encourage them to be overly conservative with 

their automatic contribution escalation rate caps and other auto features. 

Policymakers can help by: 

• Revisiting the PPA non-discrimination safe harbor to: 

• increase the maximum allowed cap from 10 percent to a higher level, or eliminate it altogether so that plan sponsors can choose their own cap. 

• start the automatic enrollment deferral at 6 percent immediately, as opposed 

to starting it at 3 percent and having it escalate to 6 percent. 

• Providing guidance explaining that there is no ‘‘inferred’’ safe harbor for nonsafe harbor plans and that the deferral amounts for the non-discrimination safe harbor should not be viewed as fiduciary guidance. 

Policymakers could also explore ways to incentivize plan sponsors to adopt auto 

features: One way is to ease the company contribution requirements under the automatic enrollment non-discrimination testing safe harbor. 

Finally, policymakers may wish to consider a fiduciary safe harbor that would 

support plan sponsors in educating participants on how their savings translates into 

expected income in retirement. This could reduce opt-outs and increase savings 

rates. 
11 

1 Hewitt Associates. 2005 Trends and Experiences in 401(k) Plans Survey. 

2 Callan Associates. 2011 Trends in DC Plans Survey. Preliminary results of 2011 DCIIA Auto 

Features Survey. 

INTRODUCTION

Good morning Mr. Chairman and members of the committee. Thank you for the 

opportunity to testify at this important hearing. 

My name is Lori Lucas and I am the Defined Contribution Practice Leader at 

Callan Associates—one of the largest independently owned investment consulting 

firms in the country. Our client services include strategic planning, plan implementation, monitoring and evaluation, and education and research for institutional investors such as sponsors of pension and DC plans. We were founded in 1973 and 

we have $1 trillion in assets under advisement. 

I am also the executive chair of the Research and Surveys Committee of the Defined Contribution Institutional Investment Association (DCIIA). Founded in 2010, 

DCIIA is a non-profit association dedicated to enhancing the retirement security of 

American workers. DCIIA fosters a dialogue among the leaders of the defined contribution community including investment managers, consultants, law firms, recordkeepers, insurance companies, plan sponsors and others committed to the best interests of plan participants. 

In today’s testimony I will address the following topics: 

• How automatic features are being implemented in DC plans. 

• How current implementation of auto features is impacting American workers’ 

retirement income adequacy. 

• How we can raise the bar and dramatically improve outcomes through the use 

of auto features. 

PREVALENCE AND IMPLEMENTATION OF AUTO FEATURES IN DC PLANS

Prior to the Pension Protection Act (PPA) of 2006, which provided valuable safe 

harbors to plan sponsors seeking to implement automatic enrollment and automatic 

contribution escalation, just one in five (19 percent) 401(k) plans automatically enrolled employees. For the majority of those plans, the money market or stable value 

fund was the default investment fund, and participants were commonly defaulted 

into the plan at just 2 percent or 3 percent of pay. Meanwhile, just 9 percent of 

plans offered automatic contribution escalation prior to the 2006 passage of the 

PPA.1

Today, half of DC plans automatically enroll participants. In most cases, new 

hires are automatically enrolled, although 4 in 10 large plans have done a one-time 

automatic enrollment sweep for existing employees. Today, asset allocation-type vehicles are the most common default investment fund by far, largely as a result of 

the PPA’s qualified default investment alternative (QDIA) provisions. However, the 

common default contribution rate remains modest at 3 percent to 4 percent of pay. 

Also, currently nearly half of DC plans offer automatic contribution escalation. 

The majority does not link automatic contribution escalation to automatic enrollment, but offers it as an opt-in option. Most plans with automatic contribution escalation as a default increase participant contributions by just 1 percent of pay annually, and cap annual contributions at low rates, such as 6 percent—which might be 

the company’s match threshold.2

According to the preliminary results of a 2011 DCIIA survey of more than 100 

plan sponsors, there are many reasons that plan sponsors do not offer automatic enrollment including: it is seen as unnecessary because plan participation is already 

sufficiently high, it doesn’t fit into the plan’s corporate culture because it is too paternalistic, it is inappropriate in the current economic environment, and it is too 

costly from a company matching perspective. Only a small percentage of plan sponsors who do not offer automatic enrollment are very likely to do so within the next 

12 months. 

Those plan sponsors who do not offer contribution escalation either haven’t considered it, find it too paternalistic, or find it inappropriate in the current economic and 

legal/regulatory environment. Plan sponsors who do not offer contribution escalation 

say that increased regulatory/legislation changes/or support would encourage them 

to do so, such as by having the safe harbor rules extended to higher levels of auto 

escalation. Otherwise, those who don’t currently offer automatic contribution escalation are not very likely to do so in the next 12 months. Those who do not offer 

automatic contribution escalation as a default also cite the fact that their employees 

would be upset if they increased rates automatically. Others mention that it is too 

paternalistic or that they haven’t really considered it. 
12 

Today, I would like to make the case that automatic enrollment and automatic 

contribution escalation are two DC plan features that can dramatically improve the 

retirement income adequacy of American workers in DC plans. However, these features must be more widely used by plan sponsors and more robustly implemented 

in order to have the necessary impact on workers’ retirement savings. 

IMPACT OF AUTO FEATURES ON RETIREMENT INCOME ADEQUACY

OF AMERICAN WORKERS

Research by Jack VanDerhei of the Employee Benefit Research Institute (EBRI) 

in 2010 simulated the savings differences generated by plans with automatic enrollment versus voluntary enrollment by comparing large 401(k) plans given actual 

plan design parameters based on participant data from EBRI’s 401(k) database. The 

analysis looked at all workers, not just those eligible for 401(k) plans. According to 

the analysis, when workers aged 25 to 29 under voluntary enrollment are compared 

to those under automatic enrollment of the same age cohort, the difference in projected median 401(k) balances is four times higher in the auto-enrolled group. Voluntary enrollment was at one and a half times final earnings whereas automatic 

enrollment resulted in six times final earnings. This shows the importance of automatic enrollment in improving retirement savings levels of workers over their full 

career. EBRI and DCIIA then collaborated on a project analyzing how the probability of 

reaching a ‘‘successful’’ retirement income level changes with different 401(k) plan 

design variables and assumptions. While the definition of success using this simulation model can be quite complex, the analysis starts out with a very simple definition for this application: namely, a 401(k) accumulation large enough that, when 

combined with the worker-specific benefits projected under Social Security, will provide a total real replacement rate of 80 percent. 

In other words, for purposes of this analysis, we will define an 80 percent income 

replacement rate as ‘‘success.’’ Eighty percent is in the typical range of replacement 

rates suggested by many financial consultants. Importantly, this new analysis looks 

at workers eligible for 401(k) plan participation over 30 to 40 years—not all workers 

regardless of eligibility. 

The analysis found that in the base case—that is, the way that automatic enrollment and automatic contribution escalation are implemented across thousands of 

DC plans—the probability of replacing 80 percent of income in retirement for workers who spend a full career in the DC system is 45.7 percent for low-income workers 

and 27 percent for high-income workers. In other words, these statistics also show 

that the current implementation of auto features is not likely to generate sufficient 

retirement for most workers. 

However, when the implementation of auto features was more robust, coupled 

with improvements in employee behavior (described below), the picture changes. 

The analysis assumed the following changes to the way auto features are implemented in DC plans: 

• Increase in the contribution rate cap (e.g., from 6 percent to 9 percent, 12 percent or 15 percent of compensation). 

• Increase in the annual contribution rate change (2 percent vs. 1 percent of compensation). 

• Successfully educate employees so that they don’t opt out of the automatic escalation program. 

• Encourage employees to remember and implement their previous level of contributions and not merely accept the new low default-contribution rate under automatic enrollment when they change employers. 

In the best-case scenario—when all of these positive changes were made to auto 

features and implementation was robust—the probability of success increased dramatically. In fact, for the lowest quartile income level, the probability of replacing 

at least 80 percent of pre-retirement income increased 33.5 percentage points from 

45.7 percent to 79.2 percent. For other quartiles, the probability improvement was 

similar. In my experience, there are few DC plan feature changes that can result 

in such dramatic improvements in retirement income adequacy. 

The results essentially reflect the fact that when auto features are implemented 

conservatively—such as with a low initial contribution default, a small annual increase, and a low cap on contributions—participants are not prone to override these 

defaults, instead remaining with them for many years. This type of participant inertia has been well-documented for over a decade by researchers such as Brigitte 

Madrian and David Laibson of Harvard University. Even employees who might 

have participated more robustly under voluntary enrollment (such as with a 7 percent to 8 percent initial contribution to the plan) are likely, according to this behav-
13 

3Saving For Retirement on the Path of Least Resistance by James J. Choi Harvard University; David Laibson Harvard University and NBER; Brigitte C. Madrian University of Chicago 

and NBER; Andrew Metrick University of Pennsylvania and NBER; Originally prepared for Tax 

Policy and the Economy 2001 under the title ‘‘Defined Contribution Pensions: Plan Rules, Participant Choices, and the Path of Least Resistance’’ Revised in 2004 to include additional data 

and analysis. 4 Hewitt Associates. ‘‘Improving Defined Contribution Plan Utilization through Retirement 

IMPACT.’’ September 2005. 

ioral research, to remain with the auto features’ less robust defaults, resulting in 

low quality participation. As Choi, et al. concluded in their paper, ‘‘Saving for the 

Path of Least Resistance,’’ ‘‘sophisticated employers should choose their plan defaults carefully, since these defaults will strongly influence the retirement preparation of their employees.’’ 3

RAISING THE BAR ON THE USAGE OF AUTO FEATURES IN DC PLANS

Given these results, why do plan sponsors implement automatic features conservatively when it comes to contribution levels? The reasons include: 

(1) Desire to minimize opt-outs: plan sponsors widely believe that more modest 

contribution rate defaults minimize opt-outs, and encourage employees to remain in 

the plan under automatic enrollment and in the program under automatic contribution escalation. 

(2) Cost: more aggressive defaults (e.g., escalating deferrals at a 2 percent rather 

than a 1 percent rate; or defaulting at a higher initial contribution rate under automatic enrollment) may result in increased matching costs. This can be difficult for 

plan sponsors to support, especially in harsh economic times. 

(3) Safe harbor effect: even plan sponsors who are not seeking a non-discrimination testing safe harbor under the PPA may infer that it is more prudent from a 

fiduciary perspective to adopt the QDIA safe harbor for required defaults. Currently, 

these defaults are conservative when it comes to deferral rates. 

The last consideration is one of particular note for policymakers. Plan sponsors 

are as subject to behavioral biases as any other individual. It is my experience and 

that of other DCIIA members that the signals being sent by the defaults, which are 

used in the automatic enrollment non-discrimination testing safe harbor, are influencing plan sponsor decisions when it comes to the implementation of auto features 

even for non-safe harbor plans. The safe harbor requires that automatic enrollment 

start at at least 3 percent and increase to at least 6 percent over 4 years. The maximum allowed cap under the safe harbor is 10 percent. It is important to note that 

the EBRI/DCIIA study found that the single most important factor in improving retirement income adequacy through more robust auto features was raising the automatic contribution escalation cap. At a minimum, guidance should be given to explain that there is no ‘‘inferred’’ safe harbor for non-safe harbor plans and that the 

deferral amounts for the non-discrimination safe harbor should not be viewed as fiduciary guidance. 

Ideally, the safe harbor cap should be revisited, increasing the maximum allowed 

cap from 10 percent to a higher level, or eliminating it altogether so that plan sponsors can choose their own cap. Additional, the automatic enrollment deferral should 

start at 6 percent immediately, as opposed to starting it at 3 percent and having 

it escalate to 6 percent. 

As mentioned, a key reason that some plan sponsors do not implement automatic 

enrollment at a higher rate (or at all), and do not incorporate automatic contribution 

escalation aggressively (or at all) is the cost associated with matching contributions. 

Therefore, policymakers may also wish to explore ways to incentivize more robust 

implementation of these features. One way is to ease the company contribution requirements under the automatic enrollment non-discrimination testing safe harbor. 

Finally, it is important to educate plan sponsors about likely opt-out rates under 

various default deferral scenarios. Namely, there is no empirical evidence that the 

average plan experiences a higher opt-out rate when the default deferral level is 6 

percent than when it is 3 percent. Because automatic contribution escalation is still 

relatively new and not yet widely adopted, we don’t have enough empirical evidence 

that would confirm or refute the notion that opt-outs are likely to increase with 

more robust caps and higher rates. However, most initial indications are that these 

design features have little to no impact on opt-out rates. Further, research shows 

that when participants do proactively choose their own automatic contribution escalation maximum cap, it most commonly is 15 percent or higher.4

Opt outs can also be mitigated by educating employees on the value of high retirement savings rates. One way to do this is to show workers what their savings may 
14 

5 Callan Associates. Callan DC IndexΤΜ. June 2010. 

translate to in monthly retirement income. Many recordkeepers already provide 

monthly retirement income projections on DC participant Web sites and on statements. Some also even provide ‘‘gap’’ analysis—that is, the amount of additional 

savings plan participants need to achieve in order to replace sufficient income in retirement. Policymakers can encourage the use of such projections by providing a fiduciary safe harbor for plan sponsors. 

CONCLUSION

In the past, DC participants—and plan sponsors—may have relied on the stock 

market to fill in the gap of workers’ low savings and help them generate a sufficient 

401(k) retirement nest egg. However, the last few years have shown that the market 

cannot be expected to ‘‘bail out’’ workers who do not save enough. Indeed, a recent 

Callan Associates study showed that the annualized total returns experienced by 

DC plan participants since early 2006 has been 0.11 percent: virtually all of the 

growth in participant balances over that time came from plan sponsor and participant contributions.5 It follows then, that to ensure retirement income security for 

workers, plan sponsors must commit either to contributing more or to finding ways 

of increasing participant savings. 

The EBRI/DCIIA study demonstrates that automatic enrollment and automatic 

contribution escalation provide a good starting point to improve worker behavior 

with regards to savings. However, insufficient attention has been given to ensuring 

that plan defaults lead to robust outcomes from a retirement income adequacy 

standpoint. The good news is that much can be done from a plan sponsor, policymaker and provider perspective to facilitate positive outcomes within the context of 

the existing framework of automatic enrollment and automatic contribution escalation. Thoughtful plan design and communication can materially alter the longterm savings levels of millions of Americans. In contrast, the alternative—plan design and communication that do not consider long-term income replacement ramifications—may have painful long-term social and economic consequences when it 

comes to American’s retirement security. 

øEditor’s Note: Due to the high cost of printing, previously published materials are not reprinted in the hearing record. Appendix materials ‘‘The 

Impact of Auto-Enrollment and Automatic Contribution Escalation on Retirement Income Adequacy’’ may be found at http://www.ebri.org/pdf/ 

briefspdf/EBRIlIBl011-2010lNo349-EBRI-DCIIA.pdf and ‘‘Raising the Bar: 

Pumping Up Retirement Savings’’ may be found at http://www.dciia.org/ 

info/publications/Documents/DCIIA%20rESEARCH%20.¿ 

The CHAIRMAN. Thank you, Ms. Lucas. 

Now we turn to Dr. Agnew. 

Dr. Agnew, welcome. Please proceed. 

STATEMENT OF JULIE AGNEW, Ph.D., ASSOCIATE PROFESSOR 

OF ECONOMICS AND FINANCE, WILLIAM AND MARY MASON 

SCHOOL OF BUSINESS, WASHINGTON, DC 

Ms. AGNEW. Mr. Chairman and members of the committee, 

thank you for the opportunity to testify in front of you today. It’s 

an honor to appear in front of this committee. 

Today the goal of my testimony is to share with you findings 

from recent research that demonstrates the clear role investor psychology and financial literacy plays in retirement decisions, as well 

as highlight ways, in light of these results, that we might improve 

the way people make decisions. 

As the committee is well aware, and clearly, from the testimony 

that’s come before me, research has proven that automatic features 

in retirement plans work. The success of these features is also 

proof that investor psychology matters. Unfortunately, as automation in plans becomes more widespread, plan sponsors and policymakers may come to view plan communications and financial literacy programs generally as not needed and believe those who opt 
15 

out of these automatic features, that they do so for informed reasons. In my testimony today I will highlight research that suggests 

just the opposite, and I’ll argue for the need for more effective financial education programs that begin early and continue through 

life, as well as the need for simple communication materials that 

by design are easy to understand and accessible to individuals— 

and this is very important—who have limited interest in finance, 

insufficient financial knowledge, nor the time to devote to investment decisions. 

Speaking to financial education, the research suggests that 

Americans may have limited financial knowledge. Numerous academic studies have shown that individuals do not understand basic 

financial concepts. Even more worrisome is that the research suggests that those with the most limited financial knowledge are the 

least aware of their deficiency, so they may not even seek advice 

when they need it. Furthermore, additional studies show that vulnerable groups, such as those with low income, low education, and 

women, are more likely to fall in this category. This is a concern, 

as the pension landscape in the United States continues to shift toward the defined contribution world and the responsibility to make 

financial decisions is increasingly placed on the individual. How 

can we expect individuals to make sound decisions when they do 

not understand their investment choices, nor appreciate the need 

to save? 

Yet, it’s not just general literacy that’s important. Many participants simply do not understand the features in their plan. We were 

curious why individuals might quit an automatic enrollment plan, 

and we surveyed employees from two different plans. Interestingly, 

we found 18 percent of those who had quit thought that they were 

participating, even though they made that active choice. And 8 percent were not sure of their status. Moreover, we also find that 

those who were, who quit were more likely to not understand that 

they had a plan match. Thus, plan sponsors must clearly explain 

the benefits offered to participants and non-participants, and periodically remind all employees of the personal choices they have 

made. 

When communicating with individuals or designing choices offered in plans, materials from plan sponsors and government agencies must be kept simple and engaging, and the set of choices limited. Through my work with CIBFR at the Mason School of Business, it’s clear from the focus groups we have held that retirementrelated decisions and understanding financial products is overwhelming for many, and related to a high level of anxiety and 

stress. When individuals become overwhelmed or lack sufficient 

knowledge to make a decision, they can easily experience what’s 

called information overload. When individuals experience information overload, it can impair their judgment. We have found individuals with low financial literacy typically are more likely to experience information overload. In addition, I’d like, while my testimony 

goes into detail about information overload, to highlight two additional benefits for limiting this. 

First, we find that people experiencing less information overload 

are more confident with their decisions when they’re made. Second, 

regardless of the financial outcome, they’re more satisfied with 
16 

1Much of this testimony is based on collaborative works with Lisa Szykman, Steve Utkus and 

Jean Young funded through grants from the Boston College Center for Retirement Research, 

the Boston College Center for Financial Literacy, FINRA Investor Education Foundation and 

the Social Security Administration. All errors and opinions are my own and do not represent 

the views of the Social Security Administration, FINRA nor the two centers at Boston College. 

their choice. This is a worth outcome in itself. Finally, while automatic enrollment is a success, we should not believe that those that 

quit these plans are doing it for fully informed reasons. As mentioned earlier, these individuals might not understand the features 

of the plan. We have also found that those that quit tend to not 

trust financial institutions. Given recent market events, this is certainly not irrational. But perhaps a better understanding of how 

their plans work would reduce the mistrust attributable to simple 

lack of literacy. 

In closing, recognizing the psychology of investing has led to useful changes in plan design. This research is important and must be 

continued. However, I also believe there needs to be a better job 

at integrating financial education into the daily lives of Americans 

at an early age, and at points where they’re making important financial decisions. Financial experts should be used to make sure 

that the correct lessons are taught, and marketing experts should 

be involved so that people actually listen and are engaged in the 

message. We also must test to make sure these methods are effective, because we have too many examples today of programs that 

simply do not work. 

[The prepared statement of Ms. Agnew follows:] 

PREPARED STATEMENT OF JULIE AGNEW, PH.D.1

Chairman Harkin, Ranking Member Enzi and members of the committee, thank 

you for inviting me to testify. It is an honor to appear before this committee. Today, 

the goal of my testimony is to share with you the findings of recent academic research that demonstrates the clear role investor psychology and financial literacy 

plays in retirement decisionmaking, as well as highlight for you ways, in light of 

these results, that we might improve the way people make decisions. 

As the committee is well aware, research has proven that automatic features in 

retirement plans work. The success of these features is also proof that investor psychology matters or else these design changes would be ineffective. Unfortunately, as 

‘‘automation’’ in plans becomes more widespread, plan sponsors and policymakers 

may come to view plan communications and financial literacy programs generally 

as superfluous, and that those who opt-out of the automated features opt-out because they are simply informed individuals making calculated choices about their 

future. In my testimony today, I will highlight research that suggests just the opposite and I will argue for the need for more effective financial education programs 

that begin early and continue through life, as well as the need for simple communication materials that by design are easy to understand and accessible to individuals who have limited interest in finance, insufficient financial knowledge and/or 

time to devote to investment decisions. 

Speaking to financial education, the research suggests that Americans today have 

limited financial knowledge. Numerous academic studies have shown that individuals do not understand basic financial concepts. Even more worrisome is that research suggests that those with the most limited knowledge may be unaware of 

their deficiencies and therefore may not seek or even realize they need assistance. 

Furthermore, additional studies show that vulnerable groups, such as those with 

low incomes, limited education, and women, are most likely to fall into this category 

and those in this category are more likely to succumb to behavioral biases. This is 

a concern as the pension landscape in the United States continues to shift towards 

a defined contribution world and the responsibility to make financial decisions is increasingly placed on the individual. How can we expect individuals to make sound 

decisions when they do not understand their investment choices nor appreciate the 

need to save? 
17 

2 A more comprehensive overview of this growing research area can be found in the book Behavioral Finance: Investors, Corporations and Markets (2010). The full citation can be found in 

the reference section. This section summarizes and provides direct excerpts from the one chapter 

in the book. Please refer to this chapter in the appendix for more details. 

Yet it is not just general literacy that is important, participants may be failing 

to participate because they do not understand the features offered in their plan. We 

were curious about why individuals might quit an automatic enrollment plan, and 

so we surveyed employees in two different plans. Interestingly, we found that 18 

percent of those who had quit did not realize that they were not participating despite making this active choice and 8 percent were not sure of their status. Moreover, we also found that those who quit were more likely not to know that their 

plan offered a match. Thus, plan sponsors must clearly explain the benefits of their 

plan to both non-participants and participants and must periodically remind all employees of the personal choices they have made. 

When communicating with individuals or designing the choices offered in plans, 

materials from plan sponsors and government agencies must be kept simple and engaging and the set of choices limited. Through my work with the Center for Interdisciplinary Behavioral Finance Research at the Mason School of Business, it is 

clear from the focus groups we have run that making retirement-related decisions 

and understanding financial products is overwhelming for many and is often associated with high levels of stress and anxiety. When individuals become overwhelmed 

or lack sufficient knowledge to make a decision, they can easily experience what we 

call ‘‘information overload.’’ When individuals experience information overload, it 

can impair their judgment by causing them to limit their research related to the 

decision, rely on simple rules of thumb or resign themselves to passively accept the 

default as it represents for them ‘‘the path of least resistance.’’ We have found individuals with low financial literacy typically are more likely to experience information overload. More about this can be found in my written testimony but I would 

like to highlight two additional benefits of limiting information overload beyond 

helping people make more informed decisions. First, we find that those experiencing 

less information overload are more confident with their decisions when they are 

made and, second, regardless of the financial outcome they tend to be more satisfied 

with their choice. This is a worthy outcome in itself. 

Finally, while automatic enrollment is a success, we should not believe that those 

who quit are always individuals making fully informed decisions. As mentioned earlier, these individuals might not understand the features of the plan. We have also 

found that those who quit tend not to trust financial institutions. Given recent market events, this is certainly not irrational, but perhaps a better understanding of 

how their plans work and their asset choices would reduce the mistrust attributable 

to simple lack of financial literacy. 

In closing, recognizing the psychology of investing has led to useful changes in 

plan design. This research is important and must be continued. However, I also believe that more needs to be done to better integrate financial education into the 

daily lives of Americans starting at an early age and at points where important financial decisions are being made. Financial experts should be used to make sure 

that the correct lessons are being taught and marketing experts should be involved 

so that people actually listen and are engaged in the message. We also must test 

to make sure these methods are effective, because we have too many examples today 

of programs that do not work. 

The remainder of my testimony elaborates further on these comments. 

INVESTOR PSYCHOLOGY AND RETIREMENT DECISIONS 2

Over the past 10 years, administrative data from 401(k) plans have provided academics a rich and fruitful context for investigating behavioral finance theories. This 

growing area of research has enhanced our understanding of the psychology of investing, provided substantial support for various theories, and led to significant 

changes in retirement plan design that have improved overall savings outcomes. 

This section provides a high level overview of some of the research findings in the 

area. I highlight several studies that relate to four important retirement decisions. 

Those decisions are whether or not to participate in a plan, how much to contribute 

to a plan, how to allocate and trade assets and what to do during the distribution 

phase. While this summary is not at all comprehensive, the intent is to convince 

the reader by the end of this section that investor psychology should not be ignored 

when discussing retirement decisionmaking or making policy. For those interested 

in more details, the appendix includes a recently published book chapter with a 

more complete overview. 
18 

3For those plans not willing to switch to automatic enrollment, researchers understanding behavioral finance have devised new approaches that work with voluntary schemes. They include 

active choice (Carroll, Choi, Laibson, Madrian and Metrick (2009)), social marketing (Lusardi, 

Keller and Keller (2008)) and Quick EnrollmentΤΜ (Choi, Laibson, and Madrian (2009)). 4These findings have been supported by several other studies including Choi, Laibson, 

Madrian and Metrick (2002). 5See Agnew, Szykman, Utkus and Young (forthcoming). 

6 Research suggests that poorer individuals have a culture of distrust of financial institutions 

(Bertrand et al., 2006; Szykman, et al., 2005). In a focus group conducted by Szykman et al. 

(2005) respondents expressed feelings of alienation as well as an underlying belief that banks 

cannot be trusted to do the right thing. The respondents also stated that they avoided doing 

business with banks because of these perceptions. Finally, Guiso et al. (2007) found that lack 

of trust can explain why some people do not invest in the stock market. Additionally, they find 

that countries with low stock participation rates have low trust levels. 7See Nessmith, Utkus, and Young (2007). 

Participation 

Brigitte Madrian and David Shea’s (2001) seminal study on 401(k) participation 

led to widespread changes in plan design and is one of the best examples of how 

applying behavioral finance research can improve financial outcomes.3 These authors analyze one 401(k) plan transitioning from a voluntary (opt-in) enrollment arrangement to an automatic (opt-out) enrollment arrangement. According to rationalchoice, this change in enrollment method should not affect participation levels if individuals have well-defined preferences because a person will always optimize and 

select the best option (Johnson and Goldstein, 2003). Contrary to this expectation, 

the authors find participation levels for employees at similar points in job tenure 

increase significantly when automatic enrollment is introduced, from 37 percent to 

86 percent. In addition, participation rates between demographic groups equalize.4

This dramatic increase in participation may be due to, among other things, the 

tendency for individuals to procrastinate or because employees view the default 

choice as an implicit endorsement from the company. 

Additional research finds other behavioral factors affecting participation rates. 

For example, Esther Duflo and Emmanuel Saez (2002, 2003) find that peers influence individuals’ choices. Furthermore, the number of investment choices offered in 

a plan may influence participation. Too many choices may overwhelm individuals 

and make them less likely to make a decision. In a voluntary plan, the absence of 

a decision translates into non-participation. Sheena Sethi-Iyengar, Gur Huberman 

and Wei Jiang (2004) find evidence that this type of ‘‘choice overload’’ discourages 

plan participation. Their analysis suggests that for every 10 funds added to an investment menu, the probability of participation decreases by 1.5 to 2 percent. 

Less is known regarding why individuals may opt-out of an automatic enrollment 

plan. However, we do find in a study that combines survey evidence with 401(k) administrative data that trust in financial institutions matters.5 Those who distrust 

financial institutions are more likely to opt-out of automatic enrollment. This is consistent with previous research that has shown that distrust of financial institutions 

influences general financial behavior, particularly among households in the lower 

socio-economic strata.6 It is important to note that distrust is not necessarily irrational and that we gathered the data prior to the recent financial crisis. 

Contribution Levels 

Determining how much to contribute to a plan is another important decision individuals face when enrolling in their 401(k) plan. Highlighting the influence of the 

default bias, James Choi, David Laibson, Brigitte Madrian, and Andrew Metrick 

(2004) report that 80 percent of automatically enrolled participants in their study 

accept both the default contribution rate and the default investment fund. Consistent with the status quo bias and inertia, they find that 3 years later, over half 

of these participants maintain these default options. Given that plan providers often 

set the default contribution rate very low, this has become one of the few downsides 

of the trend towards automatic enrollment.7

In an effort to increase contribution levels, especially as automatic enrollment has 

caused many to anchor at low rates, some plans have implemented an auto escalation feature that takes advantage of information learned about investor psychology. First engineered by Thaler and Bernatzi (2004), their auto escalation 

scheme called Save More TomorrowΤΜ allows participants to ‘‘ ‘lock-’ in’’ in to future 

increases in savings which helps them overcome self-control issues. In addition, the 

program minimizes regret by timing future contribution increases with pay raises. 

The plan also relies on inertia, the tendency for participants to not change their options. In their study, they find that after the fourth pay raise SMarT participants 

contribute on average 13.6 percent to the plan compared to an 8.8 percent contribu-
19 

8For example, see Huberman (2001). 

9See Benartzi (2001), Choi et al. (2004), Huberman and Sengmueller (2004), Agnew (2006) 

and Brown et al. (2007). 10For example, see Odean (1999), Ameriks and Zeldes (2001), Madrian and Shea (2001), 

Agnew, Balduzzi and Sunden (2003), Mitchell, Mottola, Utkus and Yamaguchi (2006). 11For an overview of the research in this area, please see Brown (2008). 12See Agnew, Anderson and Szykman (2008), Chalmers and Reuter (2009) and Previtero 

(2010). 

tion rate for those who instead consult with an advisor. The contrast is even more 

dramatic when comparing contribution rates with those who opt not to see a financial consultant (6.2 percent) or decline participation in the SMarT plan (5.9 percent). 

Asset Allocations and Trading 

Another challenging decision that investors face is how to allocate their savings 

among assets and when, if at all, they should trade their positions. Selecting a portfolio is a complicated decision that can be overwhelming to many. As a result it is 

not surprising that the research shows that many individuals exhibit behavioral biases when making these choices and often rely on simple rules of thumb. For example, owning a portfolio with a high concentration of company stock (that is, the stock 

of your employer) is not consistent with the diversification recommendations of financial experts because company stock performance is correlated with employment. 

It became clear following the WorldCom and Enron debacles that overinvestment in 

company stock was a frequent practice and led to financial ruin for many employees. 

Researchers suggest that one reason participants invest in company stock is a familiarity bias.8 They buy what they know. In addition, other research, including my 

own, finds that the allocation to company stock is higher when the past performance 

of that stock is higher.9 Individuals investing in this manner are most likely practicing what is called ‘‘excessive extrapolation’’ which can be a poor way to choose 

allocations. 

As a cautionary example against excessive extrapolation, investors in Sweden’s 

pension scheme may have been using historically high 5-year fund returns to aid 

in their fund selection. During the first year of the program, a technology and 

health-care fund recorded the best 5-year fund performance out of all 456 funds. An 

information booklet given to all the participants reported these returns. Interestingly, this fund received the largest percent of the contribution pool (4.2 percent) 

when the default fund is excluded (Cronqvist and Thaler, 2004). Unfortunately for 

those who selected this fund, by 2003 the Internet bubble had burst and this fund 

had lost 69.5 percent of its value. 

Regarding trading, unlike retail brokerage accounts, trading in 401(k) plans is 

characterized by extreme inactivity, or inertia.10 Although this behavior in certain 

cases could be consistent with the implications of models for optimal portfolio choice, 

it could also be the result of procrastination. In this case, if a participant is defaulted into a fund that is inappropriate for his or her risk characteristics, the optimal action would be to trade out of the funds. 

Distribution Phase 

While many researchers have devoted time to studying how behavioral factors influence decisions in the accumulation phase, it is not until recently that academics 

have turned their attention to understanding the psychology behind how individuals 

make investment and consumption decisions upon retirement. Recent research has 

addressed one such decision, the decision to buy an annuity, and suggests that 

framing plays an important role in this choice.11 In an experimental study I conducted with Lisa Anderson, Jeff Gerlach and Lisa Szykman (2008), we find a significant influence of negative message framing on whether our experimental participants chose an annuity option or an investment option. Brown, Kling, Mullainathan 

and Wrobel (2008) also find significant results related to the influence of framing 

on the attractiveness of annuities. They use an Internet survey to demonstrate that 

the demand for annuities can be influenced by whether the consumer is viewing the 

annuity from a narrow investment frame or a broader consumption frame. The authors find that individuals in the consumption frame prefer annuities to other nonannuitized products and the reverse holds for the investment frame. 

Research using administrative data and experimental data shows that excessive 

extrapolation may also come into play in the annuity decision.12 Both types of research show that individuals are more inclined to avoid annuities when markets 

have exhibited higher returns in the past. 
20 

13See Agnew and Szykman (2005). 14See Agnew and Szykman (2005). 15See Agnew and Szykman (2005). 16See Agnew, Szykman, Utkus and Young (forthcoming). 17Summary of these results can be found in Lusardi (2010). 

FINANCIAL LITERACY, FINANCIAL CAPABILITY AND PLAN KNOWLEDGE

The research presented in the previous section should make clear that behavioral 

biases influence all types of retirement related investment decisions. In some cases, 

a behavioral bias may actually result in a favorable outcome. For example, the default bias results in more people saving when automatic enrollment is used. However, the default bias can also lead to lower savings rates and the wrong portfolio 

allocation if those defaults are not carefully chosen for the participants in the plan. 

Moreover, the Swedish pension example mentioned earlier demonstrates the downside of choosing allocations based on prior returns. There is some evidence that 

those with lower financial literacy may be more susceptible to behavioral biases. 

Supporting this we find, in an experimental study examining portfolio choice, that 

individuals with lower financial literacy are more likely to choose the default option 

versus those in the high literacy category (20 percent vs 2 percent).13

Unfortunately, the evidence related to financial literacy in the United States is 

grim. In a paper prepared for the Financial Crisis Inquiry Commission, Annamaria 

Lusardi (2010) provides an overview of research in this area. The results are disappointing but perhaps not surprising given recent economic events. Many Americans lack basic financial knowledge. A large number cannot carry out simple interest-rate calculations, let alone correctly answer questions about asset types. Lusardi 

cites several studies that suggest that those with less literacy are less likely to plan 

for retirement, accumulate wealth and participate in the stock market among other 

things. She also describes the results of a National Financial Capability Study funded by FINRA Investor Education Foundation. In the study, financial capability is 

measured in terms of ‘‘how well people make ends meet, plan ahead, choose and 

manage financial products, and possess the skills and knowledge to make financial 

decisions.’’ The results from this study are equally troubling and suggest more needs 

to be done to improve American’s ability to make informed and sound financial decisions. 

In my research, we find similar evidence of low financial literacy. In one study, 

we find that only 37 percent of the participants understood that high-yield bonds 

funds were not invested in bonds with strong credit ratings. In addition, while 84 

percent of respondents knew they could lose money in a stock fund, only 43 percent 

realized there was also that risk in a bond fund.14 We also find that individuals’ 

perception of their own relative knowledge and their actual financial literacy score 

are often different. This suggests that some people may not know how little they 

know. This could be an issue if they do not realize that they need to improve their 

education. Unfortunately, we find those with the least education show the weakest 

correlation between their tested ability and their own perception.15 This result is 

also supported by the nationally representative data sample in the National Financial Capability Study. 

In addition to low financial literacy, we find that many individuals are unaware 

of their own plan’s features. We find that the probability of participating in an automatic enrollment plan decreases if the participant is not aware that they have a 

match.16 It is logical that individuals will not react properly to economic incentives 

when they do not understand what incentives they are offered. As a result, more 

needs to be done to explain the benefits in plans clearly to employees. 

Also disturbing is the evidence of a lack of basic awareness regarding individuals’ 

personal financial decisions. For example, in the two automatic enrollment plans we 

studied, 18 percent thought they were participating even though they opted out of 

the plan and 8 percent of the non-participants were unsure of their status. This lack 

of basic awareness regarding personal financial decisions is also reflected in the National Financial Capability Study where 12 percent of those surveyed could not recall how much they had paid down on their house and 10 percent did not know the 

mortgage interest rate they were paying.17 Thus, plan sponsors cannot assume that 

individuals are aware of the choices they have made in their plans and periodic reminders of their decisions and the possible consequences could be helpful. Finally, 

there is an alternative explanation for why individuals who are in automatic enrollment plans are more aware they have a match than those who opt-out. It could be 

that they become aware after they participate through the quarterly statements 

they receive. Thus, they are learning because they are participating. If this alter-
21 

18See Agnew and Szykman (2010). 19See Agnew and Szykman (2011). 20The economics of information literature suggests that consumers tend to use information 

more extensively if it costs less in time and/or money to acquire (Stigler, 1961, Nelson, 1970, 

1974). These findings suggest that when information is easier to obtain and evaluate, consumers 

are more likely to use it when making decisions or choices. For example, in the nutritional labeling literature, it has been shown that as dependable information becomes easier to utilize (such 

as information presented in a standardized format), consumers use the information more to determine food quality, acquire more nutrition information prior to purchase, and improve their 

overall decision quality. 21See Agnew and Szykman (2005). 22See Agnew and Szykman (2011). 

native theory holds, then it supports adding additional features to plan designs, 

such as periodic re-enrollment of those who opt-out. 

FINANCIAL LITERACY AND INFORMATION OVERLOAD

Beyond not being able to make an informed decision, low financial literacy may 

make individuals overwhelmed by financial information and by the presence of too 

many choices.18 This leads to what we call ‘‘information overload.’’ When individuals 

experience information overload, it can impair their judgment by causing them to 

limit their research related to the decision, rely on simple rules of thumb or resign 

themselves to passively accept the default as it represents for them ‘‘the path of 

least resistance.’’ We find in an experiment that the percentage of those reporting 

information overload decreases with tested financial knowledge. Thus, those with 

lower financial literacy may be more susceptible to information overload.19

There are a number of variables that may contribute to overload. One source 

could be how information about choices is presented to investors. Effectively communicating choice information has long been a topic of interest for consumer researchers, and nutritional labeling provides a good example of how information can be presented in a simple and easily comparable format.20 Another potential source of information overload is the number of investment options offered in the plan. Research shows that too many choices hamper decisionmaking. As mentioned earlier, 

one study finds that 401(k) plans with more options tend to result in lower participation rates. 

We conducted an experimental study to see if reducing the number of investment 

choices reduced reported information overload when making a portfolio allocation 

decision.21 In the experiment, individuals were asked to make a portfolio allocation 

from either a large number of funds (60) or a small number of funds (6). The number of fund choices impacted the reported overload of the high-knowledge individuals in the sample. This group experienced statistically greater feelings of overload 

with more choices. However, low-knowledge individuals were overwhelmed regardless of the number of choices offered. This indicates that changes in plan design, 

such as decreasing the number of choices may be effective in reducing information 

overload, but not for all participants. In this case, it only helped those with above 

average knowledge. For the low-knowledge, a very vulnerable group, it did nothing. 

Thus these results provide justification for continued financial literacy efforts alongside behaviorally motivated plan design changes. 

In a separate study of participants’ choice between an annuity vehicle and an investment option, we also found that those who reported less information overload 

when making their decision were also more confident at the time they made the decision.22 In addition, after the experiment was completed and participants knew the 

final financial outcome, those with less information overload were still more satisfied regardless of how well they did financially. One way to interpret this finding 

is that when individuals understand their decision, they are less likely to regret it 

because they understood the consequences when they made it. Thus by empowering 

investors through financial education, simplified plan design and effective communication, we help investors make more thoughtful and confident decisions. In addition, it may also benefit plan sponsors and the entire industry by producing more 

satisfied consumers. 

Anecdotally, participant remarks in recent focus groups conducted in conjunction 

with projects affiliated with the Center for Interdisciplinary Behavioral Finance Research and funded by the new Financial Literacy Research Consortium suggest that 

individuals are often overwhelmed. Many individuals in the groups expressed great 

anxiety related to retirement decisionmaking. In one set of focus groups, participants were asked to choose two or three pictures that represented how they felt 

emotionally about retirement. They were asked to draw them from a sample of several hundred pictures cut out of various magazines and acquired from different 

sources. The moderator encouraged them to choose pictures that represented their 
22 

hopes and dreams, as well as their anxieties. The pictures chosen were varied. Some 

images depicted idyllic scenes, such as a loving couple relaxing in a hammock or 

a man peacefully fishing in the glow of a sunset. However, many images were disturbing and chosen because they demonstrated participants’ feelings of being 

stressed and trapped. Several participants chose the picture below. 

It should be noted that these selections occurred just a year following the 

2008–9 financial crisis and one of the worst economic recessions in U.S. history. 

Thus it is hard to know whether these images are accurate images of respondents 

long-term retirement prospects, or simply an emotional reaction to recent experience. 

In the end, it is clear that many Americans are feeling overwhelmed at the 

present time, and that more can be done to help them make more informed decisions. That said, given evidence suggesting that most Americans are not interested 

in finance, the financial lessons must be taught in an engaging manner that recognizes that people have limited time and interest. To do this effectively, we must use 

an interactive approach and include financial experts, educators and marketers. One 

approach that I support is to begin financial education early on in elementary school 

and to repeat the important themes with age-appropriate lessons on through the college years. In addition, making instruction and information easily available to 

Americans when they experience important life events, such as a marriage or a 

death in the family, could capture people when they are most interested and motivated to learn. In this regard, several interesting projects designed to engage Americans are currently being developed by the three Centers affiliated with the Financial 

Literacy Research Consortium funded by the Social Security Administration. I believe efforts like these and others have a great deal of merit. 

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24 

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164–87. 

APPENDIX

CHAPTER 31 

PENSION PARTICIPANT BEHAVIOR 1

(By Julie Richardson Agnew, Associate Professor of Finance and Economics, College of William and Mary) 

INTRODUCTION

Over the past 25 years, the United States has witnessed a dramatic shift in pension coverage (for an overview, see Poterba, Venti, and Wise, 2008). For years, Social Security and defined benefit plans provided many employees guaranteed support in retirement. In both cases, difficult savings and investment decisions were 

not the responsibility of the participants. Today, the landscape has changed dramatically. While policymakers debate serious concerns about the long-term solvency 

of the Social Security system, defined contribution plans have become the most common pension offering. From the employer’s perspective, this change is beneficial because defined contribution plans are less expensive to administer and shift the portfolio risk entirely to the employee. From the employee’s perspective, defined contribution plans offer portability but also involve the personal responsibility of making critical savings decisions. For many, these new and challenging financial decisions are overwhelming and further complicated by a lack of financial literacy, interest, and time. One unintended consequence of this shift is that it has provided academics a rich context for investigating behavioral finance theories. Over the past 10 

years, this growing area of research has enhanced our understanding of the psychology of investing, provided substantial support for various theories, and led to 

significant changes in retirement plan design that have improved overall savings 

outcomes. The purpose of this chapter is to summarize the most significant findings 

in this area that relate to behavioral finance and highlight the successful plan design changes that have resulted. 
25 

This chapter contains six main sections. The first five sections address the behavioral aspects of five important financial decisions investors must make in their retirement plans: (1) whether to participate in the plan, (2) how much to periodically 

contribute, (3) where to allocate assets, (4) when to rebalance allocations, and (5) 

how to handle the sum they have accumulated once they retire. The final section 

discusses how financial literacy and lack of interest may contribute to the influence 

of biases and heuristics in these decisions. 

THE PARTICIPATION DECISION

When employers first introduced defined contribution plans, employees typically 

joined their retirement plan under a voluntary enrollment arrangement. This meant 

they had to consciously ‘‘opt-in’’ to participate. Early studies largely focused on rational explanations for nonparticipation. Often studies used either 401(k) administrative data or survey evidence to investigate the role of plan features and individual characteristics. Researchers often found that plan design elements—such as 

employer matches and individual characteristics like age, salary, ethnicity, and job 

tenure—mattered for participation rates. Munnell, Sunde ́n, and Taylor (2001/2002) 

provide a concise survey of this early work. By the late 1990s, a growing interest 

in behavioral reasons for nonparticipation was emerging that led to research evidence supporting several behavioral biases. Today, the retirement savings decision 

is clearly a function of a complex set of factors. In addition to rational explanations 

for nonparticipation, behavioral biases can play an important role. 

A popular Madrian and Shea (2001) study led to widespread changes in plan design. The authors analyze one 401(k) plan transitioning from a voluntary (opt-in) 

enrollment arrangement to an automatic (opt-out) enrollment arrangement. According to rational-choice theory, this change in enrollment method should have no effect on participation levels if individuals have well-defined preferences because a 

person will always optimize and select the best option (Johnson and Goldstein, 

2003). Contrary to this expectation, the authors find participation levels for employees at similar points in job tenure increase significantly when automatic enrollment 

is introduced, from 37 percent to 86 percent. In addition, participation rates between 

demographic groups equalize. The authors are careful in their analysis and make 

sure that none of the economic characteristics such as the vesting schedule, number 

of investment options, access to loans, and level of employer matching change during the study. As a result, their findings strongly point to behavioral explanations. 

Madrian and Shea provide a thorough summary of several behavioral theories that 

explain their findings and highlight procrastination, in particular, as a very likely 

cause. 

So what causes individuals to procrastinate when making important decisions 

about their long-run financial well-being? At first this might seem puzzling, but the 

complexity of these decisions and their high stakes are the very reasons individuals 

most likely delay decisionmaking. O’Donoghue and Rabin’s (2001) model predicts 

that an individual’s tendency to procrastinate increases the more important the goal 

and the more options that are available. In addition, the perceived complexity of the 

decision is further complicated by the well-documented lack of interest and knowledge of finance among workers that is discussed in the last section of this chapter. 

Procrastination may also be influence by how aware individuals are of their own 

self-control problems. Time-inconsistent behavior, such as neglecting to save for retirement, can result when individuals’ lack of self-control causes them to pursue immediate gratification over long-term benefits (Thaler and Shefrin, 1981). 

O’Donoghue and Rabin’s (2001) model suggests that the more ignorant individuals 

are regarding their own self-control, the more likely they are to procrastinate. 

Laibson (1997) and Diamond and Koszegi (2003) provide additional research on 

time-inconsistent behavior and retirement that focuses specifically on hyperbolic 

and quasi-hyperbolic discounting. 

Madrian and Shea (2001) also suggest that the status quo bias may influence 

their findings. The status quo bias is the tendency for individuals to do nothing or 

maintain their current or previous decision. In Samuelson and Zeckhauser’s (1988) 

experimental testing of this phenomenon, they find that subjects are significantly 

influenced by the status quo even if they do not recognize a bias. According to these 

authors, rational reasons including transaction costs (such as information search 

costs) and uncertainty, as well as cognitive misperceptions (such as loss aversion 

and anchoring), can all lead to the status quo bias. They also mention that psychological commitments such as regret avoidance can play a role. Obviously, each of 

these factors could come into play in retirement decisionmaking. Therefore, the different participation rates that Madrian and Shea find are also consistent with this 

theory. 
26 

The number of choices the individual must make also contributes to nonparticipation. As mentioned earlier, O’Donoghue and Rabin’s (2001) model predicts that additional choices can increase the probability of procrastination. In the case of 401(k) 

plans, if the individual chooses to participate, he or she then faces several additional 

decisions such as how much to save and how to allocate his or her portfolio across 

a variety of investment options. This may lead to what is called choice overload. 

Iyengar and Lepper (2000) test the choice overload theory in an innovative study 

using consumer goods in field and laboratory experiments. In one experiment, they 

present supermarket shoppers with either a display of 24 exotic jams (extensive 

choice condition) or six exotic jams (limited choice condition). While they find more 

people are drawn to the extensive choice display (60 percent versus 40 percent), the 

individuals who view the limited choice display are actually more likely to purchase 

the jams than those who view the extensive choice set (30 percent versus 3 percent). 

Thus, Iyengar and Lepper conclude that too much choice can be demotivating. 

To test the influence of the number of fund choices on retirement plan participation, Sethi-Iyengar, Huberman, and Jiang (2004) use 401(k) administrative data 

provided by Vanguard. They find that the probability of participation decreases as 

the number of funds in the investment menu increases. Their analysis suggests that 

for every 10 funds added to an investment menu, the probability of participation decreases by 1.5 to 2 percent. 

Beyond plan features, peer effects may also influence participation. Survey studies 

by Lusardi and Mitchell (2006) and van Rooij, Lusardi and Alessie (2007) report 

that a high percentage of respondents consult with family and friends when making 

financial decisions. In a study of employees at a university offering a tax-deferred 

account, Duflo and Saez (2002) find evidence of peer effects in their analysis of participation rates and investment decisions. Using an administrative dataset, they 

find that when participation rates increase by 1 percent in a department, the probability of an individual participating in that department increases by 0.2 percent. 

In a separate paper, Duflo and Saez (2003) study the role of social interactions 

by conducting a field study in which they invite individuals who do not participate 

in their university retirement plan to attend a benefits fair that encourages enrollment. They promise the invitees a $20 reward for attending. The authors draw 

these ‘‘treated’’ individuals from a random subset of departments to estimate the 

role of social interaction effects. The results show that the treatment significantly 

affects the attendance at the benefits meeting. The treated individuals are five 

times more likely to attend the benefits meeting versus the control sample. In addition, Duflo and Saez note a significant spillover social effect. Individuals not given 

invitations but working in a department with treated individuals are three times 

as likely to attend the fair versus their controls in departments without invited employees. The treatment also affects plan participation rates. Treated departments report higher participation rates. Interestingly, whether an individual receives an invitation letter does not influence participation: What matters is whether the individual is in a treated department. Duflo and Saez’s results suggest that small financial rewards and/or peer effects can significantly influence important decisions like 

retirement savings. 

Trust may also influence participation. Research suggests that a lack of trust in 

financial institutions can influence general financial behavior, specifically among 

lower socioeconomic households. For example, studies by Szykman, Rahtz, Plater, 

and Goodwin (2005) and Bertrand, Mullainathan, and Shafir (2006) show that poor 

individuals consciously avoid doing business with financial institutions due to their 

lack of trust in them. In addition, Guiso, Sapienza, and Zingales (2008) find that 

lack of trust may explain why some individuals do not invest in the stock market. 

To explore the role of trust in 401(k) participation, Agnew, Szykman, Utkus, and 

Young (2009) use a dataset that combines survey data with administrative data 

from three plans, two featuring automatic enrollment and one with voluntary enrollment. They find lack of trust in financial institutions lowers the probability of participating in an automatic enrollment plan. For a married male with average demographic characteristics based on the data sample, a low level of trust corresponds 

to a 15 percent lower probability of participation. 

Taken together, the research described above suggests that non-economic or behavioral motivations can influence participation. Proponents of Thaler and 

Sunstein’s philosophy of libertarian paternalism would argue that private and public institutions have a responsibility to help guide people toward welfare-promoting 

choices without eliminating freedom of choice (Thaler and Sunstein, 2003; Sunstein 

and Thaler, 2003). Recent and significant changes in plan design and enrollment 

techniques in retirement plans suggest that many plan sponsors are acting consistently with this philosophy. 
27 

The most notable change in retirement plans is the widespread adoption of automatic enrollment. At the time of Madrian and Shea’s (2001) study, this feature was 

still relatively uncommon but in 2007 the Profit Sharing/401(k) Council of America 

estimated that 53 percent of large plans automatically enrolled participants (Wray, 

2009). This change in plan design has led to a significant increase in participation 

rates. While the trend toward automatic enrollment continues, some company sponsors remain resistant to this change and prefer the voluntary enrollment approach. 

Fortunately for these plan sponsors, a growing understanding of behavioral finance 

has led to some new approaches that work with voluntary schemes. While the three 

alternatives discussed below are successful, none increase participation to the level 

of automatic enrollment. 

Active choice is an alternative method that institutes a deadline to require workers to decide whether to participate. Without default options, workers must make 

explicit decisions related to contribution rates and allocations. Under active choice, 

Carroll, Choi, Laibson, Madrian, and Metrick (2009) find that enrollment after three 

months is 28 percent higher compared to a voluntary arrangement. They also demonstrate that if individuals are likely to procrastinate and have heterogeneous optimal savings rates, then this method is socially optimal. 

A second approach uses social marketing to promote participation. Lusardi, Keller, and Keller (2008) employ surveys, focus groups, and in-depth interviews to identify three barriers to savings by participants. Considering these obstacles, they devise a planning aid that helps at-risk, new employees overcome self-control issues. 

Thirty days after the first intervention, they find the participation rate tripled compared to the control group. 

Finally, Choi, Laibson, and Madrian (2009) study a program instituted by Hewitt 

Associations called Quick EnrollmentΤΜ. This enrollment method reduces the complexity of the decision by requiring employees to consider only two choices between 

nonparticipation and participation with contribution rate and asset allocation defaults. They find that quick enrollment triples 401(k) participation rates after 3 

months for new employees and increases participation by previously hired workers 

by 10 to 20 percent. However, the authors find evidence of a default bias associated 

with the contribution rate and asset allocations. 

CONTRIBUTION LEVELS

Once the employee is enrolled in the plan, there are still several important decisions remaining. For those who have been voluntarily enrolled, he or she must now 

decide how much of his or her paycheck to contribute to the plan. Research shows 

that contribution rates often cluster around several points. Benartzi and Thaler 

(2007) explain that this is evidence that individuals may be using different savings 

heuristics. They describe several heuristics based on these commonly found 

clusterings, including a ‘‘multiple-of-five heuristic,’’ a ‘‘maximum contribution heuristic,’’ and an ‘‘employer match heuristic.’’ 

In contrast to the voluntarily enrolled participants, automatically enrolled participants are not required to choose a contribution rate because a default rate is available. In the case of automatically enrolled participants, researchers commonly observe a strong default bias with the contribution rates anchored to the default. 

Highlighting the influence of the default bias, Choi, Laibson, Madrian, and Metrick 

(2004) report that 80 percent of automatically enrolled participants in their study 

accept both the default savings rate and the default investment fund. Consistent 

with the status quo bias and inertia, they find that 3 years later, over half of these 

participants maintain these default options. Given that plan providers often set the 

default contribution rate very low, this has become one of the few downsides of the 

trend toward automatic enrollment (Nessmith, Utkus, and Young, 2007). 

Once the individual sets or accepts a contribution level, Choi, Laibson, Madrian, 

and Metrick (2009) find that a naı ̈ve reinforcement learning heuristic may lead to 

subsequent changes in the contribution level. According to this heuristic, individuals 

increase weights on strategies with which they have personally experienced success 

even when future success is not logically related to past experience. Using administrative data, the authors find that investors who have positive savings outcomes in 

their 401(k) plans (either high average returns and/or low variance returns) increase 

their savings rates more than others with different experiences. 

In an effort to increase contribution levels, especially as automatic enrollment has 

caused many to anchor at low rates, several plans have implemented a new feature 

that takes advantage of information learned about investors’ psychology. Engineered 

by Thaler and Bernatzi (2004), the Save More Tomorrow PlanΤΜ (SMarT) takes into 

account the self-control problems. As a result, the program requires employees to 

commit far in advance to increases in contribution rates. This ‘‘future lock-in’’ is 
28 

known to overcome participants’ problems with self-control and is effective in enabling individuals to select what they ‘‘should’’ do over what they ‘‘want’’ to do (Rogers and Bazerman, 2008). The SMarT program also mitigates feelings of loss by timing the contribution rate increases with future raises. Inertia works to the participants’ advantage because a suboptimal decision is to change once the initial decision 

to enroll in the program is made. That said, consistent with libertarian paternalism, 

employees may opt out of the program at any time. 

The results from the first implementation of the program show dramatic increases 

in savings for SMarT participants. In addition, as status quo bias theory would predict, few people drop out. After the fourth pay raise, SMarT participants contribute 

on average 13.6 percent to the plan. This compares to an 8.8 percent contribution 

rate for those who instead consulted with an advisor. The contrast is even more dramatic when comparing contribution rates with those who opt not to see the financial 

consultant (6.2 percent) or decline participation in the SMarT plan (5.9 percent). 

ASSET ALLOCATION DECISIONS

Once the individual decides on or accepts a contribution rate, he or she must decide how to allocate the portfolio. This can be challenging because research suggests 

that individuals may not have well-defined portfolio preferences (Benartzi and 

Thaler, 2002). Not surprisingly, as with participation and contribution rate decisions, defaults appear to have an influence (Choi, Laibson, Madrian, and Metrick, 

2002, 2004). As mentioned earlier, Choi, et al. (2004) report that in their study, 80 

percent of automatically enrolled participants accept the default investment fund. 

Similarly, in an analysis of 50 retirement plans, Nessmith et al. (2007) find that 

new hires in automatic enrollment plans are three times as likely to put all of their 

contributions in the default investment fund compared to new hires in voluntary 

plans. They also find that 51 percent of individuals remain in the plan default after 

2 years. 

While the influence of defaults is obviously powerful, evidence suggests that the 

default bias can be overcome through committed and sustained efforts to encourage 

active choice. One of the most interesting examples of this is the Swedish pension 

system. Under the Swedish pension scheme, individuals may invest in up to five 

funds out of a menu of over 400 fund choices. In 2000, the first year of the plan, 

the Swedish government undertook a large advertising campaign to increase public 

awareness of options. In the first year of the system, a large percentage of citizens 

made an active fund allocation choice (67 percent). As a result, the initial appearance was that Swedish investors were far less susceptible to the default bias than 

U.S. investors (Engstrom and Westerberg, 2003). However, by 2003, the advertising 

level had decreased, and 91.6 percent of new participants chose the default fund 

(Cronqvist and Thaler, 2004), demonstrating that the default bias is not limited to 

U.S. investors and cannot be overcome without sustained efforts. 

In addition to the default bias, other behavioral biases can influence allocations. 

Company stock investment provides an excellent case study. Given the well-known 

benefits of diversification, it is puzzling that investors would invest substantial 

amounts in one security, especially one highly correlated with their own human capital. Several studies detail the potentially large welfare costs associated with company stock investment (Muelbroek, 2002; Poterba, 2003; Even and Macpherson, 

2008). Despite these costs, participants still concentrate their portfolios in company 

stock, and recent research suggests that behavioral biases may be to blame. 

For example, Huberman (2001) suggests that a familiarity bias may influence an 

investment choice. He asserts that some investors are not optimizing their portfolios 

based on risk and return but rather choosing to invest in what they know. 

Huberman finds evidence of this in investing patterns associated with U.S. Regional 

Bell Operating Companies. Along similar lines, Cohen (2009) suggests that loyalty 

may come into play. He finds that employees of stand-alone firms invest 10 percent 

more in company stock than employees in conglomerates. 

Benartzi (2001) suggests that there may also be an endorsement effect when the 

employer restricts the employer match to company stock. Brown, Liang, and 

Weisbenner (2006) provide more information about why employers might provide 

matching contributions in company stock. Contrary to rational expectations, 

Benartzi finds that when the employer match is in company stock participants allocate more of their own contributions to this security (18 percent versus 29 percent). 

He theorizes that employees are interpreting the company stock match as implicit 

investment advice. Using pooled cross sections of data, Brown, Liang, and 

Weisbenner (2007) find similar evidence. However, when they control for firm-level 

fixed effects, they find this relationship between match policy and employee contributions to company stock disappears. 
29 

Excessive extrapolation may also affect company stock allocations. Benartzi (2001) 

finds that discretionary contributions to company stock with the poorest 10-year 

stock performance were lower than those with the best performance (10.4 percent 

versus 39.7 percent). Additional studies also find links between past company stock 

returns and company stock holdings (Choi et al., 2004; Huberman and Sengmueller, 

2004; Agnew, 2006; Brown et al., 2007). 

Moving beyond company stock allocation decisions, research suggests that excessive extrapolation can also be a factor in other asset choices. Returning to the Swedish pension scheme example, investors may have been using historic 5-year fund returns to aid in their fund selection process. During the first year of the program, 

a technology and health-care fund recorded the best 5-year fund performance out 

of all 456 funds. An information booklet given to all participants reported these returns. Interestingly, this fund received the largest percent of the contribution pool 

(4.2 percent) excluding the default fund (Cronqvist and Thaler, 2004). Unfortunately 

for those who selected this fund, by 2003 the Internet bubble had burst, and this 

fund had lost 69.5 percent of its value. This example is a cautionary tale about the 

potential pitfalls of using simple allocation heuristics. 

Past research also suggests that the investment menu may affect asset allocations. Benartzi and Thaler (2001) find some evidence that individuals follow a naı ̈ve diversification strategy called the ‘‘1/n heuristic.’’ Based on this rule of thumb, investors divide their contributions equally among the n choices available. Depending on 

the fund menu, this strategy can easily result in portfolios that are inconsistent 

with the investors’ risk preferences and lead to large ex ante welfare losses as documented by the authors. This rule of thumb appears to become less popular as the 

number of fund choices increases. Huberman and Jiang (2006) find that for a menu 

with a large number of funds, individuals follow a slightly different heuristic, which 

they refer to as the ‘‘conditional 1/n rule.’’ Agnew (2006) also finds evidence of the 

conditional 1/n rule. According to the conditional rule, participants will divide their 

allocations equally among the number of funds they choose. The number of funds 

chosen is not necessarily equal to the total number of funds offered. Huberman and 

Jiang (2006) point out that this may not be an irrational strategy. 

Brown et al. (2007) provide further evidence of menu-driven effects. They use aggregate data and find that the number and mix of investment options significantly 

affects the allocation of contributions. They estimate that increasing the share of 

equity funds from 1/3 to 1/2 increases overall participant allocations to equity funds 

by 7.5 percentage points. Using individual-level administrative data, Agnew (2006) 

also finds evidence of mental accounting (Kahneman and Tversky, 1984; Thaler, 

1985, 1999) when company stock is present. In a variation on the conditional 1/n heuristic, Agnew finds that individuals appear to allocate their contributions to company stock and then divide equally their remaining allocations to the other asset 

holdings. From these results, participants are apparently treating company stock as 

a separate asset class. This finding supports earlier work by Benartzi and Thaler 

(2001). Finally, Choi, Laibson, and Madrian (2008a) find mental accounting present 

when employees do not choose their own match allocation. 

Once again highlighting the importance of choice architecture, Benartzi and 

Thaler (2007) report surprising results related to subtle changes to the investment 

form design. They test whether the number of lines on a fund election form can influence the number of funds in which participants invest. In an experiment using 

Morningstar.com, they asked participants to allocate money among eight hypothetical funds. Participants received one of two possible computer forms, one featuring four lines with a hyperlink to invest in more than four funds and one with 

eight lines. The number of lines did significantly influence the behavior. Only 10 

percent of individuals presented with the four-line form chose more than four funds 

compared to 40 percent of those viewing the form with more lines. Benartzi, Peleg, 

and Thaler (2008) provide further discussion about choice architecture. 

This research has helped plan sponsors recognize the complexity of the allocation 

decision and the tendency of employees to rely on simple heuristics when making 

allocation choices. In response, 401(k) providers have become proactive in improving 

plan design and introducing new products intended to simplify the process and improve savings outcomes. Target date funds (sometimes referred to as Life-Cycle 

funds) are a recent example of this type of new product. These funds have rapidly 

become a common offering in 401(k) menus since the 2006 Pension Protection Act 

authorized that they could be used as default options. Nessmith and Utkus (2008) 

estimate that participants invested $183 billion in these funds in 2007, and 81 percent of plans with auto-enrollment used them as their default. While not without 

controversy, these funds are theoretically an effective tool to help individuals maintain a portfolio mix that is appropriate over the long term. One advantage of these 

funds is that they reduce the complexity of the allocation decision for the investor 
30 

because the participant need only choose a fund with a date similar to his or her 

expected retirement date. Once a participant decides to invest in a target date fund, 

the status quo bias and inertia keep the participant’s investment decision on track. 

Viceria (2008) provides more details about how the first generation of these products 

relates to academic models of asset allocation and suggests improvements for future 

products. 

While an innovative and a seemingly error-proof solution, the way target date 

funds are actually used in individuals’ portfolios is perplexing and suggests that individuals may not fully understand this growing asset class. Nessmith and Utkus 

(2008) find that just over half of target date fund investors are ‘‘pure’’ investors who 

hold only one single target date fund when these products are offered, while the remaining group represents ‘‘mixed’’ investors who combine target date funds with 

other investment options. In an analysis of a similar type of fund that is based on 

risk preferences, so-called lifestyle funds, Agnew (2007) finds similar ‘‘mixed’’ portfolio results. Of the participants in her sample, 36 percent held at least one lifestyle 

fund, and of that group nearly half (47 percent) invested in multiple lifestyle funds. 

Whether these ‘‘mixed’’ portfolios are due to participants optimizing their overall 

portfolios or a result of naı ̈ve decisionmaking is unclear. However, there is growing 

evidence that a lack of financial understanding about these new products may drive 

this behavior, and this is discussed later in the financial literacy section. In addition 

to financial literacy, Nessmith and Utkus (2008) propose several rational and behavioral explanations for the mixed portfolios including naı ̈ve diversification, inertia, 

and employer matching effects. Future research will need to test all these theories. 

However, existing evidence shows that defaults can encourage more pure ‘‘single selection’’ investing. Mitchell, Mottola, Utkus, and Yamaguchi (2008) find that participants are more likely to be ‘‘pure’’ investors when the default option is a target date 

fund. Once again, if individuals have well-defined preferences, the presence of a default should not matter. 

With regard to company stock investment, Bernatzi and Thaler (2003) are developing a new program based on behavioral finance principles similar to their SMarT 

program discussed earlier. The results of this program are still to be tested. 

TRADING

Once retirement participants make an asset allocation, they must then decide if 

and how to rebalance their portfolio over time. Unlike retail brokerage accounts, 

trading in 401(k) plans is characterized by extreme inertia (Odean, 1999; Ameriks 

and Zeldes, 2001; Madrian and Shea, 2001; Agnew, Balduzzi, and Sunde ́n, 2003; 

Mitchell, Mottola, Utkus, and Yamaguchi, 2006). Agnew et al. (2003) find that, on 

average, investors trade only once every 3.85 years. Mitchell et al. (2006) discover 

that almost 80 percent of the 1.2 million workers they study do not trade over a 

2-year period. This behavior is consistent with the implications of models of optimal 

portfolio choice with realistic transaction costs (Lynch and Balduzzi, 2000). However, such behavior can be a concern if it results from procrastination. For example, 

if a participant is defaulted into a fund that is inappropriate for his or her risk characteristics, the optimal action would be to trade out of the fund. 

This inertia appears to persist even in times of market turmoil (Mottola and 

Utkus, 2009). However, evidence suggests that a very small subset of individuals 

may be reacting to market returns. Mottola and Utkus report spikes in the number 

of investors who completely abandoned equities during the months of extreme market downturns in 2008. However, the number of traders represents an extremely 

small proportion of the sample. This type of trading is consistent with a positive 

feedback strategy where investors buy assets that are increasing and sell assets 

that are falling. Using data from only one 401(k) plan, Agnew et al. (2003) find evidence of positive feedback trading with a one-day lag. Using a more comprehensive 

but aggregated dataset of retirement asset flows representing 1.5 million participants over a 5-year period, Agnew and Balduzzi (2009) find additional evidence of 

feedback trading within the day. Taken together this evidence is a cause for concern 

as it suggests that some investors may deviate from their long-run investment objectives in response to one-day market returns. 

Trading in 401(k) trading plans has also been shown to be influence by access to 

the Internet. Choi, Laibson, and Metrick’s (2002) study finds that trading frequency 

after 18 months of access to Web trading nearly doubles relative to a control group 

of individuals without access. This finding may be a result of the fact that Web trading reduces time and other transaction costs. Mitchell et al. (2006) also discover that 

the most active traders use the Internet. Yamaguchi, Mitchell, Mottola, and Utkus 

(2006) find that active trading does not lead to higher risk-adjusted returns but passive rebalancing through balanced and life-cycle funds does. Given the documented 
31 

inertia and the benefits of rebalancing, plan sponsors have introduced life-cycle 

funds that automatically adjust portfolio shares over time, as well as managed account services. 

DISTRIBUTION PHASE

While many researchers have devoted time to studying how behavioral factors influence decisions in the accumulation phase, far fewer have studied how these influences affect how individuals make investment and consumption decisions upon retirement. For most defined contribution plans, the default is for participants to 

withdraw their money in a lump sum after a certain age. At this point, participants 

face complicated decisions. Should annuities play a role in their retirement portfolio? How should they allocate assets, and how much should they consume so that 

they do not run out of money? 

In response to these questions, theoreticians contend that single, premium lifetime immediate annuities should play a role in retirement portfolios. However, the 

actual market for these products is relatively small, which is puzzling to academics 

whose models of rational behavior predict a much larger demand. Even when theoreticians add extensions to the basic model, such as adverse selection and bequest 

motives, they cannot explain the small size of the actual market. This well-known 

fact is commonly referred to as ‘‘The Annuity Puzzle.’’ Brown (2008) provides a thorough and informative summary of the past theoretical and empirical literature and 

challenges researchers to consider behavioral explanations in the future. He offers 

framing, complexity, mental accounting, loss aversion, misleading heuristics, regret 

aversion, and the illusion of control as possible behavioral reasons for the annuity 

puzzle. 

One recent study by Hu and Scott (2007) explores how several behavioral theories 

such as cumulative prospect theory, loss aversion, and mental accounting can explain the low demand for immediate annuities. They find behavioral reasons for the 

popularity of guaranteed period life annuities. 

Two new studies examine the role of framing in the annuity decision. Agnew, Anderson, Gerlach, and Szykman (2008) use a large scale-laboratory experiment to investigate the influence of negative message framing. They are motivated by the 

framing work of Tversky and Kahneman (1981) and more recent studies in the 

health communications literature that examine how positive and negative messages 

influence recommended health behaviors (Block and Keller, 1995). Agnew et al. ask 

participants to play a retirement game with real money where they must choose between an annuity and an investment. Before making their decision, the participants 

see one of three brief presentations that either (1) favor the annuity choice by emphasizing the potential losses associated with investing in the market and outliving 

resources, (2) favor the investment choice by emphasizing the potential loss from 

dying early after purchasing an annuity, or (3) favor neither choice. The presentations were factual but played on the participants’ aversion to loss. Agnew et al. 

report a sizeable and significant influence of the message frame. 

Using a different type of frame, Brown, Kling, Mullainathan, and Wrobel (2008) 

also find significant results related to the influence of framing on the attractiveness 

of annuities. They use an Internet survey to demonstrate that the demand for annuities can be influence by whether the consumer is viewing the annuity from a narrow investment frame or a broader consumption frame. They present individuals 

with product choices that represent annuities and competing non-annuitized products like savings accounts. Some participants view the product choices from an investment frame where they are discussed in terms of their account values and earnings. Other participants are presented with the same products but they are discussed in a consumption frame. In this case, the discussion centers around how 

much the consumer can spend over time with each option. The authors find that 

individuals in the consumption frame prefer annuities to other non-annuitized products, and the reverse holds for the investment frame. For example, Brown et al. 

(2008) find that 21 percent of participants in the investment frame compared to 72 

percent in the consumption frame prefer the life annuity to a savings account. 

Finally, very recent working papers suggest that the decision to annuitize may 

also be influence by past market returns. Using administrative data, Chalmers and 

Reuter (2009) and Previtero (2010) find an inverse relationship between past market returns and the probability of annuitization. Agnew, Anderson, and Szykman 

(2010) find similar evidence using a laboratory experiment. 

These early results suggest that using behavioral finance to explain annuity demand is a promising area for future research. As more becomes known about the 

psychology behind this decision, there are opportunities for plan providers to devise 

products and programs that make annuities more attractive. However, as Brown 
32 

(2008) points out, the irreversibility of the annuity decisionmakes this a more challenging task. For example, simple plan solutions used in the accumulation phase 

such as choosing optimal defaults are more difficult to implement in the case of annuities because the decision cannot be undone. 

FINANCIAL LITERACY

One reason that individuals may succumb to behavioral biases is that they lack 

financial literacy and are subsequently overwhelmed by the decisions they face. 

Widespread evidence demonstrates that there is a substantial lack of financial literacy both in the United States and abroad (Lusardi and Mitchell, 2007). If people 

do not understand their financial choices or cannot grasp general financial concepts, 

they can easily make mistakes and may be more likely to fall back on simple 

heuristics. 

This could easily be the case with investment in company stock and ‘‘mixed’’ target date investing. An earlier section of this chapter raised these asset allocation 

issues. In both cases, evidence suggests that individuals may not understand these 

assets. Several studies demonstrate that individuals often do not realize that investment in company stock is riskier than investing in the market (for example, Agnew 

and Szykman, 2005; Lusardi and Mitchell, 2008). Benartzi (2001) reports that 84 

percent of the respondents in a Morningstar survey made this mistake. In addition, 

a recent study by Envestnet finds that 40 percent of respondents in a small survey 

strongly agreed or somewhat agreed that target date funds provide a guaranteed return, while 30 percent agreed that they could save less money using these vehicles 

and still have sufficient funds to retire (Behling, 2009). Additional studies show misunderstanding of other basic products. 

Yet more than general financial literacy is important to pension participants. How 

well individuals understand their own plan features is also paramount. Choi, 

Laibson, and Madrian (2008b) find that 21 percent of participants who contribute 

at a rate below the match threshold knew their match rate compared to 41 percent 

of those above the match threshold in their sample. According to Chan and Stevens 

(2006), individuals who are knowledgeable about their plan features are five times 

more responsive to plan features than the average individual. 

One issue facing plan sponsors is that efforts designed to help investors, such as 

simplifying investment materials or reducing plan choices, may be ineffective for the 

financial illiterate. For example, Agnew and Szykman (2005) use a laboratory experiment to test how the number of investment choices and information presentation 

influence decisionmaking. While reducing the number of choices decreased feelings 

of information overload for those with above-average financial literacy, it did nothing for those with below-average literacy. They remained simply overwhelmed. Not 

surprisingly, individuals with below-average financial knowledge were more likely 

in the Agnew and Szykman study to choose the default option than those with 

above-average knowledge (20 percent versus 2 percent), suggesting that low literacy 

may make individuals more susceptible to biases. 

As the shift toward defined contribution plans continues, improving financial literacy becomes increasingly important. However, evidence is mixed about the success 

of current educational efforts. While employer-sponsored seminars suggest that individuals have good intentions to improve savings behavior after attendance, there is 

growing evidence that they do not follow through with their intentions (Clark and 

d’Ambrosio, 2008). Choi et al. (2002) find that after one seminar nearly every worker not participating in the plan indicated his or her intention to join, but only 14 

percent actually followed through. In addition, individuals do not seem to learn from 

the experiences of others. Choi, Laibson, and Madrian (2005) find that even when 

Enron employees were losing their retirements because of investing in company 

stock, there was little change in company stock holdings by employees in other 

401(k) plans. 

Educators must also consider that individuals tend not to be interested in financial matters or financial planning, and this leads to inattention. MacFarland, Marconi, and Utkus (2004) find that at least half of their sample of retirement investors 

had limited interest in topics often presented in current financial education programs. Additionally, Lusardi and Mitchell (2006) discover that only 18.5 percent of 

their sample was able to determine how much they needed to save, develop a savings plan, and actually stick to it. In addition, individuals may not even realize that 

they lack financial literacy and therefore need assistance. Agnew and Szykman 

(2005) find that certain groups (for example, low-income individuals) have a low correlation between their own perceived knowledge and their score on a literacy test. 

Lusardi and Tufano (2009) find similar evidence for older individuals. 
33 

This suggests that educators must recognize psychological biases and be creative 

in their approach to teaching. Tufano and Schneider (2008) provide a review of existing financial literacy programs that include new and innovative approaches for 

low- and moderate-income families. In addition, Lusardi (2008) provides insights 

into improving the effectiveness of programs in the United States, and Fox, 

Bartholomae, and Lee (2005) present information regarding the importance of financial education evaluation. 

SUMMARY AND CONCLUSIONS

The retirement research literature provides solid evidence that behavioral biases 

influence every financial decision related to retirement. In view of the documented 

lack of financial literacy and interest in retirement planning, overwhelmed investors 

often resort to simple heuristics. The findings in the literature clearly show that 

even the most subtle details in plan design influence behavior. A successful working 

relationship between practitioners and academics in this field has resulted in numerous plan design changes that have improved savings outcomes. While the literature in this field is now extensive, there is still more work to be done, particularly related to the distribution phase of retirement and the role of annuities. In 

addition, financial education programs can become more effective by incorporating 

what is known about behavioral biases and investor psychology. Given the increasing responsibility of individuals for their own retirement, the behavioral literature 

should continue to grow quickly for years to come and motivate further successful 

changes to plan design. 

DISCUSSION QUESTIONS

1. Given participants’ documented behavioral biases in retirement decisionmaking, should plan sponsors and policymakers focus on automating plan design to 

avoid common mistakes made by plan participants, or work on improving financial 

education? 

2. Until recently, there has been little behavioral research related to the distribution phase of retirement, and specifically annuities. Discuss some possible behavioral theories that might explain the annuity puzzle. 

3. Investing a large portion of one’s wealth in an employer’s company stock is contrary to sound investment principles. Discuss some theories that might explain this 

questionable investment behavior. 

4. Discuss three successful changes to plan design that have improved savings 

outcomes, and explain how they relate to behavioral finance. Are there any associated drawbacks? 

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ABOUT THE AUTHOR

Julie Agnew is an associate professor of finance and economics at the Mason 

School of Business, the College of William and Mary, and co-director of the Center 

for Interdisciplinary Behavioral Finance Research (CIBFR). Her research focuses on 

behavioral finance and its relationship to decisions made in individuals’ retirement 

plans. Several leading academic journals have published her research using data 

from 401(k) plans and laboratory experiments. Often cited in the business press, she 

frequently speaks at academic and practitioner conferences in the United States and 

abroad. She is a TIAA-CREF Institute Fellow, a member of the Defined Contribution Plans Advisory Committee (DCPAC) for the Virginia Retirement System, and 

a research associate for the Center for Retirement Research at Boston College. Dr. 

Agnew earned her BA in economics from the College of William and Mary and her 

PhD in finance from Boston College. A former Fulbright Scholar to Singapore, she 

began her professional career in investment banking and equity research at 

Salomon Brothers and Vector Securities International. 

The CHAIRMAN. Thank you, Dr. Agnew. 

Now we’ll turn to Dr. Brown. Welcome to Washington. 

Mr. BROWN. Thank you very much. 

The CHAIRMAN. He’s in Chicago. You’re in Chicago right now. He 

couldn’t make it. 

Mr. BROWN. Yes, technically, I’m in Champaign, IL. 

The CHAIRMAN. Dr. Brown, welcome again. Your testimony will 

be part of the record. Please proceed. 

STATEMENT OF JEFFREY R. BROWN, Ph.D., WILLIAM G. 

KARNES, PROFESSOR OF FINANCE, UNIVERSITY OF ILLINOIS AT URBANA—CHAMPAIGN COLLEGE OF BUSINESS, 

CHAMPAIGN, IL 

Mr. BROWN. Thank you. 

Chairman Harkin, Senator Enzi, and members of the committee, 

thank you for the opportunity to discuss the important issue of retirement income security with you today. I sincerely wish that I 

could be there in person, but the severe winter weather we’ve had 

here recently made travel impossible, so I’m grateful to the committee staff, as well as our own IT support here at Illinois for allowing me to testify from a distance. 

I’d like to briefly summarize a few key points from the longer 

written testimony that I previously submitted. The primary overriding message that I would like to leave you with today is that I 

think it’s time that we shift America’s conversation about retirement away from one that is solely focused on wealth accumulation, 

to one that is focused on the broader concept of retirement income 

security. 

As was noted earlier, saving, investment and wealth accumulation are absolutely critical for retirement security. But they’re not 

enough. True retirement security also depends upon having part of 

one’s retirement resources in the form of a guaranteed income 

stream that cannot be outlived. In short, we need to focus on more 

than just getting people to retirement. We need to focus on getting 

people through retirement. 

Life annuities are products that allow individuals to convert a 

lump sum of wealth into a guaranteed income stream that will last 

for as long as they live. There are decades of economic theory that 
38 

indicate how valuable annuities can be as part of a retiree’s retirement plan. Unfortunately, annuitization is on the decline, for a 

number of reasons which I outlined in my testimony, including the 

declining role of Social Security going forward, the shift we’ve witnessed over the last few decades away from defined benefit plans, 

which typically paid out in the form of annuity, and to defined 

plans, like 401(k)s, that more often than not do not even offer access to guaranteed income options. Third, the limited size of the retail annuity market. 

In order to encourage annuitization, I’d like to briefly mention 

three ideas, and there are a few others in my testimony that I submitted earlier. The first is captured in the Lifetime Income Disclosure Act, with, which a couple members of your committee were instrumental in putting forth in the last session. I’ve conducted academic research that shows that Americans’ views about annuities 

are very strongly influenced by the framework in which this information is presented. For example, when viewed through a frame 

that emphasizes wealth accumulation and investment features, 

only 20 percent, only about 1 in 5 individuals, think that an annuity looks attractive in comparison to a simple savings account. The 

same holding finds when comparing an annuity against other financial products. 

In contrast, when viewed through what we call a consumption 

frame, or a frame that really emphasizes one’s ability to buy the 

goods and services that they want during retirement, 70 percent of 

individuals find an annuity attractive. 

This is a pretty remarkable shift in preferences from what’s essentially a very small change in the way the information is portrayed or presented. This research suggests that when plan sponsors are issuing their annual or their quarterly statements about, 

for example, 401(k) balances, that what we should really also be 

telling them is how much retirement income those accounts will be 

able to provide. The Lifetime Income Disclosure Act could be a very 

important step in reframing the conversation and discussion in a 

way that encourages annuitization. This legislation, which, if properly designed, could be implemented at very minimal cost to employees and employers, and could have a very significant impact on 

the way individuals evaluate how well-prepared they are for retirement. 

Second, I would strongly encourage Congress to rethink the required minimum distribution rules. These rules were written, really, from a tax policy perspective to ensure that qualified plan assets were eventually subject to income taxation. But, from a perspective of retirement income policy, these rules were poorly conceived. They encourage individuals to deplete their assets more 

quickly than may be optimal, and they have a number of unintended consequences, including discouraging some forms of 

annuitization. 

Finally, I think there’s a strong case to be made for extending 

the idea of automatic enrollment to the annuitization phase, and 

thinking about automatically annuitizing a portion of qualified 

plan assets in order to overcome some of the institutional and behavioral biases that currently stand in the way of retirement income security. 
39 

1 I also serve as Director of the Center for Business and Public Policy at the University of 

Illinois, as Associate Director of the NBER Retirement Research Center, and as a Trustee for 

TIAA. Previously, I served on the Social Security Advisory Board (2006–8), on the staff of the 

President’s Commission to Strengthen Social Security (2001), and as Senior Economist with the 

President’s Council of Economic Advisers (2001–2). All views presented in this testimony are my 

own, and do not reflect the views of any of the organizations with which I am affiliated. 

However, as I outline in my testimony, there are a number of 

reasons to perhaps go slowly on this front. Before Congress implements such a policy, I think it would be very useful to have more 

research to help us understand both the intended and unintended 

consequences for both plan participants and plan sponsors. 

One thing that Congress and, or the Department of Labor could 

do would be to provide some safe harbor protection to employers 

who would be willing to be leaders or innovators in this area so 

that we could all learn from their experience. 

Just to conclude, I certainly agree that it is extraordinarily important that we have policies in place to encourage participation in 

retirement plans, to encourage saving, to encourage wealth accumulation. But we also need to ensure that public policy is equally 

supportive of the second half of the retirement income security 

equation, which is encouraging individuals to annuitize some of 

their retirement assets so that they can have an adequate income 

stream for as long as they live. 

Thank you for the opportunity to speak to you today, and I look 

forward to your questions. 

[The prepared statement of Mr. Brown follows:] 

PREPARED STATEMENT OF JEFFREY R. BROWN, PH.D. 

Chairman Harkin, Senator Enzi, and members of the committee, I am Jeffrey 

Brown, the William G. Karnes Professor of Finance in the College of Business at 

the University of Illinois at Urbana—Champaign.1 I thank you for the opportunity 

to appear before you today to discuss the important issue of how to improve our system of retirement security. 

To start, I would like to ask a question, Why do we save for retirement? 

This may seem like a simple question. There are many possible answers, but I 

would like to focus on two, each of which sounds plausible, but each of which has 

very different implications for the optimal design of a retirement system: 

1. ‘‘We save so that we will have a large sum of money in our account at retirement.’’ 

OR 

2. ‘‘We save so that will have the income we need to maintain our standard-ofliving throughout retirement.’’ 

The first answer focuses solely on the accumulation of wealth. In essence, it focuses only on getting people to retirement. 

The second answer focuses on getting people not just to retirement, but also 

through retirement. 

In this sense, the second answer is much more complete. It recognizes that while 

saving, investment and wealth accumulation are a necessary condition for retirement security, they are not sufficient. This second answer recognizes that true retirement security also depends on having part of one’s retirement resources in the 

form of a guaranteed income stream that cannot be outlived. 

Ensuring that one’s nest egg lasts a lifetime is a complex financing planning exercise because people face uncertainty about asset returns, interest rates, inflation, expenses and, perhaps most importantly, uncertainty about how long one can expect 

to live. 

The good news is that financial products exist that help individuals address these 

complex planning problems. For example, a life annuity is an insurance product that 

allows an individual to convert a lump-sum of wealth into a stream of income that 

is guaranteed to last for as long as an individual (and if desired, his or her spouse) 
40 

2For purposes of this testimony, I am using the term ‘‘life annuity’’ to refer to products which 

guarantee income for as long as the annuitant lives. This excludes some products with the term 

‘‘annuity’’ in the name that do not offer life-contingent payouts. 3The seminal paper in this area is by Yaari (1965). The results of his paper were generalized 

and extended in Davidoff, Brown and Diamond (2005). 4See, for example, Mitchell et al. (1999) and Brown (2001). 

lives.2 As I will discuss below, economic theory suggests that life annuities can be 

enormously valuable to retirees. 

Unfortunately, the U.S. retirement system has evolved over the past 30 years into 

a system that focuses almost entirely on wealth accumulation. Many of our public 

policies, our plan designs, and our financial planning tools have been designed as 

if the first answer provided above—that we save in order to have a large sum of 

money in our account at retirement age—is the end goal. 

We have paid far too little attention to the equally important issue of how to ensure that one’s accumulated resources are sufficient to last for a lifetime. 

The one, over-riding message that I would like to leave you with today is that we 

need to shift America’s conversation about retirement away from a conversation solely focused on wealth accumulation and to a conversation about the broader concept 

of retirement income security. 

In support of this message, I will proceed with my testimony as follows: 

First, I will provide a very brief overview of the academic research that indicates 

the importance of guaranteed lifetime income. 

Second, I will briefly discuss a number of factors—including the declining role of 

Social Security, the shift from defined benefit (DB) to defined contribution (DC) 

plans, and the limited size of the private annuity market in the United States— 

which suggest that Americans are becoming increasingly exposed to longevity risk 

(i.e., the risk of outliving one’s resources). 

Third, I will briefly describe research that I, and co-authors, have undertaken on 

how the psychological concept of ‘‘framing’’ can have an important impact on people’s perception of the value of life annuities. I will specifically discuss the implications of this research for the Lifetime Income Disclosure Act. 

Last, but not least, I would like to briefly discuss a few other policies that might 

be used to encourage retirement income security. 

1. THE IMPORTANT ROLE OF LIFE ANNUITIES: A BRIEF REVIEW OF ECONOMIC THEORY

Within the economics discipline, there is a very large research literature exploring 

the role of life annuities in improving the well-being of consumers who face uncertainty about their length-of-life. While the literature is too large to fully summarize 

here, a fair characterization of the core theoretical result is that life annuities can 

substantially improve consumer well-being.3

This finding arises from two related benefits: First, annuities provide a higher 

rate of return, contingent on survival, than otherwise similar, but non-annuitized, 

assets. This arises because the resources of those annuitants who die relatively 

early can be used to increase the rate of return to those who live longer than average. This extra return is sometimes referred to as the ‘‘mortality premium.’’ 

Second, life annuities guarantee that the annuitant will receive income for as long 

as he or she lives. 

In essence, life annuities eliminate the need to trade-off two risks for retirees: (i) 

that if they consume too much, they will run out of money before they die, and (ii) 

that if they want to set aside enough money to live on even if they live to extremely 

advanced ages, they must consume much less during the entirety of their retirement 

years. 

Simulation studies have suggested that the benefits from having access to life annuities is equivalent—in terms of consumer well-being—to a substantial increase in 

financial wealth.4

2. ARE AMERICANS UNDER-INSURED AGAINST LONGEVITY RISK?

There are several factors suggesting that Americans are becoming increasingly exposed to the risk of outliving their resources (a risk sometimes referred to as ‘‘longevity risk.’’) 

Let’s begin with the U.S. Social Security system. While there are many ways to 

describe the Social Security system, for today’s purposes it is instructive to understand that it is the only meaningful source of inflation-indexed, annuitized income 

available to most retirees in the United States. From this perspective, Social Security plays a vital role in providing a guaranteed income floor. 
41 

5See, for example, Munnell 2003. 

6 In perhaps the most famous example of framing, Tversky and Kahneman (1981) showed that 

citizens would choose very different policies to address a public health threat depending upon 

whether the information was provided in terms of ‘‘lives saved’’ or ‘‘lives lost.’’ 

However, Social Security will play a declining role going forward. Even without 

further policy changes, the combination of the increasing normal retirement age, 

and the fact that Medicare premiums—which are netted out of Social Security 

checks for most Americans—are rising faster than inflation, means that net Social 

Security replacement rates are projected to decline in the future.5

Furthermore, we must face that undeniable fact that the United States is on an 

unsustainable fiscal path, and that the growth in entitlement programs like Social 

Security (and even more importantly, Medicare and Medicaid) must be reined in. 

Taken together, these facts make it apparent that future generations of retirees 

should not be relying on Social Security to play as large of a role in their retirement 

as the program has done for past generations. 

Turning to the private sector, the past three decades have witnessed a substantial 

decline in the role of DB plans in the private sector. Further, many of those that 

remain are substantially underfunded. This fact poses risks both for retirees (in particular, those whose benefits exceed the amount insured by the Pension Benefit 

Guaranty Corporation, or PBGC) as well as for taxpayers (given the large projected 

deficits facing the PBGC that will ultimately require an infusion of taxpayer funds 

to avoid a reduction in insured benefits). 

In the place of DB plans, we have seen the 401(k) plan emerge as the dominant 

form of retirement plan in the United States. While 401(k) plans have many advantages for both employers (e.g., reduced funding uncertainty) and employees (e.g., increased portability), the recent financial crisis and recession clearly exposed the 

long-standing inadequacy of appropriate risk management in the 401(k) system. A 

prominent example of this is the near absence of guaranteed income options in the 

typical 401(k) plan. It has been estimated that fewer than one-in-four 401(k) plans 

offer participants the option of converting a portion of their account balances into 

life annuities. 

Further, many Americans do not have access to a retirement plan of any kind 

through their employer. For these individuals, as well as for those with 401(k) plans 

that lack an annuity option, it is possible to purchase guaranteed lifetime income 

through the retail market. However, the market for such products continues to be 

small relative to the retirement income needs of Americans. 

As a result of these factors, it is clear that the relative dearth of opportunities 

to insure against longevity risk is a serious issue for U.S. retirement policy. 

3. ‘‘FRAMING ANNUITIES’’—IMPLICATIONS FOR PUBLIC POLICY

Much of the academic research on annuities has focused on how to explain the 

lack of a more robust annuity market. Having concluded that this literature was 

limited in its ability to explain empirical regularities in this market, I began to work 

with several colleagues to explore various psychological, or behavioral, biases that 

might be limiting the demand for annuities. 

In 2008, we published a paper in the American Economic Review (Brown, et al. 

2008) showing that individuals’ perceptions of life annuity products are strongly influenced by what psychologists and economists call ‘‘framing.’’ Framing is simply the 

idea that people may be induced to change the behavior by changing the way information is communicated (even when the actual information content is itself unchanged.) 6

Our paper was motivated by a simple insight. As noted earlier, the dominant 

frame in the U.S. retirement system is an ‘‘investment,’’ or wealth accumulation, 

frame. Individuals have been conditioned to think of account balances as the appropriate yardstick for measuring their retirement preparedness. 

In such an investment frame, life annuities look relatively unattractive. Indeed, 

they may even look risky, because the amount of money that one receives depends 

on how long one lives. 

In contrast, when viewed through a frame that emphasizes the ability to sustain 

monthly consumption during retirement, life annuities are quite attractive because 

they can guarantee this outcome. 

In short, whereas annuities look risky in an investment frame, they look like a 

valuable form of insurance in a consumption frame. 

In our study, we conducted a survey of over 1,300 Americans age 50+ and presented them with information about various financial products. We randomly di-
42 

7For example, see Brown et al (1999). 

vided individuals into groups that were presented with the same information but 

in different frames. 

Our results were supportive of the importance of framing. When viewed through 

an investment frame, only about 20 percent of individuals thought a life annuity 

looked attractive in comparison to a simple savings account. When viewed through 

a consumption frame, over 70 percent of individuals preferred the annuity. This is 

a remarkable shift for what is essentially a small change in the way the information 

is portrayed. 

This research has led me to believe that one simple, but potentially very powerful, 

way to encourage annuitization is to change the way that plan sponsors communicate about participants’ 401(k) plans. Put simply, rather than focusing solely on 

how much wealth one has accumulated in their plan, we should be telling people 

how much retirement income their account balance will be able to provide them. 

This research has implications for the bipartisan Lifetime Income Disclosure Act 

that was introduced in 2009. Indeed, the research suggests that the core idea of that 

act—to require that plan sponsors provide information about the retirement income 

that their 401(k) could provide—could help re-frame the retirement discussion in a 

way that encourages annuitization. If enacted, this legislation could have—over 

time—a very significant impact on the way individuals evaluate their preparedness 

for retirement. 

Of course, it is important that the provisions of the Lifetime Income Disclosure 

Act, if passed, be enacted in a manner that keeps the message simple for consumers. 

It is equally important that the rules be structured to keep the cost of compliance 

to a minimum, particularly for small businesses. We must remember that employers 

who offer retirement plans to their employees do so voluntarily. Thus, even the most 

well-intentioned policy can end up harming retirement security if it imposes costs 

on employers that lead them to stop offering an employer-provided plan. 

Fortunately, the Lifetime Income Disclosure Act should impose minimal, if any, 

additional costs on employers, at least as long as it is efficiently designed and implemented. For example, in order to avoid forcing small employers to become annuity 

valuation experts, the Department of Labor could provide a very simple table or formula (i.e., based on standard annuitant mortality tables and an interest rate assumption) that converts a given account balanced into a monthly or annual 

annuitized income stream. If implemented in a simple way, plan sponsors would be 

sending the same quarterly or annual statements that they do now, but with two 

numbers (account balance and monthly income) instead of one (account balance). 

Of course, some plan sponsors may wish to provide more comprehensive or detailed projections—and, indeed, some already do so. The act should certainly allow 

plan sponsors to continue to provide such projections. In addition, plan sponsors 

who offer annuities in their plan should be permitted to use actual annuity payouts 

from their plan, rather than the example payouts. 

4. OTHER POLICIES TO ENCOURAGE ANNUITIZATION IN QUALIFIED PLANS

In addition to reporting 401(k) and other DC balances in terms of monthly income, there are numerous other policies that Congress could consider to encourage 

annuitization. As noted above, it is extremely important to weigh the advantages 

of these approaches against the potential costs of imposing additional burdens on 

plan sponsors. 

a. Required Minimum Distributions (RMD’s) 

The required minimum distributions appear to have been designed solely from the 

perspective of tax policy—in essence, with the goal of ensuring that the income is 

eventually subject to income taxation. 

From the perspective of retirement policy, these rules run counter to the idea of 

promoting retirement income security. The rules encourage individuals to spend 

their resources down more quickly than is, in all likelihood, optimal for most retirees. Indeed, simple simulations have shown that following some of the RMD rules 

can lead to the virtual exhaustion of all of one’s retirement wealth long before individuals reach their maximum possible lifespan.7

As such, Congress may wish to consider how to design the RMD’s from the perspective of promoting retirement income security. 

b. Annuities in Qualified Default Investments Alternatives (QDIAs) 

The Pension Protection Act took a very important step in recognizing that individuals who are automatically enrolled into a 401(k) or other qualified plan should 

have their contributions placed in a well-diversified investment vehicle. 
43 

8 In 2009, I authored a white paper (Brown, 2009) on behalf of the American Council of Life 

Insurers in which I discussed the case for an automatic annuitization policy, and outlined how 

such a program could be implemented. While that research was sponsored by the ACLI, the 

views and opinions expressed therein are mine alone and do not necessarily represent the views 

of the ACLI or its member companies. 

Looking to the future, I would like to see the market evolve in the direction of 

incorporating lifetime income into these life-cycle or target-date funds. 

To put it simply, in addition to thinking about the ‘‘glide path’’ for the allocation 

between stocks and bonds (and other asset classes), I would like to see products 

which also automate the ‘‘glide path’’ between annuitized and non-annuitized assets. 

The gradual, and partial, annuitization of accounts would be a very natural and 

very welcome evolution of these plans. 

I am not suggesting that such an approach be mandated. Rather, I would like to 

see such an approach encouraged—or at least not discouraged—through the regulatory framework. Providing plan sponsors with clear fiduciary safe harbors for providing such products is one important consideration. 

c. Auto-Annuitization 

Research in behavioral economics has clearly demonstrated the strong influence 

that default options can have on behavior. As you know, the Pension Protect Act 

took very important steps in expanding automatic enrollment in 401(k) plans, as 

well as the automatic escalation of contributions. 

Looking to the future, it is reasonable to ask whether ‘‘automatic annuitization’’ 

is a natural next step in this progression. 

As I have written elsewhere, this idea has considerable merit as a way of overcoming the policy, institutional and behavioral biases that currently stand in the 

way of annuitization.8

However, the merits of this idea must also be weighed against the fact that designing an ‘‘auto annuity’’ program is much more complex than automating other 

aspects of the 401(k). There are several reasons for this. First, as noted above, most 

401(k) plans sponsors do not even offer life annuities through their plans. Thus, it 

is not a simple matter of defaulting individuals into an already-existing option. Requiring plan sponsors to provide access to annuities would impose additional cost 

and complexity on plan sponsors. 

Second, unlike the state of affairs prior to the passage of the Pension Protection 

Act—when academic researchers had produced substantial empirical evidence about 

the effects of automatic enrollment—we have very little empirical evidence on how 

an annuity default would work in practice. Ideally, some plan sponsors will take the 

lead in voluntarily adopting such an approach in the coming years so that the program can be carefully evaluated. But no such studies exist today in a U.S. context. 

Third, the ‘‘downside risks’’ to consumers in an automatic annuity program are 

greater than is the case with automatic enrollment. Under auto-enrollment, if an 

individual determines that it was a mistake to be enrolled, they can ‘‘undo’’ it by 

pulling their money out of the qualified plan at a relatively low cost. In contrast, 

typical life annuity contracts are often irreversible (to avoid adverse selection), and 

it could actually harm some consumers if they were automatically annuitized when 

an annuity was clearly sub-optimal for them (e.g., someone with a terminal disease 

and a short remaining life expectancy). 

It is possible to design an auto-annuity program that overcomes this and other 

problems (see Brown 2009 for an example of such a framework). However, doing so 

is necessarily a complex exercise. 

All-in-all, while I continue to believe that automatic annuitization may be a desirable feature of DC plans, it is premature to consider such an approach in the 

near-term. At minimum, we need much more research to fully understand both the 

intended and unintended effects on plan sponsors and participants. 

With this in mind, policymakers might wish to consider whether there are steps 

that could be taken to encourage plan sponsors to implement such a program voluntarily. For example, it might be desirable to provide fiduciary safe harbors for plan 

sponsors who wish to do so. 

5. CONCLUSIONS

It is important to continue to pursue policies that encourage Americans to save 

and invest. However, it is equally important that plan participants have the knowledge, the opportunity, and the access to products which allow them to convert their 

accumulated savings into a secure source of retirement income. The Lifetime Income 

Disclosure Act would be a useful first step in changing the national conversation 

about retirement in this direction. 
44 

Thank you for the opportunity to speak here today. I would be happy to take your 

questions. 

REFERENCES

Brown, Jeffrey R. 2009. ‘‘Automatic Lifetime Income as a Path to Retirement Income Security.’’ White Paper prepared for the American Council of Life Insurers. 

Brown, Jeffrey R. 2001. ‘‘Private Pensions, Mortality Risk, and the Decision to 

Annuitize,’’ Journal of Public Economics, Vol. 82, No. 1, October, pp. 29–62. 

Brown, Jeffrey R., Jeffrey Kling, Sendhil Mullainathan, and Marian Wrobel. 2008. 

‘‘Why Don’t People Insure Late Life Consumption? A Framing Explanation of the 

Under-Annuitization Puzzle.’’ American Economic Review, 98(2): 304–9. 

Brown, Jeffrey R., Olivia S. Mitchell, James M. Poterba, and Mark J. Warshawsky. 

1999. ‘‘Taxing Retirement Income: Non-Qualified Annuities and Distributions 

from Qualified Accounts,’’ The National Tax Journal, Vol. LII, No. 3, September, 

pp. 563–91. 

Davidoff, Thomas, Jeffrey R. Brown, and Peter Diamond. 2005. ‘‘Annuities and Individual Welfare,’’ The American Economic Review, Vol 95, No. 5, December, pp. 

1573–90. 

Mitchell, Olivia S., James M. Poterba, Mark J. Warshawsky and Jeffrey R. Brown. 

1999. ‘‘New Evidence on the Money’s Worth of Individual Annuities,’’ The American Economic Review, Vol. 89, No. 5, December 1999, pp. 1299–1318. 

Munnell, Alicia H. 2003. ‘‘The Declining Role of Social Security.’’ Boston College 

Center for Retirement Research. Just the Facts Issue No. 6. 

Poterba, James M. 1997. ‘‘The History of Annuities in the United States.’’ NBER 

Working Paper No. 6001. 

Tversky, Amos and Daniel Kahneman. 1981. ‘‘The Framing of Decisions and the 

Psychology of Choice.’’ Science, 211(4481): 453–58. 

Yaari, Menahem E. 1965. ‘‘Uncertain Lifetime, Life Insurance, and the Theory of 

the Consumer.’’ Review of Economic Studies 32(2): 137–50. 

The CHAIRMAN. Thank you so much, Dr. Brown. Can you hear 

us and see us all right? 

Mr. BROWN. I sure can. Thank you. 

The CHAIRMAN. Thank you very much. We’ll start our 5-minute 

rounds of questioning. I’ll start with Ms. Chatzky. I think there’s 

a lot of misinformation about investments. A lot of fact sheet marketing materials. I get them in the mail and I look at them, and 

they sound great. I don’t understand a lot of them, to tell you the 

truth, and I’m sure a lot of other people don’t. But, where does a 

person go to really get good, impartial advice about 401(k) plans? 

Ms. CHATZKY. They tend to go to the benefits department at their 

employer. They tend to read Money Magazine, USA Today, listen 

to what’s happening on CNBC. The answer is, they often wind up 

with information overload, feeling confused and unable to make a 

decent decision. Anything that we can do to simplify the process, 

to make the defaults better—and I understand all of the limitations 

of the target date funds, but I think that was definitely a step in 

the right direction. To provide children as young as middle school, 

but definitely into high school and college, with more financial education so that they understand how to read the basic documents 

and how to speak the basic language, will be moving the ball forward. 

The CHAIRMAN. Anyone else want to respond to that question? 

Where do you get more impartial information? That’s readable. It’s 

so confusing. I’m a college-educated person, graduate, law degree, 

and I can’t understand it. How do you expect the average person 

out there that doesn’t have any financial information or advice to 

understand? 

Ms. AGNEW. Well, I have a Ph.D., and I know that some of the 

information that I’m presented is also confusing to read. Often-
45 

times, it’s because plans are thinking about, perhaps, some legal 

concerns that, it needs to be written in a language where they will 

not be sued. But unfortunately, what happens then is that it’s written in a way that the average person can’t understand it. So, it 

really, it does need to be simplified. 

I do believe that, you said middle school. I even think getting 

into elementary school and teaching lessons about savings, making 

these things familiar, so that when individuals are actually faced 

with a decision when they graduate from college, that they’re able 

to understand it, is incredibly, incredibly important. 

There are ways to make the information easier. There was a lot 

of work done in the nutritional labeling research area. I think most 

of us can go to a cereal box and understand how to compare calories and sugar content. And we need to be able to do that when 

we’re looking at plans. We need to make this information very 

clear. 

I do know that there are efforts out there right now. I know the 

Social Security Administration has funded a financial literacy research consortium, and the job there is to produce literacy products 

that are unbiased, that help people make a good decision. I think 

those are worthy efforts that should be pursued. 

Then, finally, I’d like to say, Anna Maria Lucardi at Dartmouth 

has done some very, very good research. One of her research pieces 

was using social marketing to get people to participate in 401(k) 

plans. Basically, she held focus groups with the people at Dartmouth, found out what was keeping them from participating, came 

up with a one-pager with steps on what they needed to do to participate—it was an automatic enrollment—saw how that worked, 

tweaked it again with more focus groups, and eventually was able 

to significantly increase participation by simply making things 

easier to understand, and the steps that need to be taken easier 

to understand. So, I think there’s a lot we could do. 

Ms. LUCAS. Chairman Harkin, I would like to just add that I 

think what we’re getting at is the reason why auto features have 

become so critical to 401(k) plans and other defined contribution 

plans. Because it’s not only difficult for people to understand this 

very complex topic. They don’t have time, they don’t have the interest. And so, they’re really faced with the notion that, I have many 

things on my plate, and this is my last priority. To simplify, sometimes it’s not even enough. What we do find is that people will respond to something as simple as a postcard that says, if you want 

to enroll in this plan, check the box. Something as simple as that, 

they will respond to. But, as you said, getting reams of paper is, 

they’re not going to go through it. It’s going to be a very low priority. 

The good news is that as people get older and retirement approaches, say, in their 40s, and they do begin to pay a lot more attention to this, they will use things like managed accounts, and actually input their circumstances and situation into the software to 

understand what is a better allocation for them than a simple target date fund. But for young people, the decisionmaking has to be 

so simple and so straightforward. That’s the reason that defaults 

are critical for people in their twenties who are just starting out. 
46 

The CHAIRMAN. Dr. Brown, did you want to weigh in on this at 

all? 

Mr. BROWN. Sure. Yes. I think I agree with most everything 

that’s been said. I will say that, I think it was Ms. Chatzky that 

pointed out that one of the first places people go is to their HR office, to their employer. 

The CHAIRMAN. Yes. 

Mr. BROWN. I think it’s very important to remember in this process that the employer does play oftentimes a very important intermediary role, and, in many cases is a trusted source of information. 

For good reasons, we have put restrictions on what employers can 

do in terms of providing advice and so forth to the employees. But 

I think we need to be careful not to go so far as to make employers 

or plan sponsors, who would like to provide access to unbiased advice, be concerned about doing so out of fear of violating fiduciary 

rules. 

Employers really do play a central role in all of this, and I think 

the more we can do to make that easier for them to pass along useful information, the better. 

The CHAIRMAN. Well, thank you all very much. My time has well 

run over. But, you raise a question about, how about the small employer that doesn’t have an HR department. 

Senator ENZI. That’s right. 

The CHAIRMAN. But, I’ll yield to Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. I’m working on a solution to that. Yes. I’m going to have a bill that will allow small businesses to group together to do a 401(k) plan, so that they can hire 

some expertise that can handle all the problems that come up with 

that. 

Ms. Lucas, in your testimony you mentioned some problems with 

non-discrimination and other tests that have to be done. Could you 

run through a few of those? Just mention them? Problems that employers have to run into in order to be able to do one of these 

401(k)s? 

Ms. LUCAS. Yes. One of the things that was very attractive with 

the Pension Protection Act was the non-discrimination testing safe 

harbor that allowed plan sponsors who used automatic enrollment 

and several other criteria, to not have to engage in non-discrimination testing, which can be costly and difficult for them, and an obstacle for plan sponsors. These safe harbors that eliminate the need 

to do non-discrimination testing is very, very important. 

I think the non-discrimination testing safe harbor was very well 

received. But the way that it was implemented within the legislation was quite conservative, and so you expect that, because people 

could opt out, maybe you would have a pretty high contribution escalation cap, so that people who are automatically enrolled, could 

be escalated to 15 or 20 percent of pay, which is quite a robust 

rate, and if they didn’t like to be escalated up to 15 or 20 percent 

of pay over time, they could simply opt out. Instead, the cap was 

put at a very low 10 percent of pay. Why that seems strange to me 

was that when we did analysis of participants that we saw who 

had actually gone in and proactively selected to choose what they 

would like their automatic contribution escalation cap to be, they 

chose a much higher number than 10 percent. They wanted to be 
47 

escalated up to 15 percent or more. There’s an artificial barrier 

that’s been put in these safe harbors that are actually inhibiting 

people from saving as much as they might naturally want to. 

Senator ENZI. Thank you. As the accountant, I have some more 

technical questions, but I won’t put those out for everybody. But I 

would appreciate an answer from you when we get them to you. 

Professor Agnew, I understand that you ran some focus groups, 

and when they were presented with the normal 3 inches of paper 

that employers have to give employees, that there’s a little bit of 

stress involved, and sometimes they break down crying. I’d like to 

know what you think we ought to do to relieve that stressful situation. What kind of things could we be doing? 

Ms. AGNEW. Well, it was very enlightening. We’ve done a series 

of focus groups for several different projects. I was actually surprised at the reactions when we asked people to express their feelings towards making retirement decisions. If you see in my testimony, there’s a picture at the very end. I know others can’t see it. 

But it’s a little bit disturbing. People obviously are very concerned. 

This picture shows a fellow getting shaved. He’s in a chair, and the 

person shaving has a long knife, but looks very distracted, like he’s 

about to cut his throat. This is how some people, or, many people 

in our focus group are feeling about these things. I think that what 

we learn from these focus groups is, a lot of people just were saying, there are so many different choices, I just don’t know what to 

do. I’d like somebody to help me and to tell me what to do. 

There was also this feeling of mistrust. It was interesting, one 

of our focus groups was asking about target-date funds. One thing 

that you find with target-date funds is, they’re designed that you 

just invest in one target-date fund. You’re going to retire in 2020, 

and so you buy the 2020 fund. But we find, actually, that there are 

many people that invest in multiple target-date funds, or targetdate funds and additional funds. What we’ve learned is that many 

people don’t understand what the target-date funds is. Some did, 

and were actually trying to dial up the risk and were just fine. 

Others had trust issues, and they didn’t want to put it all in one 

fund. They wanted to move it around. A certain level of mistrust 

is a bit healthy, especially in this environment. But if it’s because 

you just don’t understand the product, I think we need to do better 

in terms of explaining these products. Everybody on the panel has 

already mentioned, people have limited time— 

Senator ENZI. Yes. 

Ms. AGNEW [continuing]. And have limited interest. So, we have 

to figure out how to catch them. Once again, going back to the marketers. The marketers know how to get people in 30 seconds to 

think about things that they might not normally think about. By 

engaging them with financial experts, I think we can get important 

messages across. 

Senator ENZI. Well, the Department of Labor has refused to embrace some of the new technologies that could provide more information to people, too. They consider some of the comparison tools 

to be investment advice, and that has some fiduciary duties attached to it, too, that I think we need to solve. I have a lot more 

questions, but my time has run out. 

The CHAIRMAN. Interesting. 
48 

Senator Bingaman. 

Senator FRANKEN. Yes. Thank you all for your testimony. 

The CHAIRMAN. I said Senator Bingaman. 

Senator FRANKEN. Oh. I’m sorry, Senator. 

[Laughter.] 

Bingaman, Franken, they just sounded the same to me. I’m 

sorry. 

[Laughter.] 

Senator BINGAMAN. I’ll jump ahead of you here. 

Senator FRANKEN. You’re ahead of me. 

STATEMENT OF SENATOR BINGAMAN

Senator BINGAMAN. Let me thank the Chairman and Senator 

Enzi for having the hearing. I think it’s very useful. 

Dr. Brown spoke about the Lifetime Income Disclosure Act. Johnny Isakson, Herb Kohl, and I introduced the bill today. I wish all 

members would look at that. I think it’s a very good proposal. What 

it does, basically, is provide the opportunity for us to do the same 

things with regard to 401(k) plans that Congress did in 1989 with 

regard to Social Security. Back in 1989, Congress enacted a provision leading all Americans to receive annually a benefits statement 

from Social Security that tells you how much you can expect to receive each month when you retire. What our bill does is to say we 

should do the same things with 401(k) plans. We should have protections for the employer to hold them harmless, as long as they 

follow the procedures set forth by regulations. I think it’s a very 

good bill. I hope we can get it passed in this Congress. 

Mr. Brown, you spoke about this bill in your testimony. Maybe 

you’d want to make another comment on it. 

Mr. BROWN. Sure. I’m quite supportive of this bill. As I mentioned in my opening remarks, our research suggests that when 

you get people to think in terms of monthly income in retirement, 

they have different preferences. They express different views about 

what’s important to them. I think it’s a more accurate view, in the 

sense that, ultimately, when we’re planning for retirement, that 

monthly or annual consumption is what we’re ultimately saving in 

order to provide for. I think that this act could be a very important 

first step in sort of changing the conversation, and changing the 

way that people think about retirement planning. 

Senator BINGAMAN. Yes. My understanding is that this information changes people’s view of their retirement assets, and in doing 

so, it encourages them to save more, which is one of the big things 

that I think I was hearing from the witnesses we ought to be doing. 

Ms. Chatzky. 

Ms. CHATZKY. That’s absolutely one place where I think it could 

be incredibly useful, but not the only place. Senator Enzi spoke 

about the student loan problem that we’re having in this country 

right now, and the fact that the student loan debt is out of control. 

I believe that if students were shown the monthly pay back amount 

that they were taking on at the time they borrowed, we would 

make big strides to solving that problem, too. 

Senator BINGAMAN. That’s another good suggestion. Let me 

also— 

Mr. BROWN. Could I add one other comment? 
49 

Senator BINGAMAN. Yes. Sure. 

Mr. BROWN. In general, there is a phenomenon known in the behavioral economics literature that people are not very good at being 

able to translate lump sums of wealth into flows of income, and 

vice versa. Ms. Chatzky’s right, that that is a more general phenomenon than what we have just in the context of retirement income. But this is clearly a case where it’s really, really important. 

If you ask people, What would you think if you had $100,000 in retirement? They feel like that’s a lot of money. Then when you tell 

them what that translates into in terms of the actual monthly income that it can provide, suddenly they don’t feel so rich anymore. 

That’s where the incentive to save more comes in. So, I think it’s 

quite important. 

Senator BINGAMAN. Great. 

Ms. Chatzky, you also talked about the Auto IRA bill. Well, 

that’s another bill I hope all Senators will look at. I introduced that 

in the last Congress. We’re going to try to introduce it again, but 

we’d like to get some cosponsors. We think that that bill is designed in a way that does not put a burden on small business, but 

does provide an opportunity for folks that don’t have 401(k)s to still 

put some money away in a retirement account before they actually 

get it in their paycheck. That’s the purpose behind it. I think it 

would be a major step for the American worker. 

Ms. Lucas, there is a T. Rowe Price study on the same issue that 

Dr. Brown was just talking about on the question of savings patterns that people will follow in their 401(k) plans based on their 

knowledge about what this translates into on a monthly basis. Are 

you familiar with that? 

Ms. LUCAS. Well, there have been a number of recordkeepers, T. 

Rowe Price among them, who have done an excellent job of providing projections for participants for their retirement needs. So, 

you’d look on their Web site. It might be on their statement. It tells 

you, if you continue to save at this level, given what we know 

about you, at retirement here’s what it will translate into monthly 

income. It might even have a gap analysis on it in case you are not 

saving enough. It might say, you need to save X amount more in 

order to reach a 80 percent income replacement level. So, there’s 

a lot of good work that’s already being done, very sophisticated 

work. It would be my hope that whatever the bill is that is being 

proposed would also provide a fiduciary safe harbor for this type 

of analysis that’s already being done by many of the recordkeepers. 

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

[Prepared statement of Senator Bingaman follows:] 

PREPARED STATEMENT OF SENATOR BINGAMAN

I would like to thank Chairman Harkin and Senator Enzi for 

convening this afternoon’s hearing, to highlight how insights from 

behavioral economics can be applied to raise our Nation’s retirement savings rate. 

As this committee is well aware, defined benefit pension plans— 

to which employers make regular fixed contributions—have become 

relatively rare. So those who receive any form of workplace retirement account are increasingly offered the opportunity to contribute 
50 

to defined contribution plans, like 401(k)s, to which their employer 

may or may not provide a matching contribution. 

But the shift from DB to DC plans means that plan participants 

need to be even more proactive in planning for their retirement. 

Right now, 401(k) plan statements typically provide a total account 

balance, but not a monthly income equivalent. This leaves many 

participants unprepared to evaluate whether they are saving adequately to maintain cost of their current standard of living in retirement. Take for instance a 55-year-old secretary at a law firm 

in Albuquerque with a $75,000 balance in her 401(k). That balance 

may be significantly larger than her annual salary. But while she 

may think that is enough to carry her through retirement, in reality, even when combined with Social Security, that $75,000 probably will not last long enough. We need to ensure that she has the 

benefit of full information. 

And to address this challenge, I am pleased to have joined today 

with our fellow committee member, Senator Isakson, as well as 

with Senator Kohl, to reintroduce the Lifetime Income Disclosure 

Act. Our bill would require DC plans annually to include ‘‘lifetime 

income equivalents’’ on benefit statements they already provide 

employees. A lifetime income equivalent is the monthly payment 

that would be made if the employee’s total account balance were 

used to buy a guaranteed lifetime income product that begins at 

the plan’s normal retirement age. 

In 1989, Congress passed legislation that has resulted in all 

Americans receiving an annual Social Security benefit statement, 

which informs them how much to expect in monthly benefit payments at retirement. Our bill would round out the retirement income picture. Knowing the amount of monthly income they can expect from Social Security and their DC plan will help employees determine whether they are on the path to a secure retirement. Undoubtedly, many will decide to dial up their contribution rates. 

We have worked hard to ensure that this proposal does not impose a burden or potential liability on employers. So the act directs 

that within a year, the Department of Labor must issue assumptions that employers may use in converting a lump sum amount 

into a lifetime income equivalent. DOL would further be directed 

to issue, within a year, a model disclosure. And the act also provides employers with a clear path to avoid any liability whatsoever. 

Mr. Chairman, our proposal is a small step, but one that can 

make a significant difference in beginning to tackle a key policy 

challenge. I am pleased that the act enjoys the support of many 

leading voices on retirement policy, from AARP to the National 

Women’s Chamber of Commerce to American Society of Pension 

Professionals and Actuaries, the Nation’s leading association of retirement plan professionals. And I look forward to working with 

you, Chairman Harkin, with Senator Enzi, and with all of our colleagues on this committee to enact this common-sense approach 

into law. 

Senator ENZI [presiding]. Senator Murkowski. 
51 

STATEMENT OF SENATOR MURKOWSKI

Senator MURKOWSKI. Thank you, Mr. Chairman. Senator Bingaman, I am looking at the legislation that you have introduced, the 

Lifetime Income Disclosure Act, as one way to again help with this 

financial literacy. I guess, a question that I would ask of you, Mr. 

Brown, and something that I’m still looking into, is this concern 

about any associated liability that may attach about assumptions 

that are made. Can you just speak to that as an issue? 

Mr. BROWN. Sure. I’d be happy to. 

I always think it’s very important to step back and remember 

that plan sponsors are not under any obligation to offer a plan in 

the first place, and that under current law they’re not obligated to 

offer a lifetime income option. Anytime that we impose fiduciary 

risk or a liability on them we’ve run the risk, no matter how well 

intended the regulation is, we’ve run the risk of providing a disincentive for them to be providing these plans in the first place. So, 

I think it’s very important that we keep an eye on that at all times. 

I think, in this context I think it can be easily handled in the 

sense that if, for example, the Department of Labor were to lay out 

a very simple formula or a table that plan sponsors can look up 

and simply say, well, if an individual has, say, $100,000 in their 

account, here is the amount that they can now report to that individual as an example of the monthly income that they would receive, and that as long as a plan sponsor follows that, it essentially 

provides them a safe harbor so that they are protected from those 

fiduciary concerns. 

However, I do agree with the prior comment as well, that there 

are a number of companies out there that are actually doing a very 

sophisticated job, probably a more sophisticated job than we would 

expect through a safe harbor provision. I think it’s also important 

that we allow those companies to continue to do that as well. 

I do think it’s an important concern, but I think it’s one that 

could be quite easily addressed in the legalization. 

Senator MURKOWSKI. Let me ask you this as a general question, 

some discussion about financial literacy amongst young people, and 

how we effectively reach out to them. I think we’re all learning the 

benefits, certainly, of the social media and Facebook and Twitter, 

and some of the other methods of communication, videos out there 

on YouTube. Are we using these tools in any kind of an education 

effort to reach out to the kids that are my kids age, that really 

could care less at this point in time about their future retirement? 

What’s available to them? Ms. Chatzky. 

Ms. CHATZKY. I have a 16-year-old and a 13-year-old. 

Senator MURKOWSKI. So, you’re engaged. 

Ms. Chatzky. So, I’m in there. 

Senator MURKOWSKI. Yes. 

Ms. CHATZKY. One of the things that I know from dealing with 

my own kids and their friends is, you have to get them where they 

are. You have to reach them at a point where they actually have 

a reason to want the information, even if their reason isn’t the 

same as your reason. I have believed for quite some time that a 

very effective way to move some financial education through the 
52 

channels would be to put 10 to 20 financial education questions on 

the driver’s license permit exam. 

[Laughter.] 

Senator MURKOWSKI. There you go. 

Ms. CHATZKY. Well, and it makes economic sense, because auto 

insurers price based on your credit score. So, if we could work together with them to show that these kids who pass this section of 

the exam are more likely to have better credit scores simply because they understand the information, then parents who pay 

those premiums would have an incentive to get their kids to study 

for that portion of the test. 

Senator MURKOWSKI. Interesting. 

Any other suggestions, Ms. Agnew? Got any great ideas? 

Ms. AGNEW. Well, I think that’s a fantastic idea. You definitely— 

I have three children, and you have to get them where they are. 

I do think that there are ways we might be able to integrate it into 

the school, but I’m not saying another requirement for the schools. 

I was talking to a superintendent of the school district yesterday, 

and they’re tight-staffed, and to ask a teacher to come up with 

more to teach in a limited amount of time is a lot to ask for. But 

I think there’s a lot that could be done with people in academia 

that could put together some off-the-shelf lessons that could be integrated into the school, that could pool and hit on standards that 

need to be met in math and social studies. 

I think that there are ways that we in academia can help the actual schools. Make it fun, though. It has to be fun. Worksheets 

don’t work for 7-year-old boys,. 

Senator MURKOWSKI. Well, and I know my time is up. But, I 

think an important thing to recognize is, we can’t talk about investments unless you’ve saved for it. We save pennies with the kids 

when they’re little, but then when they hit 17 and 19, like my boys 

are, they’re saving for the car, and beyond that, there’s not a lot 

that they are saving individually. As parents, we try to set the example—save for college, save for their future. But are we doing a 

better job generally with young people in encouraging them to 

save? I don’t think that we are. But do the statistics prove me 

wrong? 

Ms. Lucas. 

Ms. LUCAS. I’d like to go back to automatic enrollment again. The 

amazing thing about automatic enrollment is that, regardless of demographic group—young people, old people, low salary workers, 

high salary workers, across different ethnic groups—the opt-out 

rate is almost identical, and so we see people in their twenties who, 

if they were to save on their own, maybe half of them or less would 

save. Under automatic enrollment, closer to 90 percent are saving, 

just because of inertia. They are in the plan, and somehow, even 

though they’ve said, ‘‘Oh, I can’t afford to save.’’ When it’s taken 

out of their paycheck before they have an opportunity to spend it, 

suddenly they can afford to save. 

Senator MURKOWSKI. So, we help them along initially with the 

enrollment. 

Ms. LUCAS. I think automatic enrollment for young people is 

really one of the most effective ways to get them to save in the 

plan. 
53 

Ms. CHATZKY. We can do the same for our kids. If, it’s parental. 

It’s not systematic. If we want our kids to be savers, then we take 

part—saving money is no fun, but having money saved is a lot of 

fun. So, we force them into a position where we take part of their 

allowance, and that goes into savings. And when they see that 

money piling up, all of a sudden we can feel good about that. 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

The CHAIRMAN [presiding]. Thank you, Senator Murkowski. 

Senator Franken. 

STATEMENT OF SENATOR FRANKEN

Senator FRANKEN. Thank you, Mr. Chairman. 

Ms. Chatzky, Ms. Agnew, you both have been talking about financial literacy, and possibly teaching that in school. This committee is reauthorizing ESEA this year, we hope. I’d just like to 

ask you some questions about how to do that. You’ve been talking 

about it a little bit. I know we don’t want to put another burden 

on people and require them to do another thing. But this seems to 

be a good—I like your idea about putting it in math. I liked your 

idea about putting questions about financial literacy for your driver’s permit. 

I think we should be teaching home ec again, and home ec 

should really be home ec. It should be home economics, including 

how to cook healthy food, and fruits and vegetables, and the whole 

panoply of home economics and family economics. 

You know, we’re talking today, really, about defined contribution 

plans because the defined benefit plans are basically going away. 

One, I just wanted to touch on Social Security a little bit, because 

Social Security is still a defined benefit plan. What percentage of 

people rely on Social Security, Ms. Chatzky, for almost all, or all 

of their retirement? 

Ms. CHATZKY. I don’t actually know the numbers off the top of 

my head. 

Senator FRANKEN. Does anyone? 

Ms. CHATZKY. Thirty-seven. 

Senator FRANKEN. Thirty-seven percent. OK. And compared to 

other defined benefit pensions in this country, how’s Social Security 

doing in terms of solvency, would you say? 

Ms. CHATZKY. I would say there are an awful lot of people out 

there who are convinced that it won’t be there for them. 

Senator FRANKEN. That doesn’t answer my question, though, 

really. 

Ms. CHATZKY. If you look at the numbers, it’s 2037 that it’s supposed to, the trust fund is supposed to run out of money. At least, 

that’s the last number that I saw. So, not well. 

Mr. BROWN. Senator, can I jump in here? 

Senator FRANKEN. Yes. Please. 

Mr. BROWN. Yes. The difficulty in comparing Social Security to 

either private sector or public sector defined benefit plans is that 

both in the public and private sector, either by choice or by requirement, they’re trying to fully fund their pensions. Social Security’s 

not really designed as a fully funded retirement system. It’s a payas-you-go system, where today’s retirees are supported by the tax 

payments of today’s workers. So, the difficulty facing Social Secu-
54 

rity is the fact that, because we don’t do a lot of pre-funding, just 

the demographic changes that we have coming make that a difficult system to sustain without having tax rates rising. In a sense, 

even poorly funded State and public defined benefit plans are better funded than Social Security, in the sense that they actually 

have made an attempt to pre-fund the benefits. 

Senator FRANKEN. Right. But, this was started in 1935, and has 

worked in this system. In 2037 Social Security doesn’t run out of 

money, so, that’s the day until which everyone is guaranteed the 

full benefit. And at that time—you said it exactly right—you’re 

paying for your parents. It’s a generation legacy that started then, 

right? 

Mr. BROWN. That’s correct. 

Senator FRANKEN. Let me talk about annuities a little bit. We 

have some testimony in a Special Committee on Aging hearing that 

said that most seniors actually believe they’re going to live a shorter period of time than they actually are, actuarially. Is that correct? 

Mr. BROWN. There have been a number of academic studies done 

comparing expectations to actual survivor tables. What we find is 

that, on average, that’s right. But what that disguises is, a large 

number of Americans are overly optimistic, and a large number 

overly pessimistic. So, there are a lot of people who fall under the 

category. There are others on the other side. 

Senator FRANKEN. I know I’m out of time. I just want to ask one 

question. Can I ask one more question about annuities? Is distrust 

of financial institutions, that they’re going to be there 20 years 

from now, a big part of people’s reluctance to buy annuities? 

Mr. BROWN. Yes. The concern about what economists call 

counterparty risk, the concern of whether the insurance company 

will be there, is something that we think is driving some consumers’ aversion to annuities. Not a lot of empirical evidence to 

support just how important it is, but I certainly believe that it is 

a factor, and ever more so after the most recent recession and financial crisis in which some of the longstanding financial institutions ceased to exist. That is an issue that, there are some ideas 

out there about how to address it. But it’s certainly one that needs 

some thought. 

Senator FRANKEN. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator BLUMENTHAL. 

STATEMENT OF SENATOR BLUMENTHAL

Senator BLUMENTHAL. Just, first, about appealing to potential 

young drivers. I don’t know whether you’ve been through the driver’s application process with any of your children, but it can be a 

very trying time, and so, focusing their attention on retirement 

then may not be the best way to do it. 

[Laughter.] 

Having been through the process with four children. 

I want to raise a larger issue which concerns the confidence people have in the financial system these days. Having just been 

through a deeply traumatic experience, many of them losing their 
55 

life savings, I’d be interested in your perspective on, No. 1, isn’t it 

necessary to restore confidence in this system which has really betrayed so many of our seniors, as well as other age groups? In particular, to pursue, perhaps even more aggressively some of the regulatory reforms that the Congress adopted during the last session? 

Because many of these regulations, obviously, will be issued in the 

next 6, 12 months. 

Ms. LUCAS. I’d be happy to address that. At Callan Associates we 

have an index called the Callan DC Index, in which we track the 

movement of money across participants’ plans. And while, certainly, participants did move money, more often than not, toward 

principal preservation vehicles during the financial crisis, we did 

see that the money was remarkably sticky within target-date 

funds. They were not moving money out of target-date funds. And 

in fact, every quarter throughout the financial crisis, there was net 

inflows into target-date funds. Further, there’s very little evidence 

that people reduced their savings levels during the financial crisis. 

So, I think you can look at 401(k) participants’ inertia as a very 

positive thing during times like that, that certainly they do not 

tend to react in a large number, they stick with their allocations 

and be very willing to continue to look to the long term, as opposed 

to having knee-jerk reactions. 

Senator BLUMENTHAL. Do the rest of you concur on that view? 

Ms. AGNEW. I do. I’ve done some research in inertia, and it is a 

fact that in some cases it actually is helpful with people not reacting. One study I did do using some data, though, did show that 

there was a very, very small portion of people that did have reactions. The problem was, inertia then took hold and they never 

switched back their allocations. So, you know, I do agree, as long 

as the institutions are acting correctly, I think it’s good to instill 

confidence in people in the institutions. 

Senator BLUMENTHAL. The other trend that, obviously, is at play 

here is the higher ratio of debt to wealth. I wonder if you could 

comment on whether you’ve seen any impact as a result, whether 

there’s any research that shows any impact resulting from that 

current economic trend. Obviously, the debt ratios are coming down 

now. But, it’s still an important factor. 

Ms. CHATZKY. We know as consumer debt picked up the savings 

rate went down. I think if you look at whether it’s mortgage debt 

or auto loan debt or credit card debt, debt is really a savings killer. 

Particularly, that high interest rate credit card debt. There are a 

number of pieces of research that would support that. We have 

seen the savings rate come back a bit over the last couple of years. 

I think we want to get on that band wagon, and we want to encourage people to soft-pedal the plastic, and really continue to put more 

away, if that’s the path that they’ve gotten themselves on. 

Senator BLUMENTHAL. So, soft-pedaling the plastic really is profoundly important, not only in an immediate economic sense, but 

also in terms of the long-term trends that you’ve identified? 

Ms. CHATZKY. I believe that it is. We’re starting to see, particularly in the younger generation, more of a reliance on debit, less 

of a reliance on credit, a shift toward the other products in the 

marketplace. Again, not enough education out there about what are 

the differences, what are the pros and the cons of all of these tools, 
56 

because that’s what they really are, and how to use them wisely. 

But I think things are moving in the right direction. 

Senator BLUMENTHAL. My time is up. But I want to thank you 

for being here today and giving us this very, very important and 

helpful testimony. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thanks, Senator Blumenthal. 

Senator Whitehouse. 

STATEMENT OF SENATOR WHITEHOUSE

Senator WHITEHOUSE. Thank you, Chairman. 

First of all, thank you for what you’ve said about the need to 

clarify for folks who are looking at retirement what their real situation is, and give people a better appreciation of what they have 

to look forward to. 

I noticed in Ms. Chatzky’s testimony, you said that 50 percent of 

even, I think your phrase was ‘‘good-earning baby boomers and 

Gen-Xers’’ will run out of money in retirement. Some of the other 

figures you used were that 41 percent of Americans who are in the 

lowest income quartile, the lowest income, 25 percent, would run 

out of money in 10 years. Even in the top 25 percent income bracket, that 5 percent would run out money in 10 years, and 13 percent 

would run out of money in 20 years. So, even for top earners I assume that actuarially somebody who’s a top earner can be expected 

to live, on average, more than 20 years after retirement, correct? 

Ms. CHATZKY. I think actuarially, I mean— 

Senator WHITEHOUSE. That was the breakdown. 

Ms. CHATZKY [continuing]. I don’t know where the breakdown is. 

But I would assume, with better access to healthcare and the access to the best doctors, sure, those numbers would go up. 

Senator WHITEHOUSE. So, for those people who are running out, 

those 50 percent of the population, their only safeguards at that 

point are Social Security and Medicare, correct? 

Ms. CHATZKY. Correct. 

Senator WHITEHOUSE. Without them, what? 

Ms. CHATZKY. They move in with the kids. 

Senator WHITEHOUSE. I’m sure a lot of kids will be thrilled to 

think about that. 

[Laughter.] 

At the time that they’re running out, 10 years or 20 years after 

their retirement, do you have any information on what their earning capacity is at that point? 

Ms. CHATZKY. I don’t. This is an EBRI study that I was citing. 

I’d be happy to forward it to your office. 

Senator WHITEHOUSE. Presumably, it’s pretty negligible. 

Ms. CHATZKY. Twenty years out, yes. 

Senator WHITEHOUSE. Say, you’ve retired at 65, you’re now 85. 

Ms. CHATZKY. I would say negligible. 

Senator WHITEHOUSE. It’s a tough time to be asked to go back 

into the job market, isn’t it? 

Ms. CHATZKY. Yes. 

Senator WHITEHOUSE. So, it reinforces how vital Social Security 

and Medicare are to our safety net and to assuring that Americans 

have a decent standard of living in their old age. 
57 

Ms. CHATZKY. Absolutely. 

Senator WHITEHOUSE. All right. I appreciate your testimony very 

much. Thank you all. 

The CHAIRMAN. Thank you, Senator Whitehouse. 

Senator Merkley. 

STATEMENT OF SENATOR MERKLEY

Senator MERKLEY. Thank you very much for the testimony from 

all of you. This is near and dear to my heart because when I was 

the director of a non-profit I wanted to encourage all my employees 

to start with the assumption that they would sign up and then decide later if they wanted to opt out, knowing from a variety of 

sources that they’re much more likely to save especially if they 

start savings early in their career. We had a lot of young employees 

who we would help over the long term. 

I have had one concern about the default sign-up. That is, how 

a company goes about setting out the default allocation of the 

funds that are being saved. We had a company in Oregon, PGE, 

that had a situation where the employees’ funds were largely invested in Enron stock, and there was a lot of risk to that concentration in a single area. So, are there any guidelines for companies 

that are kind of best practices about starting? If they’re starting 

with a default option—and I understand they have to give 30 days 

notice to the employee, and give the employee an opportunity to 

change it—is there any kind of best practices guideline that encourages companies to start with, a diversified portfolio, or in some 

other way, reduce the risk profile of the choice? 

Ms. Lucas. 

Ms. LUCAS. I would like to address that. I think one of the key 

features, and most important features, for a defined contribution 

perspective of the Pension Protection Act, was that it did provide 

a safe harbor called the Qualified Default Investment Alternative 

safe harbor, for plans that wanted to adopt automatic enrollment. 

It was hugely successful. It outlined that there are three possible, 

qualified default investment alternatives, target-date funds, asset 

allocation funds, and managed accounts, all of which are welldiversified investment vehicles. Today, according to a recent survey 

that I saw, about 70 percent of plan sponsors are using target-date 

funds, highly diversified, well-managed funds for the qualified default investment alternative. If you look at prior to that, sometimes, indeed, company stock was the default, often it was stable 

value. So, plan sponsors were simply putting people in stable value 

at a 3 percent contribution rate, and then saying, ‘‘Good luck getting to your retirement.’’ So, this has been a very big improvement 

in getting people to save in a well-diversified plan. 

Senator MERKLEY. When you speak about safe harbor, essentially, let me describe what I think you mean, and then you can 

clarify if that’s right. Companies were told, you’re immune from 

lawsuits if you put folks into this structure as a default option. Additional legal protection. Is that what the safe harbor means? 

Ms. LUCAS. Certain legal protections. The plan sponsor is liable 

for the selection of the fund, but the individual is responsible for 

any losses within the fund. So, the plan sponsor is not liable, as 

long as it’s a prudent fund, for losses within that fund. It doesn’t 
58 

immunize them against lawsuits, but it forms a defense within a 

lawsuit. 

Senator MERKLEY. Anyone else want to come in on this? 

Earlier you addressed teenagers and how to do better financial 

education with teenagers. I wanted to ask you to address either the 

challenge of financial education for low-income families, or financial education specifically for women, whether there is any distinction, or any special strategies or, for that matter, special strategies 

for men that we should be thinking about? 

Ms. CHATZKY. I’ll address the women question. I do think, and 

it’s definitely controversial, because we know that stocks are not 

pink or blue, right? Money’s green. It’s definitely a controversial 

proposition. But, women are behind the 8 ball, because we live 

longer. We’re the ones who still take breaks from the workforce to 

care for the kids and to care for older parents. As a result, our retirement balances, even if we have the same starting salary, tend 

to be lower than those of men. So, an argument should be made 

that women almost need the education more, to a greater degree. 

If you look at survey after survey, you’ll see that women are not 

feeling prepared at all. 

There is an argument to be made for educating women in groups 

of women, that there are certain comfort zones where people feel 

more able to receive the information, more able to take it in. I believe that that, almost a Weight Watchers type model where people 

come together and they have a group, and they discuss the issue. 

Whether it’s in churches, which have been a great place to receive 

this information over years, or schools, or other sorts of community 

outposts is, might be helpful. If we could come together on a single 

curriculum that would provide the information, through an organization like Jump$tart, or through the government, I think that 

would be very, very helpful. Because right now there are so many 

forces working toward the same direction, the same mission, but 

competing endeavors that a lot of times we find that we’re getting 

in each other’s way. 

Mr. BROWN. Could I throw something in here? 

Senator MERKLEY. Yes. 

Mr. BROWN. Thank you. There undoubtedly is important heterogeneity within the population in terms of how effective, and the 

type of financial education that’s needed. This may sound a little 

self-serving coming from an academic researcher, but I think one 

of the important things that I would stress in all of this is how important it is to have well-designed research to actually assess the 

effectiveness of any financial literacy intervention. 

We do know that financial literacy programs can be effective, but 

they also can be quite expensive, and it’s important if we have to 

stretch resources to dedicate to this that we really study that. Oftentimes, you know, studies will find that it’s very simple things 

that get in the way of a program being effective. Dr. Agnew mentioned earlier the Financial Literacy Research Centers that are 

sponsored through Social Security. They’re doing a lot of work in 

this area. There are other organizations doing that as well. I just 

thought that it’s really critical as we move forward in this area. 

Senator MERKLEY. Thank you very much to all of you. My time’s 

expired. I very much appreciate your testimony. 
59 

The CHAIRMAN. Thank you, Senator. 

Ms. Chatzky, going back to a point that was raised earlier, I 

think by Mr. Franken, the Social Security trustees say that by 

2037 the Social Security Trust Fund will then only be able to pay 

out 75 percent of benefits. It will not go broke. 

Ms. CHATZKY. Right. 

The CHAIRMAN. And that 75 percent continues, and I don’t know 

the answer. I think it’s 25 years or 30 years until all the baby 

boomers die off, then it bounces back up slightly. 

Ms. CHATZKY. OK. 

The CHAIRMAN. To the response that you gave about a lot of 

young people don’t think it’s going to be there. I run into that in 

town meetings all the time, and when I talk to young people, ask 

them if they believe that Social Security will be there for them, and 

not very many people raise their hands. 

I always like to inform them that, I ask them if they believe that 

the United States of America will exist, will even exist when 

they’re that age. Every hand goes up. Well, I say to them, if the 

United States of America exists, your Social Security will be there 

for you, because it is the only retirement system backed by the full 

faith and credit of the U.S. Government. It has to pay it out. So, 

therefore, if the United States of America exists, Social Security 

will have to pay it out, because it is backed by the full faith and 

credit of the U.S. Government. None of these other retirement systems are. Financial institutions can go bankrupt, you can lose your 

money, all kinds of things. They’re not backed by the full faith and 

credit of the U.S. Government. That’s why I’ve always been such 

a strong supporter of a basic social safety net that is backed by the 

strength and power of who we are as a nation. And that’s what Social Security is. 

Over and above that, you need some retirement security to have 

a little bit better lifestyle. You mentioned, correctly, that, I think, 

right now it’s around 35 percent— somewhere in that neighborhood—of present retirees, depending on Social Security for 100 percent of their retirement income. I think a lot of people in that regard probably wish they could have saved more when they were 

younger. But when you’re young, you have a short horizon. The horizon is very short. So, that’s why this whole idea of financial literacy, of getting young people involved in automatic savings as 

early as possible in their lifetimes, where you build up a culture, 

a culture of saving, is so important. We’ve just not had that very 

much in our country. We’ve become more a culture of debt than of 

savings. So, I’m hopeful that, again, what, or, if I’ve heard all of 

you, Dr. Brown, everybody say is that we do need to have a better 

sense of—you say financial literacy, but, what it means to save 

money, and what it means to save, not just for wealth accumulation, but what it means for how you will live when you are in the 

later part of your life. 

I’m always looking for ways of, that we can promote, or 

incentivize at the earliest possible time in life, that you could, you 

would have something that all the time would remind you that 

you’re putting money away for retirement. 

I would throw one out for your consideration. That every single 

dollar of Federal money that goes out, or State money, or local tax 
60 

money, anything that goes out, from the public treasury of any 

sort, that goes out in any form of a payment to any individual, that 

right off the top, a certain portion is taken and is put into a retirement account. Not Social Security. I’m not talking about Social Security. I’m talking about a 401(k) type of a system. And so, that 

could be everything from your local Head Start recipient, at the 

earliest possible age, to maternal and child health care programs, 

to education, of course, all kinds of things. So that right off the top 

you know that a certain amount of that money is going to be put 

into a retirement system. As I said, not Social Security. I’m talking 

about over and above what Social Security is, which is not, as 

someone pointed out, it’s not a retirement saving. It’s a 

generational transfer of money, is what Social Security is. 

Again, I go off on this vein only to encourage you to help us start 

thinking about different ways, I’m looking for new ideas on how we 

can start this younger generation, knowing that whenever they 

make a buck, some of that is put away, automatically put away, 

for retirement. How we do it in concert with the Constitution. It 

has to be constitutional. But somehow starting this at the earliest 

possible age. Like I said, there may be ideas out there. Dr. Brown, 

maybe you have some thoughts. We need to have the best ideas on 

how we start this culture of savings in our country. 

I don’t know if any of you have a response. I went over my own 

time just talking. Didn’t even ask a question. But do any of you 

have any responses to that, or any other ideas on starting this, either now or later on? 

Well, with that, I’ll turn to Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. We were talking earlier 

about driver’s licenses and financial literacy. I’m usually in Wyoming on the weekends. I usually get there on Friday and quite 

often talk to some school classes. And one of the things that fascinates me is finding out how much they think they could make 

when they’re in junior high, if they get a high school diploma and 

go into the job market. Most of them expect that they will make 

$50,000 a year. I take copies of Parade Magazine with me. They 

do, I think it’s a semiannual review of what real people make. And 

that’s usually quite an eye-opener to find out that some people in 

real estate make $3,000 a year. Of course, they include the sports 

figures, too, so there are still going to be kids out there dribbling 

a basketball so they can make $25 billion a year. But that’s been 

a big help in financial literacy. 

It’s kind of interesting how this committee has changed, because 

before the downturn one of the things we were concentrating on 

was how to keep people in the job market longer so that all the jobs 

could be filled. Of course, now we have a surplus of workers compared—although the front page of the paper, the Washington Post, 

yesterday pointed out that there are a lot of jobs in the United 

States, but we don’t have the skills to match up to them. So, I’m 

going to put in a plug for getting my Workforce Investment Act 

passed. 

[Laughter.] 

That’s one of the ways for them to stay viable, which is if they 

stay in the market longer. 
61 

Ms. Chatzky, you said that people aren’t saving enough, and I 

think that everybody would agree with you on that. What strategies would work best for someone who has been in the workplace 

a few years? I’m not talking about those 8th graders that I talk to, 

or the seniors, but the ones in between. What retirement savings 

advice would you give to young workers? How much of their paychecks should they be putting away? 

Ms. CHATZKY. I tell them, something. Because you have to start 

someplace. Although I completely agree in theory with Lori’s suggestion to increase the default to 6 percent, I worry that might, I 

think it needs to be tested and to see where people feel like the 

number is so high that they would start opting out. If you’ve tested 

it already, and I don’t know, please forgive me. 

People need to start where they feel that they can start, and 

then they need to ratchet it up from there. I would love to see everybody putting aside 10 to 15 percent, including what sort of 

match, whatever match they’re getting from their company. I think 

if we look at the data, that’s the range that shows to work. But 

people start to feel good about their savings when they’re putting 

away 5 percent, we know, and they start to feel that it’s possible 

when they put away something. 

Senator ENZI. Ms. Lucas. 

Ms. LUCAS. I did test it. 

[Laughter.] 

There is no empirical evidence at all that opt-out rates increase 

when the automatic enrollment default is 6 percent versus 3 percent. Opt-out rates are the same. I think plan sponsors are, harbor 

the myth that opt-out rates will increase, but we’ve done tests on 

it, and we see no empirical evidence. 

I’d also like to say, you know, I have done a number of surveys 

of participants in 401(k) plans, asking them, ‘‘Why don’t you save.’’ 

They invariably say, ‘‘Well, I can’t afford to save.’’ Then you keep 

kind of going through the questions and asking them a variety of 

different questions, and it becomes apparent that the reason they 

don’t save is not because they can’t afford to save, but because they 

don’t want to. They have other priorities. They want to spend. Perhaps they want to save for other things. It’s not that they don’t 

have the wherewithal to save. It’s just, it’s not a priority. That’s 

why you can increase the automatic enrollment default. You can 

get, they can, actually, save more, and not suffer from not being 

able to make ends meet. 

Senator ENZI. I think you suggested, too, that with the optimal 

escalation, that the top level ought to be raised, too. But here’s a 

little different question. Is there an optimal level for employer contributions? Has anybody had any experience with that? What encourages the people the most to get into that? 

Ms. LUCAS. I could answer that. What we find is that, as long 

as the employer contributes something, that has a huge impact. It 

almost doesn’t matter whether it’s 25 cents on the dollar or 50 

cents on the dollar, as long as there’s a contribution. 

What does make a big impact is the level at which the contribution ends. So, if they only contribute, if they’re doing 50 cents on 

the dollar up to 6 percent, people will contribute up to 6 percent. 

If it’s a smaller amount, up to 8 percent, they will contribute up 
62 

to 8 percent. So, there’s a huge influence in terms of the level at 

which the employer contribution ends. We often encourage employers to have very high levels of—it can be economically neutral for 

them, but get the level of the employer contribution to a very high 

level of pay deferral. 

Senator ENZI. Thank you. And for all of you, are there any viable 

advice options, viable places to get investment advice? I know one 

of the automatic things would be at universities, but a lot of people 

don’t go to the university, don’t start making those decisions until 

after they’ve been to the university, and maybe miss that. So, what 

are some viable options for investment advice? 

One of the problems that businesses run into is whether, when 

they elicit those investment advice places, whether they’re going to 

be liable for the advice that their employee gets. 

But putting that part aside, what are the good sources of investment advice? 

Ms. CHATZKY. Sorry. I think it’s the job of the employer, it should 

be the goal of the employer to make the least biased sources of that 

investment advice available. The Morningstar Ratings, for example. If you’re offering your employees mutual funds, that would 

allow them to compare them like they compare one car against another car when they’re shopping. 

There are a number of—Value Line—and a number of different 

organizations that do these unbiased comparisons. I think just putting them out there in as simple and abbreviated form as possible, 

while still containing the necessary information, would be helpful. 

Senator ENZI. OK. Anyone else? Yes. 

Ms. LUCAS. I would like to offer that what we’ve experienced 

within the defined contribution system is that there’s been many 

attempts to offer advice, online advice, and other types of services, 

and the utilization has been quite low. And part of it is just a lack 

of confidence that people have in really understanding the advice 

and having confidence that if they implement it, it will be good advice. So, where we’ve seen more, actually, more success, is through 

managed accounts, when not only has the advice been given, but 

discretionary control has been taken of the account, and the advice 

provider actually manages the account on behalf of the participant. 

That’s been proven to be much more effective. It actually changed, 

in, getting people to have confidence in the advice that’s given. 

Senator ENZI. Ms. Agnew. Dr. Agnew. 

Ms. AGNEW. Yes. May I also say, I did a research project where 

I compared people that used online advice and managed accounts, 

and we found that managed accounts were appealing across demographic groups. But typically, with online advice, it’s people with 

higher salaries that were interested in using it. Basically, people 

are using it that understand what they’re doing and they’re looking 

for someone to say, ‘‘You’re on the right path.’’ So, it’s supporting 

what you have just said. 

Senator ENZI. Thank you. 

I would mention that that takes me back to one of the ideas that 

I mentioned about being able to pool a bunch of small businesses 

to get the investment advice, because Morningstar, for example, is 

expensive for a small business to be able to purchase. 

Ms. CHATZKY. So are managed accounts. 
63 

Senator ENZI. Yes. Yes. 

The CHAIRMAN. Senator Blumenthal. 

Senator BLUMENTHAL. Thank you, Mr. Chairman. I would just 

add a footnote to your comments, which I found very pertinent, 

about welcoming new ideas, particularly, ideas aimed at not only 

men and women, but boys and girls. Because I think that, as one 

of you suggested, there’s never too early an age to begin. In fact, 

I think a very strong argument could be made that the driver’s license age is almost too old, or maybe there’s no place to get them 

at that age that will work. Maybe if you lose them at an early age, 

you don’t reach them until some later point in their lives when 

they really come back to earth. So, any ideas you have about that 

age group, I personally would very much welcome. 

The CHAIRMAN. Anything off the top of your head right now? 

Senator BLUMENTHAL. Thank you, Mr. Chairman. 

The CHAIRMAN. Well, thank you. 

I really don’t have any more. I really appreciate your testimonies 

and your expertise, and your views on this. 

I’m anxious to see your legislation. I’d like to, because I think it 

has a lot of merit. I always worry about people that only have 2, 

3, or 4 employees. They can’t do this kind of stuff. So, if you can 

get consortiums of them together, that seems to make good sense. 

Any closing comments or observations by anyone? 

Dr. Brown. 

Mr. BROWN. Yes. I appreciate the opportunity to speak here 

today, and I think you were asking a lot of very important questions. I look forward to continuing our communication in these 

areas. 

The CHAIRMAN. Thank you, Dr. Brown. 

Ms. Chatzky, any last thing. 

Ms. CHATZKY. I would very much echo that thank you for inviting me here today. It’s been very interesting. 

The CHAIRMAN. Thanks for being here. 

Ms. Lucas. 

Ms. LUCAS. Thank you. I guess the one comment I’d like to make 

is that, another area that is of great concern for the overall retirement income adequacy of participants is plan leakage. Not only 

getting money into the plan, but keeping it there through preventing excessive loans, withdrawals. 

The CHAIRMAN. Oh, yes. 

Ms. LUCAS. I think that that’s another very important area that 

needs further investigation and further support. 

The CHAIRMAN. Well, I’m getting ready to gavel this shut, but 

you just opened up a whole new avenue, and that’s the whole idea 

that people that get in stressful situations borrow the money out. 

My professional staff has told me it stayed pretty stable over the 

last 20 years. But, during the recent economic recession there was 

an uptick in loans. But, before that it was pretty stable. But it is 

a concern. People borrow the money out of their plan, and then 

they either have to pay it back, or they pay taxes on it. And the 

taxes are less than paying it back, so you pay the taxes, and then 

your plan’s depleted. I think that’s part of what you were getting 

at. 

Anything else. 
64 

Dr. Agnew. 

Ms. AGNEW. Well, many of the Senators asked the question, 

where can people get information? 

I think one thing that we do need is a trusted source that people 

can go to. I know in New Zealand they have a Web site called sorted.org. Many New Zealanders use it, actually, to get information 

about different life and financial decisions. I do know that there 

are certain groups with the Financial Literacy Research Consortium that are working to build a Web site like that, that would be 

engaging people, and that people would want to go to. I think that’s 

very much a worthwhile effort and should be pursued. 

The CHAIRMAN. Thank you all, very much. 

The record will stay open for 10 days for any comments or further questions. 

This is an area of deep interest to this committee on both sides. 

And, that is, this whole idea of retirement security. We will continue to have more hearings on this this year, and trying to see 

what else we can do to help secure retirement savings for American 

citizens. 

Thank you very much for being here. 

The committee will stand adjourned. 

[Additional material follows.] 
65 

ADDITIONAL MATERIAL 

PREPARED STATEMENT OF SENATOR ISAKSON

I thank Chairman Harkin for calling this hearing and I welcome 

the witnesses. 

I am proud to be a cosponsor, along with Senators Bingaman and 

Kohl, of the Lifetime Income Disclosure Act, which would amend 

the Employment Retirement Income Security Act of 1974 to provide 401(k) participants with an estimated monthly value of their 

benefits if they were to convert it to a guaranteed lifetime income 

stream upon their retirement. 

Our bill models this notice upon the annual report workers already receive from the Social Security Administration. 

As the witnesses will attest today, too many Americans are dangerously underprepared for retirement. Our bill will increase financial literacy, promote increased savings, and encourage participants 

to think of their 401(k) balance as a vehicle for lifetime income. 

For instance, let’s imagine a 29-year-old participant who has 

been saving for 7 years has accumulated a $10,000 account. Under 

the bill, he would be informed that upon his retirement at age 65, 

he could expect a guaranteed lifetime income stream of about $600/ 

month. That amount tells the participant that he is doing well in 

saving for retirement, but has a long way to go. 

The estimated value would be derived from a government formula that assumes a normal retirement age. The plan sponsors 

and the providers would both remain completely free from fiduciary 

liability on the accuracy of the estimation, as long as they used the 

government formula. 

It is important what the bill does NOT do. It does not affect the 

tax treatment of 401(k) funds, nor does it mandate participants 

choose any particular retirement option. It merely provides participants with additional information so they can make informed 

choices about retirement. 

I am happy to sponsor this bipartisan legislation that will foster 

increased preparation for retirement for millions of American workers. 

PREPARED STATEMENT OF THE WOMEN’S INSTITUTE FOR A

SECURE RETIREMENT (WISER) 

The Women’s Institute for a Secure Retirement (WISER) is pleased to submit this 

testimony for the record, relative to the Senate Committee on Health, Education, 

Labor, and Pensions hearing on encouraging better retirement decisions. 

WISER is a non-profit organization whose primary mission is to focus exclusively 

on the unique financial challenges that women face and provide the crucial skills 

and information women need to improve their long-term economic circumstances 

and financial quality of life. WISER supports women’s opportunities to secure adequate retirement income through its research, training workshops, education materials and outreach. 

WISER’s major objectives are to: (1) Educate women age 18–70 to improve their 

financial decisionmaking; (2) Provide clear up-to-date information that moderateand low-income women can use to mitigate the risks they face with respect to retirement income security; and (3) Raise awareness among policymakers and the public 

on these issues. 

WISER also operates the National Education and Resource Center on Women and 

Retirement Planning (The Center) under a cooperative agreement with the Administration on Aging. The Center is a one-stop gateway of information created with strategic public-private coalitions to provide hard-to-reach women with financial tools. 
66 

The Center’s goal is to help women make the best decisions they can with their limited income. 

The Center has directly reached tens of thousands of women through our workshops and our partners’ workshops, and we have further reached millions with our 

publications and Web site. WISER’s approach is to bring financial planning back to 

the basics, and our strength is to provide women and minorities with core financial 

knowledge that encourages them to make financial and retirement planning a priority in their lives. The initiative began in 1998 and now includes numerous partners, including employers, aging and women’s organizations, and community organizations. 

We support the committee’s efforts to find ways to meet the financial capability 

needs of all plan participants, avoid poverty in retirement, and to raise awareness 

among policymakers and the public on the unique challenges women face. 

RISKS WOMEN FACE

The term ‘‘lifetime’’ takes on a whole new meaning for retiring women. Millions 

of women will live a third of their lifetimes after they reach their 60s. Thirty years 

is a long time to make savings last, putting women at high risk for poverty in their 

old age. 

Many of the risks women confront, like longevity, simply come with the territory 

of being a woman in the United States. Women get paid 78 cents on the dollar for 

the same work men do. Many work in low-paying industries where benefits are 

scarce. When it comes to family caregiving needs, the vast majority of the responsibility falls on women who take time out of the workforce to raise kids or care for 

adult family members. Women often end up alone in retirement, which substantially 

increases the risk of poverty. They are also more likely to have chronic illness and 

require institutional care. 

The most pressing threat women face in retirement is outliving their assets. Running out of money in retirement is too large of a risk to self-insure, but that is what 

millions of retirees do in an era of lump sum distributions from defined contribution 

plans. Women need information and access to safe, affordable lifetime income products. 

THE IMPACT OF RETIREMENT RISK ON WOMEN

A report recently released by the Society of Actuaries and co-sponsored by 

WISER, The Impact of Retirement Risk on Women, finds that women have special 

retirement planning needs that are largely being ignored. The report details why 

it is particularly critical that women, who outlive men by 3 to 4 years on average, 

understand—and act on—the post-retirement risks they face. 

Here are five key reasons women’s retirement could be at risk: 

Reason No. 1: Planning horizons are too short. Most women can expect to live 20 

or more years after age 65. However, 9 out of 10 women in retirement or close to 

retirement do not plan nearly that far into the future. 

Reason No. 2: Outliving assets is a risk. On average, women live 20 years after 

age 65, while men live 17 years. So women are more likely than men to outlive their 

assets. In fact, 4 out of 10 women over age 65 who are living alone depend on Social 

Security for virtually all their income. 

Reason No. 3: Married women need to prepare for widowhood. Because men tend 

to marry younger women, and women tend to outlive men, periods of widowhood of 

15 years or more are not uncommon. The numbers show that 85 percent of women 

over age 85 are widows, while only 45 percent of men over age 85 are widowers. 

Yet there is a planning disconnect here. Only 17 percent of female retirees and 27 

percent of female pre-retirees said they would be worse off if their husband passed 

away; the majority of married women think that their financial situation would be 

the same or better if their husband passes away. However, the reality is that most 

widows have significantly lower income after their husband dies. 

Reason No. 4: Women need to plan for long-term care. Women are more likely than 

men to have chronic disability in their later years and need care in a long-term care 

facility, or need a paid caregiver. The expected average value of the cost of lifetime 

long-term care services is $29,000 for males and $82,000 for females, although these 

amounts can get far higher for some people. 

Reason No. 5: Women have a greater need to plan for medical expenses. Retirement 

incomes are generally less for women than for men, but they do not have lower 

health care costs. And women are less likely to have medical insurance from their 

employer, compared to men. 

For most women, there’s little room for error, and being unprepared for nearly 

a third of their lives will have consequences. 
67 

1 Employee Benefit Research Institute. Income of the Elderly Population, Age 65 and Over: 

2007. EBRI Notes, Vol. 30, No. 5. May 2009. 2For an in-depth discussion, please see WISER’s report: How Can Women’s Income Last as 

Long as They Do? Thought Leaders Discuss Managing Assets in Retirement. June 2009. 3 David F. Babbel. Lifetime Income for Women: A Financial Economist’s Perspective. Wharton 

Financial Institutions CenterPolicy Brief: Personal Finance. 2008. 

THE NEED TO EDUCATE ON THE IMPORTANCE OF LIFETIME INCOME

Combined with Social Security, immediate annuities represent a meaningful channel through which millions of women can live out their years in comfort and dignity. 

Yet, despite their availability, few retirees opt for lifetime income products. Only 

18.6 percent of retirees aged 65 and over receive retirement income in the form of 

an annuity.1

Education plays a crucial role in achieving lifetime income security. Policy discussions on retirement security focus largely on asset accumulation. The same holds 

true for all of the financial information swirling around for people to try to make 

sense of. 

Accumulation is, of course, a critical ingredient to retirement income security. But 

we need to help people see the big picture: how can they make use of what they 

have earned and saved to make their money last as long as they do? The pursuit 

of lifetime income—not the prospect of a one-time lump sum check, is the goal of 

retirement planning. We need to build better awareness about the tradeoffs of retirement income options.2

We need to help participants learn how to manage assets in retirement, and reframe the discussion. 

LIFETIME INCOME PRODUCT LIMITATIONS

Lifetime income products are not without their limitations. For example, they 

typically do not adjust for inflation, eroding the annuitant’s purchasing power over 

time. Providers are increasingly coming up with features to address issues like this, 

but they come at the cost of higher expenses and lower income payout. 

Also, the decision to accept a lifetime annuity is typically irreversible. Studies 

show that people fear this aspect, on the chance they may die long before they have 

received the cost of the annuity back. 

THE IMPORTANT ROLE OF ANNUITIZATION

In spite of limitations, WISER sees immediate annuities as an important resource 

for millions of women, even those who have modest retirement assets. One hundred 

percent annuitization would make little sense for most (if not all) retirees. On the 

same hand, a retiree managing 100 percent of her retirement assets does not make 

much sense for most (if not all) retirees either. But we believe the option of 

annuitizing some portion of retirement assets is critical. 

As Professor and Wharton Fellow, Dr. David Babbel, notes: 

‘‘Lifetime income annuities may not be the perfect financial instrument for retirement, but when compared under the rigorous analytical apparatus of economic science to other available choices for retirement income, where risks and 

returns are carefully balanced, they dominate anything else for most situations. 

When supplemented with fixed income investments and equities, it is the best 

way we have now to provide for retirement. There is no other way to do this 

without spending much more money, or incurring a whole lot more risk—coupled with some very good luck.’’ 3

On behalf of the Women’s Institute for a Secure Retirement, thank you for your 

consideration of this submission for the record. We welcome the opportunity to discuss these comments with committee members and staff. 

PREPARED STATEMENT OF THE AMERICAN COUNCIL OF LIFE INSURERS

The American Council of Life Insurers (ACLI) commends this committee for holding hearings on the growing retirement security crisis. We applaud Chairman Harkin (D–IA) and Ranking Member Enzi (R–WY) for focusing on what can be done to 

help Americans save more for retirement and make informed decisions about their 

retirement savings. In particular, we believe that as Congress examines ways to 

preserve and enhance the current system, special attention should be given to help 

workers understand how their savings can provide them income they cannot outlive 

in retirement. ACLI believes that by providing a simple illustration of retirement 

savings as guaranteed lifetime income directly on defined contribution plan statements, workers will better understand whether they need to increase their savings, 
68 

1 ACLI Study on Retirement Choice, Mathew Greenwald & Associates 2010 (see Appendix 2). 

adjust their investments, or reconsider their retirement date, if necessary, to assure 

the quality of life they expect when they retire. It will also fundamentally change 

the way workers view their retirement savings, not only as a lump sum, but also 

as a source of guaranteed lifetime income. 

The American Council of Life Insurers is a national trade organization with over 

300 members that represent more than 90 percent 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 (IRAs) or on a non-qualified 

basis. 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 and managing assets throughout retirement are critical 

economic issues facing individuals and our Nation. 

As the first wave of the baby boom generation reaches retirement age this year, 

it is timely that this committee is looking at the retirement savings plan system’s 

ability to provide sufficient retirement income for these and future retirees. Many 

current retirees are fortunate in that they are receiving lifetime monthly income 

from both Social Security and an employer-provided defined benefit (DB) pension. 

That situation is rapidly changing. Today, more workers have retirement savings in 

defined contribution 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 lifetime. 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 so that anticipated monthly expenses can be covered, shifting the risk of outliving one’s savings to a life insurer. 

With the passage of the ‘‘Lifetime Income Disclosure Act,’’ which was reintroduced 

today by Senators Bingaman, Isakson and Kohl, Congress will move one step closer 

to helping individuals think of defined contribution plan savings as not only a lump 

sum balance, but also as a source of guaranteed lifetime income so that retirees can 

plan for a predictable standard of living. With this additional information on one’s 

statement, workers will receive a ball park estimate, which when coupled with their 

Social Security statement, visually displays how much monthly income they could 

potentially receive in retirement based on their current savings. Workers can better 

decide whether to increase their savings, adjust their 401(k) investments or reconsider their retirement date, if necessary, to assure the quality of life they expect 

when their working days are over. From a recent survey, workers find it valuable 

to see how much guaranteed lifetime income they could obtain with their retirement 

plan savings.1

As an addendum to this statement, ACLI has outlined a number of other recommendations to encourage employers to offer guaranteed lifetime income options. 

Additionally, the prior survey notes that workers are also interested in guaranteed 

lifetime income options. 

In conclusion, workers need additional information and access to lifetime income 

options if they are expected to successfully manage their savings throughout retirement. To this end, a lifetime income illustration will help workers visualize how 

their savings will address their basic month-to-month living expenses after retirement. Taking this important step today can help address tomorrow’s retirement income security crisis. 

ADDENDUM

New laws and regulations can help employers assist their employees in obtaining 

guaranteed lifetime income in the same way they have assisted employees in obtaining life insurance, disability insurance, and other financial protection products. New 

laws and regulations can also create an incentive to use guaranteed lifetime income 

as part of an employee’s overall retirement income plan. 

Recommendations to Encourage Employers to Offer Annuities 

1. Provide Employers with Guidance on Lifetime Income and Education. The 

ACLI urges the DOL to revise and extend Interpretive Bulletin 96-1 beyond guidance on investment education to include guidance on the provision of education regarding lifetime income and other distribution options, both ‘‘in-plan’’ and outside 
69 

the plan, to assist participants and beneficiaries in making informed decisions regarding their distribution choices. 

2. Help Employers Select an Annuity Provider. The DOL took an important step 

by changing the so-called ‘‘safest annuity standard’’ in Interpretive Bulletin 95-1 by 

adopting a safe harbor for the selection of annuity providers for individual account 

plans. While this regulation provided some helpful guideposts, it contains a requirement that the fiduciary ‘‘conclude that the annuity provider is financially able to 

make all future payments.’’ This standard is difficult to meet, in part because it is 

hard to know how to draw this conclusion. While it is part of a ‘‘safe harbor,’’ this 

prong makes it difficult to use the safe harbor and thus is an impediment to the 

offer of annuities in defined contribution plans. ACLI believes that changes can be 

made to these rules which will make it easier for employers to meet their duties 

while at the same time ensuring a prudent selection. We plan to work with the Department of Labor to simplify this requirement so that an employer can more easily 

and objectively evaluate the financial stability of the annuity provider. 

3. Annuity Administration. Employers take on a number of duties in administering a retirement plan, and the administration of an annuity option would increase those duties. The qualified joint and survivor annuity (‘‘QJSA’’) rules provide 

important spousal protections. The notice and consent requirements provide spouses 

with an opportunity to consider the survivor benefits available under a joint and 

survivor annuity. However, these rules add an additional layer of administrative 

complexity as well as technical compliance issues that most plan sponsors choose 

to avoid by excluding annuities from their plans. 

There are a number of ways that the rules can be modified to make it easier for 

employers to administer this important requirement while protecting survivors, including: 

• model plan amendments for employers to add guaranteed lifetime income options; 

• simplify QJSA notice requirements; and 

• the use of electronic signatures, widely accepted in financial transactions today. 

ACLI proposes allowing those employers who choose to do so to transfer the duties 

and liabilities of administering qualified joint and survivor annuity rules to an annuity administrator. Also, employers need guidance that confirms that a participant’s purchase of incremental deferred payout annuities should not be subject to 

the QJSA rules until the participant has elected to take the annuity payout. 

4. Partial Annuitization Option. Some employers view annuitization as an ‘‘all-ornothing’’ distribution offering. In our RFI submission, we asked the Departments to 

provide guidance making clear that plans may provide retirees with the option to 

use a portion of the account value to purchase guaranteed lifetime income, including 

model amendments to simplify the adoption of such a provision. 

Recommendations to Encourage Workers to Elect Annuities 

1. Illustration. To reframe retirement savings as a source of lifetime income, ACLI 

supports legislative proposals to include an illustration of participant accumulations 

as monthly guaranteed lifetime income on defined contribution plan benefit statements. ACLI thanks Senators Kohl, Bingaman and Isakson for their bi-partisan 

sponsorship of S. 2832, the Lifetime Income Disclosure Act, in the 111th Congress. 

This bill would help workers understand how their retirement savings might translate into guaranteed lifetime income. 

2. Information. The ACLI has asked the Treasury Department to modify the 

402(f) rollover notice requirements and the safe harbor notice to include information 

on guaranteed lifetime income, including the importance of income protections and 

the availability of lifetime income plan distribution options, if any, as well as lifetime income options available outside the plan. 

ATTACHMENTS

[Editor’s Note: Due to the high cost of printing previously published materials are not reprinted in the hearing record. The material, ‘‘ACLI Retirement Choices Study,’’ by Mathew Greenwald & Associates, Inc., April 2010 

may be found at www.acli.com.] 

‘‘ENCOURAGE ANNUITY OPTIONS FOR DEFINED CONTRIBUTION PLANS,’’ ACLI PROPOSAL, 

FEBRUARY 2009

Problem: Currently, about one-half of employees’ retirement savings is in defined 

contribution plans. Most defined contribution plans do not contain guaranteed life-
70 

time income (annuity) distribution options notwithstanding that annuitization of account balances on retirement is the best way of assuring that retirement funds will 

not be exhausted during the participant’s life. Early exhaustion of account balances 

may also adversely affect surviving spouses. 

A major reason that defined contribution plans do not provide guaranteed lifetime 

income options is that, if they do so, the plan must then comply with burdensome 

statutory requirements relating to joint and survivor annuities. The J&S rules impose costly and burdensome administrative requirements involving notifications to 

spouses, waivers by spouses, and prescribe the form and amount of spousal benefits. 

A major reason for the shift to defined contribution plans is a desire by employers 

to avoid the administrative cost and complexity associated with defined benefit 

plans, including compliance with joint and survivor annuity requirements. 

A potential solution to this problem would be for the plan sponsor to outsource 

the administration of the joint and survivor annuity rules to the annuity provider. 

However, in the event of a failure of the annuity provider to properly administer 

the rules, the plan and plan sponsor would still be liable for a claim for benefits 

under Section 502 of ERISA. 

Solution: Where the plan sponsor and the annuity provider have agreed that the 

annuity provider will be responsible for administration of the joint and survivor annuity rules, provide that enforcement actions for failure to comply with the joint and 

survivor annuity rules may only be maintained against the annuity provider, provided that the plan sponsor or administrator has prudently selected and retained 

selection of the annuity provider. Make this provision applicable only to administration of the joint and survivor annuity rules under defined contribution plans. The 

electronic delivery rules should be modified to allow greater use of electronic means 

for administration of the J&S rules. 

Rationale: The ability to shift responsibility for the administration of the joint 

and survivor annuity rules would make guaranteed lifetime income (annuity) options more attractive to plan sponsors and could result in significantly wider availability of such annuity payment options under defined contribution plans. While this 

approach would retain the cost and complexity of the annuity rules, it would preserve spousal protections and would permit the plan and plan sponsor to shift responsibility to an experienced third party annuity provider. This provider would be 

an insurance company with experience in annuity administration and a secure financial ability to pay annuities. These factors makes shifting responsibility to annuity issuers more beneficial to and protective of plan participants, beneficiaries (including surviving spouses) and the plan sponsor than leaving responsibility with the 

plan and plan sponsor. 

Electronic administration is more cost-efficient and has become more widely used. 

DOL has indicated that they are modifying their regulation on electronic delivery, 

although it is not known whether the modification will cover the QJSA rules. 

SECTION— 

(a) AMENDMENTS TO THE EMPLOYEE RETIREMENT INCOME SECURITY 

ACT OF 1974.— 

(1) IN GENERAL—Section 402(c) of the Employee Retirement Income Security 

Act of 1974 (29 U.S.C. 1102(c)) is amended— 

(A) in paragraph (2) by striking ‘‘or’’ at the end; 

(B) in paragraph (3) by striking the period at the end and inserting ‘‘; or’’; and 

(C) by adding at the end the following new paragraph: 

‘‘(4) that a named fiduciary, or a fiduciary designated by a named fiduciary 

pursuant to a plan procedure described in section 405(e), may appoint an annuity 

administrator or administrators with responsibility for administration of an individual account plan in accordance with the requirements of Section 205 and payment of any annuity required thereunder.’’ 

(2) Section 405 (29 U.S.C. 1105) is amended by adding at the end the following 

new subsection: 

‘‘(e) Annuity Administrator 

If an annuity administrator or administrators have been appointed under section 402(c)(4), then neither the named fiduciary nor any appointing fiduciary shall 

be liable for any act or omission of the annuity administrator except to the extent 

that— 

(1) the fiduciary violated section 404(a)(1)— 

(i) with respect to such allocation or designation, or 

(ii) in continuing the allocation or designation; or 

(2) the fiduciary would otherwise be liable in accordance with subsection (a).’’ 

(3) Section 205(b) (29 U.S.C. 1055) is amended by adding at the end the following 

new sentence: 
71 

1The SPARK Institute represents the interests of a broad-based cross section of retirement 

plan service providers and investment managers, including banks, mutual fund companies, insurance companies, third party administrators, trade clearing firms and benefits consultants. 

Members include most of the largest firms that provide recordkeeping services to employer-sponsored retirement plans, ranging from one-participant programs to plans that cover tens of thousands of employees. The combined membership services approximately 70 million employersponsored plan participants. 

‘‘Clause (ii) of subparagraph (C) shall not apply if an annuity administrator or 

administrators have been appointed under section 402(c)(4).’’ 

(b) AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986— 

(1) IN GENERAL—Section 401(a)(11) of the Internal Revenue Code of 1986 (relating to requirements of joint and survivor annuities and pre-retirement survivor annuities) is amended by adding at the end the following new sentence: 

‘‘Clause (iii) (II) shall not apply if an annuity administrator or administrators 

have been appointed under section 402(c)(4) of the Employee Retirement Income Security Act of 1974.’’ 

(c) ELECTRONIC DELIVERY 

(1) IN GENERAL—The Secretary of the Department of Labor shall modify the 

regulations under section 104 or section 205 of the Employee Retirement Income Security Act of 1974 to provide a broad ability to administer the requirements of section 205 of the Employee Retirement Income Security Act of 1974 by electronic 

means. 

THE SPARK INSTITUTE, INC. 

SIMSBURY, CT, 06070, 

February 14, 2011. 

Hon. RICHARD BURR, 

U.S. Senate, 

217 Russell Senate Office Building, 

Washington, DC 20510. 

Re: Proposal for a Universal Small Employer Retirement Savings Program 

DEAR SENATOR BURR: On February 3, 2011, the Senate Committee on Health, 

Education, Labor, and Pensions (‘‘HELP’’), held a hearing on ‘‘Simplifying Security: 

Encouraging Better Retirement Decisions.’’ During the hearing Senators Enzi and 

Harkin, among others, called for the best new ideas that would help Americans save 

for a more secure retirement. The SPARK Institute 1 understands the challenges for 

small employers and Americans, trying to figure out how to save for retirement. 

Consequently, we developed a simple and cost-effective employer-based retirement 

savings plan alternative to the plans that are currently available and to the proposed mandatory payroll deduction IRA. 

Our Universal Small Employer Retirement Savings Program (the ‘‘Program’’) was 

developed specifically to address and overcome the roadblocks in the current system 

that have been identified by small employers, American workers and service providers. For example, the Program addresses employers’ concerns about costs, complexity and potential fiduciary liability. Simplified administration will make it possible for service providers to cost-effectively take on more responsibility for employers. The Program also leverages automatic enrollment and escalation features that 

have been successful in getting employees to start and continue to save. A copy of 

the Program is attached for your review. 

We welcome the opportunity to discuss the concept with you as Congress considers new ways to help Americans save for retirement. We also welcome the opportunity to share our ideas with the HELP Committee at future hearings. If you have 

any questions regarding this information, please do not hesitate to contact me at 

(704) 987–0533. 

Respectfully, 

LARRY H. GOLDBRUM, 

General Counsel. 

[Editor’s Note: Due to the high cost of printing, previously published materials are not reprinted in the hearing record. The above referenced material may be found at http://www.sparkinstitute.org.] 
72 

[Whereupon, at 3:50 p.m., the hearing was adjourned.] 

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