President’s Commission

to Strengthen Social Security

Tuesday,

August 22, 2001

Held at the

L’Enfant Plaza Hotel

Washington, DC

Audio Associates

9537 Elvis Lane

Seabrook, Maryland 20706

301/577-5882
 
2

A T T E N D A N C E

Wednesday August 22, 2001 

MEMBERS PRESENT:

Senator Daniel Patrick Moynihan, Chairman

Richard D. Parsons, Co-Chair

Samuel Beard

John Cogan, Ph.D.

Estelle James, Ph.D.

Gwendolyn S. King

Gerald Parsky

Timothy J. Penny

Robert C. Pozen

Mario Rodriguez

Thomas R. Saving, Ph.D.

Fidel A. Vargas

ALSO PRESENT:

Mike Anzick, DFO

Social Security Administration

I N D E X
3

PAGE

Welcome and Opening Statements 4 

Historical Experience in Administering Personal Accounts

Roger Mehle, Executive Director 

Federal Retirement Thrift Investment Board 7 

James Wolf, Executive Vice President

Teachers Insurance and Annuity 

Association--College Retirement Equities 

Fund (TIAA-CREF) 46 

Possible Discussion of Public Hearings:

September 6, 2001, in San Diego California and

September 21, 2001 in Cincinnati, Ohio 72 

KEYNOTE: "---" Indicates inaudible in transcript.
4

WELCOME AND OPENING STATEMENTS

CHAIRMAN MOYNIHAN: I would like to welcome you to 

this latest public hearing the commission is holding. 

As you observed at the last occasion, those of you 

who were here, my distinguished co-chairman and I passed the 

gavel back and forth, and I have the high honor and distinct 

privilege of passing the gavel to you, sir. Now, how is that 

for formality?

CO-CHAIRMAN PARSONS: Thank you, Mr. Co-chair. 

Let me add my own welcome to all of you who are here. We are 

sorry to be a little late in getting started, but we 

appreciate your interest in this important subject matter and 

your attendance here today.

Hopefully you all have an agenda. But for those 

who don’t, let me tell you what we are going to be doing this 

afternoon. We are still in our information gathering, 

perspective shaping phase of the work of the commission, 

having put out the interim report where we talked about the 

nature of the problems that we see facing the Social Security 

system.

We are now trying to find out more about what the 

solutions might look like, and we are going to hear from some 

experts today who have dealt with this issue in other 

context. And I will introduce them shortly.

Then we will have a short discussion after they 

have testified, and we will have some Q&A with them about the 
5

commission’s upcoming public hearing, where we will invite 

members of the public and interested commentators to come and 

share their views with us.

But before we proceed any further, I would like to 

introduce you all to Ms. Lea Abdnor. Lee is the newest 

member of the commission. 

(Applause.)

CO-CHAIRMAN PARSONS: We have been shorthanded, and 

Lea is not sitting at the table today because we have got one 

or two things that -- the counsel. You know, we made a 

comment earlier about we are the most over-lawyered 

commission in the history of the world. 

Counsel is still doing some final dotting of i’s 

and crossing of t’s. But we all look forward to your full 

participation, Lea, and we are grateful that you have agreed 

to join us, notwithstanding what has been going on of late.

CHAIRMAN MOYNIHAN: But don’t say a word. The 

penalties are -- well, ...

CO-CHAIRMAN PARSON: The other thing I would like 

to do, just following up on the press conference that the 

co-chair and I just had, is that there were some questions 

that came up that were more appropriately referred to counsel 

to the commission for what I will call FACA compliance, the 

Federal Advisory commission Act compliance.

We are way beyond my depth of knowledge, and we 

suggested that we would have FACA counsel, a fellow named 
6

Mike Anzick, identify himself at this public hearing. And, 

members of the press who have further questions can take them 

up with Mike, who has agreed to stay for as late as it takes 

into the evening to deal with your questions fully, 

completely and straightforwardly. Mike, could you wave.

(Mr. Anzick stands.)

CO-CHAIRMAN PARSONS: There is the man.

CHAIRMAN MOYNIHAN: At $500.00 the hour even.

(Laughter.)

CO-CHAIRMAN PARSONS: Okay. What we thought would 

be helpful to the commission, and maybe even enlightening for 

the audience, would be to hear from some of the experience of 

those who have been involved in administering large pension 

and retirement plans that have the element of portability. 

That is to say where you can -- both personal accounts and 

accounts that are movable, regardless of where your 

particular employment may be at a moment in time.

And we have asked two gentlemen to come and speak 

to us and then take our questions, the first of whom is at 

the table, the so-called witness table in front us. Roger 

Mehle.

Roger is the executive director of the Federal 

Retirement Thrift Investment Board, which oversees the Thrift 

Savings Plan, which is a 401K style retirement plan for 

federal employees. It is relatively new, but Roger is going 

to come and share with us some of his experience and, as I 
7

say, enable us to pick his brain in a public setting a 

little. And for that, we are enormously grateful. Roger.

HISTORICAL EXPERIENCE IN ADMINISTERING 

PORTABLE PERSONAL ACCOUNTS

By Roger Mehle

MR. MEHLE: Thank you, Co-chairman Parsons, Senator 

Moynihan and members of the commission. As you said, my name 

is Roger Mehle. I am the executive director of the Federal 

Retirement Thrift Investment Board, and as such, I am the 

managing fiduciary of the Thrift Savings Plan, or TSP, for 

federal employees.

I welcome this opportunity to appear before the 

commission on behalf of the board. The commission has 

invited my testimony as part of its review in historical 

experience in administering portable personal accounts.

Although the board has no view regarding any 

proposals to change Social Security, our experience with the 

TSP may provide some useful information for the commission in 

its deliberations.

My prepared statement contains a rather extensive 

discussion of the relevant issues of TSP structure, 

governance, record keeping, benefits, communications and 

investments. But I will limit my oral remarks today to the 

issues pertaining to governance and investments. 

And, of course, I will be happy to answer any 

questions you might have regarding my entire testimony.
8

The TSP is a voluntary savings and investment plan 

that provides a mechanism for federal employees to accumulate 

capital for their retirement. It was enacted into law with 

bipartisan, congressional cooperation and support as part of 

the Federal Employees Retirement System Act of 1986.

We often refer to this piece of legislation, which 

is the organic act for our agency, as FERSA, F-E-R-S-A. 

FERSA created the Federal Employees Retirement System, 

sometimes called FERS, F-E-R-S. FERSA created this system to 

replace the old Civil Service Retirement System, or CSRS.

The TSP offers employees of the federal government 

the same types of savings and tax benefits that many private 

corporations offer their employees under Internal Revenue 

Code Section 401K, retirement plans. The TSP currently has 

approximately two and one half million individual accounts, 

and an additional 2.7 million members of the Uniformed 

Services will be eligible to sign up beginning in October of 

this year.

TSP fund balances have grown to nearly $100 

billion, and each month participants add more than $700 

million in new contributions, which portends substantial 

growth in the size of the Thrift Savings Plan in the 

foreseeable future.

Participants may contribute to any or all of five 

investment funds, transfer their monies among the funds, 

apply for loans from their accounts and receive a 
9

distribution of their accounts under several available 

withdrawal options.

TSP administrative expenses are borne not by the 

taxpayer, but by the participants themselves. The 

government-wide participant rate for employees covered by 

FERS stands at 86.6 percent, with eight major federal 

agencies showing participation rates of 90 percent or 

greater.

TSP participation by CSRS employees is currently 

approximately 66 percent. The difference between the two may 

be attributed largely to the fact that for FERS employees 

there are matching contributions made by their employing 

agencies, where there is no such match for CSRS employees.

TSP benefits are in addition to the FERS and CSRS 

defined benefit basic annuities; however, for FERS employees, 

the TSP is an integral part of their retirement package, 

along with the FERS basic annuity and Social Security. 

Without participation in the TSP FERS employees usually would 

have insufficient retirement benefits in comparison to those 

available under CSRS, and this is because the formula used to 

compute the FERS basic annuity is not as generous as the 

formal used to compute the CSRS benefit.

The TSP is administered by the Federal Retirement 

Thrift Investment board, which was established as independent 

federal agency under FERSA. Governance of the board is 

carried out by five part-time presidential appointees who 
10

serve four-year term and by a full-time executive director 

selected by those appointees who serves an indefinite term.

With input from the executive director and his 

staff, the board members collectively establish the policies 

under which the TSP operates and furnish general oversight. 

The executive director carries out the policies established 

by the board, the board members and otherwise acts as the 

full-time chief executive of the agency.

FERSA provides that all monies in the Thrift 

Savings Plan are held in trust for the benefit of the 

participants and beneficiaries. As fiduciaries, the 

executive director and the board members are required to act 

prudently and solely in the interest of TSP participants and 

beneficiaries. This fiduciary responsibility gives the board 

a unique status among government agencies. 

Congress wisely, in my opinion, established this 

fiduciary structure because it recognized that all funds held 

in trust by the plan belonged to the participants, not the 

government, and thus must be managed for them independent of 

political considerations. Congress also exempted the board 

from the normal budget appropriations process and the 

legislative and budget clearance process of the Office of 

Management and Budget.

The plan’s independence is critical to insure the 

fiduciary accountability envisioned by FERSA, so long as the 

plan is managed by the fiduciaries named in FERSA. That is 
11

the executive director and the members of the board. In 

accordance with the statute’s strict fiduciary standards, 

federal employees can be confident that their retirement 

savings will not be subject to political or other priorities, 

which might be imposed by the usual budget appropriations and 

policy clearance process or otherwise.

A word about our investments. The TSP is a 

participant directed plan. This means that each participant 

must decide how the funds in his or her account are invested. 

 As initially prescribed by FERSA, participants could invest 

indirectly in three types of securities: U.S. treasury 

obligations, common stocks and fixed income securities.

In 1987 these options were implemented by the board 

in the form of a government securities fund, the G-Fund, a 

common stock fund, the C-Fund, and a fixed income fund, the 

F-Fund. In 1996, on the board’s recommendation, Congress 

authorized two additional investment funds, which allow 

further diversification and potentially attractive long-term 

yields. A small capitalization stock fund, or S-Fund, and an 

international stock fund, or I-Fund, were offered beginning 

in May.

The fund assets held by the F, C, S and I funds are 

all index funds. Indexing is a common form of portfolio 

management in which securities are held in proportion to 

their representation in the stock or bond markets.

The philosophy of indexing is that over the 
12

long-term it is difficult to improve upon the average return 

of the market. The investment management fees and trading 

costs incurred through indexing generally are substantially 

lower than those associated with active portfolio management.

The employment of index funds also precludes the 

possibility that political or other considerations might 

influence the selection of securities. In that regard, FERSA 

explicitly provides that the voting rights associated with 

the ownership of securities by the board’s funds may not be 

exercised by the board, the executive director, other 

government agencies, a present or former federal employee or 

a present or former member of congress.

Instead, the manager of the C, S and I fund assets, 

currently Barkley Global Investors, has a fiduciary 

responsibility to vote stock proxies solely in the interest 

of TSP participants and beneficiaries. 

A final comment, and that is about the returns of 

the board’s funds. From the beginning of the G-Fund’s 

existence in 1987 and the beginning of the F and C-Fund’s 

existence in 1988 through July of this year, the G, F and C 

funds have provided compound annual returns of 7.2 percent, 

8.1 percent and 14.8 percent respectively.

Because the S and I funds were introduced in May of 

this year, the board has no significant history for them yet. 

 The indexes which they track, however, have produced 

compound annual returns of 15.9 percent and 8.2 percent 
13

prospectively for the 10-year period ended December 2000.

The expenses of the TSP, which are netted out of 

the returns I just gave you, are very low in both relatives 

and absolute terms. For example, in the year 2000 the 

expense ratio for the C-Fund was 6/100th of one percent. 

That means that the year 2000 net investment return to 

participants in the C-Fund was reduced by approximately 60 

cents for each $1,000 balance invested in that fund.

These costs compare very favorably with typical 

private sector 401K service provider charges. I believe that 

the Thrift Savings Plan has effective and efficiently 

realized the numerous objectives congress thoughtfully 

established for it 15 years ago. 

To the extent that our experience is useful to the 

commission, the board welcomes the opportunity to provide any 

additional information you may require, and I would be 

pleased to respond to any questions that you may have at this 

time.

CO-CHAIRMAN PARSONS? Thank you. Very impressive, 

particularly on the return side.

Are there any members of the commission who have 

questions for our guest?

CHAIRMAN MOYNIHAN: Mr. Chairman, may I simply make 

light that Mr. Mehle did not make -- appear before us as the 

executive director of this board. In a real sense, he is the 

creator of the board.
14

In the period when this whole matter was being 

conceived, you were a member of the board. He became so 

impressed with the possibilities and the public service that 

he could perform that he chose to become an employee of the 

board he had chaired, and he has done a superb job. 

As a benefactor, I want to thank you and all 2.8. 

The thought that Marine Gunnery Sergeants are going to have a 

position in the G-Fund is a new idea, but there you are. 

Congratulations to you, sir.

CO-CHAIRMAN PARSONS: Questions?

DR. JAMES: First of all, I would like to thank you 

for coming here to answer our questions. The TSP is really 

an interesting model to explore. So you are not only 

benefiting federal employees, but you are giving us a lot of 

information and ideas.

I have two sets of questions. One concerns the 

investment choices that people make, and the other concerns 

how you handle the record keeping and collections part of the 

job.

With respect to investment choices, could you just 

provide us with information on the breakdowns of investments 

among those funds and how they evolve through time, if they 

have changed through time, as people have gained more 

experience? And also, any information you have on whether 

these investment choices differ among different income groups 

and between the genders.
15

So, that is just a strictly informational question 

about investment choices.

The second question concerns your record keeping 

function. Could you give us -- because that is something we 

really have to be concerned about if we set up an individual 

account system.

We will have many individual accounts. Of course, 

it will be much larger than the Thrift Savings Plan, but 

still, your system is a fairly large one, and so you have to 

deal with setting up an information system that could keep 

track of individual accounts for many people and over many 

years.

So, I wonder if you could give us some insights on 

your experience from that. For example, how much does it 

cost? The capital costs and amortized over some period of 

time. I understand that recently you have changed your 

information system and, if I am not mistaken, that you have 

acquired new technology for keeping track of individual 

accounts. 

So I would be interested in learning why you did 

this; what problems you ran into as you tried to develop a 

new information system. How long did it take you to set this 

up? Did it take longer than you expected?

For example, in some cases in Sweden it took them 

longer than expected; it cost more. So any insights you 

could provide about the information systems for record 
16

keeping would be useful, since that is something we have to 

be concerned about.

MR. MEHLE: All right. I will start with your 

first question. I am not sure I am going to hit every point 

that you mentioned. But if not, you can tell me.

Right now we have, as I said, about $100 billion in 

total balances. We have five funds. As of the end of 

July, and this will work out to be a percentage, as well as a 

dollar number, because we are at 100, we had $37 billion in 

our G-Fund. So that is 37 percent. We had $6.5 billion in 

our F-Fund. That is the fixed income fund. And we had $54 

billion in our C-Fund, the common stock index fund that 

emulates the Standard and Poors 500 index.

And in the two newest funds, the S-Fund, which is 

the small capitalization stock fund, we had about $600 

million. In the international stock index fund, the I-Fund, 

we had $250 million.

As to your question about how these distributions 

may have changed over time, at the inception of the Thrift 

Savings Plan, FERSA, as originally enacted, restricted the 

amounts of investments that might be made into other than the 

G-Fund. So initially, the statute limited the amounts of 

contributions that could be made by plan participants into 

the then two -- we call them risk funds, the C and F funds.

That statutory limitation was lifted, as I recall, 

in 1990. So, some four years, as I remember, after the 
17

original enactment of FERSA, the limits were done away with.

Since that time we have seen a dramatic increase in 

contributions to the risk funds from the G-Fund, which is not 

risky, such that, as of now we have, among federal employees, 

about 90 percent of those who are contributing. The number 

is somewhere between 80 and 90 percent of those who are 

contributing; have balances in either the C or the F Fund.

So the orientation of federal employees over time 

has been more towards investing in the risk funds, as you can 

tell.

DR. JAMES: More than 50 percent are in the fund 

right now.

MR. MEHLE: Well, the balance right now is 53 

percent. Now that is variable.

DR. JAMES: Right. 

MR. MEHLE: It is variable, in particular, because 

of the market. These fund balances will go up and down not 

only as a reflection of contributions, but also, as a 

reflection of gains or losses in the underlying securities 

that are held by the funds.

As far as the question of women’s participation, 

women versus men’s participation, what we have observed is it 

is very much the same. The participation rates are very much 

the same. The deferral rates, as we call them, which means 

an amount that the individual chooses to save from his or her 

salary, are very much the same when you adjust them for 
18

salary.

We note that participation rates and deferral rates 

are very much a function of salary, and they are also a 

function of age. But those two are often correlated.

DR. JAMES: And are the allocations also a function 

of salary?

MR. MEHLE: We find that the younger people have 

allocated more to the risk funds than those who are older, 

and this seems appropriate, if an individual was expecting to 

liquidate the balance and not wishing to take risks with it 

further.

DR. JAMES: Right.

MR. MEHLE: I might tell you that we have an 

abundance of statistics along the lines of your question. We 

would be happy to furnish them. We have time series. We 

have cuts of every conceivable kind. So we can give you, 

through your staff, much greater detail on this.

Shall I continue with your question? Or is this --

DR. JAMES: Could you just comment on the 

information system? I understand you recently changed 

your --

MR. MEHLE: Well, no.

DR. JAMES: No.

MR. MEHLE: Let me tell you what has happened.

DR. JAMES: Yes.

MR. MEHLE: We have had a system that was built for 
19

us under an intense schedule pressure, starting in 1986, when 

I was, as Chairman Moynihan mentioned, the then chairman of 

the Thrift Savings Plans. The Thrift Investment Board.

We were obliged, as of the time of my appointment 

by President Reagan, to bring the plan up and operating and 

available to federal employees to contribute. It was a 

matter of about four or five months, and there was absolutely 

no ground work that had been laid.

I became the chairman in October, October 1st of 

1986, and I was the only employee. We did not have an 

executive director, we did not have an office, we did not 

have a hat rack. At the time I accepted the appointment, I 

might add, with some trepidation.

I had many friends and colleagues, however, still 

in the administration, because I had been an assistant 

secretary of the treasury from 1981 to 1983. Many of my 

colleagues and friends were still in the administration. So 

I elicited from them, as a price for my accepting this scary 

appointment --

DR. JAMES: A coat rack.

MR. MEHLE: -- and given the time table, the 

cooperation to put it all together under the gun, and I got 

that. It was really quite wonderful to see how everybody 

could work together in such a productive way.

And we brought this system up, and it began to take 

contributions from federal employees in April of 1987. Now, 
20

that was with a system that was only partially built at the 

time.

We had to build it a piece at a time. We knew that 

the first thing we would have to do was to take 

contributions. We were not worried about loans. We were not 

worried about withdrawals, because it was all new.

The system was built for us by the National Finance 

Center of the Department of Agriculture. It is not an agency 

with which I had been familiar at the time, but I have become 

very familiar with it, because the National Finance Center, 

from that time when it volunteered to do this work for us, 

has been our record keeper and the developer of our system 

ever since.

The National Finance Center is in New Orleans, 

Louisiana. All of our computers, all of our software, all of 

our call center representatives, all of our operations 

activities are in New Orleans, Louisiana. Because the system 

had to be built under the gun with such an exigent time 

table, it was not done exactly the way we would have done it 

if we had had more time to study and reflect and consider a 

variety of alternatives, but it was done.

Pieces were added to it over time. The modules 

that would permit loans, the modules that would permit 

withdrawals. Indeed, the ability to make inter fund 

transfers. We started out with one fund only by statute, the 

G-Fund.
21

All of those things were added, and they were done 

by the National Finance Center with the board staff. We are 

very, very pleased about what they have done and what they 

continue to do.

However, in 1996 the board concluded that it would 

be appropriate to adopt a new system, and the board, after 

much study and reflection, produced a request for proposals 

for the building of a new by the private sector.

It distributed these requests for proposals, and it 

had a number of responses. Ultimately the board selected one 

of the responses, one of the companies, and after 

considerably more discussion and evaluation adopted the -- or 

rather, selected the particular company that presented its 

proposal. This is a company called American Management 

Systems.

For the next four years, that is to say from 1997, 

when the proposal was accepted, until 2001 and this last 

month, American Management Systems has been working on the 

development of this new system. It has not been, in the 

board’s view, done well or properly, and this is a matter of 

record.

On July the 17th the board terminated American 

Management Systems and brought suit against it in Federal 

District Court, in the District of Columbia. Because it 

appeared that American Management Systems indeed was not 

going to be able to fulfill the latest of its commitments to 
22

the board.

In December of 2000 the board selected a standby or 

alternate contractor, in the event that it would be necessary 

to terminate American Management Systems. That company the 

name of which is Matcom, M-a-t-c-o-m, and Subcontractors, 

have been engaged by the board, in fact, to pick up where 

American Management Systems left off; to develop a new system 

for us, which will be centered around a so-called commercial 

off the shelf, COTS, record keeping package for 401K plans.

This COTS package will be customized. This is the 

job of American Management Systems initially. It is now the 

job of Matcom. It will be customized to accommodate the 

board’s particular needs.

The COTS package is called Omni Plus. It is in 

widespread use in the private sector as a 401K plan record 

keeping software package. We expect that the Omni Plus 

package will be modified for the board’s needs and will 

indeed be delivered to us as of the end of July of next year, 

and we will replace the system, which while it has served us 

well, it is outmoded in certain respects. Particularly in 

the respect of quick adaptability to changes.

So, that is the full story.

DR. JAMES: Yes. I didn’t realize it was such a 

complicated story. I wonder if you could reflect on lessons 

that could be learned from your experience? You see, I don’t 

think it is really just unique to this particular company and 
23

your particular organization, because many countries have had 

problems when they have tried to institute record keeping 

systems for their individuals accounts.

Often it has taken longer, it has cost more and so 

forth. So I am just wondering what kinds of generalizable 

lessons we can learn from your experience. Do you have any 

comments?

MR. MEHLE: Well, there are a lot of issues 

involving development of sophisticated software packages. I 

don’t think you are asking about that.

DR. JAMES: No.

MR. MEHLE: There are all kinds of project 

management questions, priority questions, team development 

questions, all of which, I might add, we have been deeply 

immersed in.

And I personally come from a background in a former 

life of fairly heavy project management. I suppose what I 

would tell you is that to develop a record keeping system for 

the Thrift Savings Plan was the biggest central challenge 

that we had, and I was very, very personally involved with 

the National Finance Center, in 1986 and thereafter, as were 

many of my colleagues.

They, that is the National Finance Center, had the 

advantage of doing payroll for hundreds of thousands of 

federal employees, and there is a large payroll element of 

what we do, because there are payroll deductions. That is 
24

how participants make their contributions.

This was a critical capability on the part of the 

National Finance Center, to say nothing of the incredible 

dedication that they turned to on our job.

CO-CHAIRMAN PARSONS: We have got a few other 

commissioners who want to ask some questions.

MR. MEHLE: I will go on forever until you stop me.

CO-CHAIRMAN PARSONS: I was getting that 

impression.

(Laughter.)

CO-CHAIRMAN PARSONS: I was getting that 

impression. John and then Sam. So, Gerry, John and Sam. 

Gerry.

MR. PARSKY: I will try to make it very brief. Two 

questions that I have. One has to do with perhaps giving us 

some insight in terms of the -- what we can expect by way of 

participation in a personal account, voluntary personal 

account system, should we decide to recommend that and it be 

set up.

My understanding, from your testimony and 

materials, is that there is a very high percentage of those 

potential participants that have chosen the option of 

participating in your plan. Is that right?

MR. MEHLE: That is right.

MR. PARSKY: Would that lead you to believe that 

should we create a system, that -- create such an option 
25

under the appropriate guidelines, that we could expect a high 

percentage to participate?

MR. MEHLE: I really don’t know. I can tell you 

what influences the participation in the Thrift Savings Plan, 

but I have got no idea what might be expected in some other 

plans.

MR. PARSKY: Why don’t you just give a couple of 

comments on that so that it may -- what influences that under 

yours?

MR. MEHLE: The match is a very important 

influence. We have a match of five percent effectively 

against contributions of five percent. There is a one 

percent automatic contribution that is made to every FERS 

employee’s account by his or her employing agency. So that 

is regardless of any contribution.

MR. PARSKY: Okay.

MR. MEHLE: That is an automatic payment for any 

FERS employee. As soon as a FERS employee begins to 

contribute from his or her own salary, a match kicks in. A 

dollar for dollar match on the first three percent and 50 

cents on the dollar for the next two percent.

So effectively, the individual can fetch as much as 

four percentage points into the TSP account from the 

employing agency. That is for the FERS employees.

As I said, the CSRS employees have no match. Their 

participation rate is lower. It is 66 percent. The 
26

demographics, however, of federal employees, and in 

particular CSRS employees, is that they are relatively older 

and relatively more highly paid. So trying to extrapolate 

our experience beyond is a job I can’t do.

MR. PARSKY: The second question has to do with 

educating those that participate with risk respect to the 

risk that may come from participating in one or more of these 

accounts. There is a lot of commentary that has come out 

about how we don’t want to move to a risky stock market 

program in creating personal accounts.

What has been your experience or how have you gone 

about -- first, how have you gone about educating the 

potential participants that what they are provided, by way of 

choice, is not that risky? And then second, what has been 

the experience?

You gave your 10-year returns. That at least would 

suggest to me that the way in which you have crafted the 

options has not eliminated all risk, but over a 10-year 

period has produced positive returns. So, just a little bit 

on the education, and then second, on your experience in 

terms of how risk oriented this program may be.

MR. MEHLE: As far as information, we have a 

central document. You could almost think of it as a 

prospectus, for those who are familiar with the securities 

market, and it is called the Summary of the Thrift Savings 

Plans. This is it. This is our bible. 
27

It contains, for federal employees, everything the 

employee needs to know to make an informed choice about which 

funds to contribute to, or indeed, whether to contribute at 

all.

There is a compliment to it. It is this. It is a 

much bigger book. It is available on request to anyone 

really. But presumably to federal employees. It is called a 

Guide to TSP Investments.

It has got more detail in it about the now five 

funds and their performance over time, the risks associated 

with them and the like. 

We have a distribution mechanism through the 

federal employing agencies that sees to it that these kinds 

of documents get given to federal employees. We also have a 

website on which every publication that we offer in print is 

available electronically for downloading.

The further methods that we have of informing 

federal employees about their choices, the risk associated 

with the choices, are all ancillary. We have pamphlets that 

we will give out from time to time reminding people about the 

options and the like.

It is the plan summary and the Guide to TSP 

Investments, as a compliment, but not a necessary compliment 

to it, that does the job. As far as we are concerned we have 

everything in there that a participant needs to know to make 

a correct choice or an informed.
28

Every participant who makes an investment, a 

contribution, to any of the funds except the G-Fund, which is 

the Treasury securities funds, must acknowledge that he or 

she understands the risks associated with investment in those 

funds.

MR. PARSKY: Nice point.

MR. MEHLE: So we have a record acknowledgment from 

every individual that that person knows what the risk in 

those funds are. That is to the question of how we let 

people know what they can invest. And your other?

MR. PARSKY: The other was based on your experience 

now, in commenting to this group that is now charged with 

making some recommendations, how would you characterize the 

risk profile based on your experience of giving these 

options?

MR. MEHLE: I am not sure I understand that 

question. Do you mean are these fundamentally --

MR. PARSKY: Well, let me phrase it a little 

differently. Some people have commented that in the past 

year there has been a decline in the value of the 401K 

assets, for instance, and that that should be a signal to 

this group not to move in the direction of offering those 

alternatives, because an alternative like your plan could 

result in, over the appropriate period of time, the loss of 

all your money.

From what you cited in your testimony, based on the 
29

experience -- at least the returns that you have achieved, 

there hasn’t been a loss in money. In fact, there has been a 

significant return on that money.

MR. MEHLE: That is right.

MR. PARSKY: And in part, based on the careful way 

in which you crafted the options. The indexed approach, for 

instance, gives diversity and other forms of comfort.

MR. MEHLE: Well, let me tell you that the index 

funds were the first choice of Congress when we had the 

statute enacted to administer in >86. The index fund was 

built into the statute, into what became the C-Fund. It was 

up to us to pick the index, and we did pick the S&P 500.

Likewise, the S and I funds, which are the other 

two equity funds, are index funds by statute. We did suggest 

to Congress that they be index funds.

As far as any returns are concerned over any given 

period of time, this is a very deep subject, but I think 

everybody appreciates that students of this area, 

commentators in this area, will say, in pieces that are well 

written and thoroughly researched, that the equity markets 

over time do produce a better real return than do fixed 

income markets.

Now, whether you hit it at the wrong time or not is 

 a different question. Quite plainly, if somebody last year 

had gone in and out of the Thrift Savings Plan in the C-Fund, 

joined the Federal Government and gotten out of the Federal 
30

Government, that person would have presumably had an 

unsatisfactory experience as far as he was concerned, because 

last year the equity fund lost nine percent.

But one can study slices of time and come to 

conclusions about the likelihood of the future replicating 

the past, in terms of equity returns, but there are a host of 

studies on this that I wouldn’t pretend to try to summarize 

or paraphrase. This is not my particular -- our particular 

expertise. I’m aware of these, and I think they are of 

record.

CO-CHAIRMAN PARSONS: John.

DR. COGAN: Roger, thanks for coming. I appreciate 

it. Let me commend you on the job you are doing.

It is one thing for the government to write down, 

on a piece of paper, a plan as big as this. It is another 

thing to bring it to fruition, and you have done a very, very 

good job it seems from my perspective here.

I have two questions. The first has to do with 

choice of fund managers. You choose one fund manager per 

fund type. Have you considered expanding the number of 

managers for a given type of fund so that you get more 

competition among managers to provide better service?

MR. MEHLE: Well, every fund manager selection that 

we have -- and over the course of the existence of the agency 

I think we have had -- it is either four -- I think it is 

four, because we have three-year contracts with limited 
31

renewal options on the board’s part. They have all been 

procured in competition. 

Because these are index funds, there is no 

performance competition so to speak.

DR. COGAN: Right. On the returns.

MR. MEHLE: A party is expected to demonstrate that 

it can emulate the index of choice well and with a so-called 

small tracking error. So we are not looking for performance, 

other than good emulation of the index’s performance.

But every time we have had a selection through a 

competitive process, we have put out an RFP again, and the 

marketplace has responded.

DR. COGAN: Right.

MR. MEHLE: we have picked Barkley’s Global 

Investors in the most recent round and before then because 

their proposals have always been the best.

DR. COGAN: And do you envision, as the number of 

participants grows, that you might run into problems of 

discuss-economies of scale and so you might expand?

MR. MEHLE: No. Not at all. I don’t think so. 

Not an index fund.

DR. COGAN: So you are completely comfortable with 

one fund manager?

MR. MEHLE: This is not like the active portfolio 

management where you hope you will pick a fund manager who is 

really good and will stay good and that his track record will 
32

turn out to be just as good in the future as it was in the 

past. We are not betting on individual stock pictures.

DR. COGAN: Right. The second question relates to 

the administrative expenses, which are very low for the fund 

managers.

When thinking about applying this model to personal 

Social Security accounts, we worry about the costs that might 

be imposed on employers and having a government as a central 

collector of funds might be a way, some people think, of 

avoiding a burden on employers.

My first question is do you know how much the 

administrative costs for the agencies are that have to 

make -- have to have payroll systems and so forth to make the 

deposits for the individuals?

MR. MEHLE: No. I don’t.

DR. COGAN: You don’t?

MR. MEHLE: No. We have cooperation from all of 

the federal agencies. There are people working in the 

payroll offices and the personnel offices who are our front 

end, so to speak, but their costs are all borne by their 

individual employing agencies. So we don’t see them.

DR. COGAN: Right. Right. It does seem to me that 

if we take this model and apply it to Social Security, right 

now Social Security -- well, the Treasury collects payroll 

tax revenue in a bulk and doesn’t identify any contributions 

that an individual might make until W-2 forms are submitted 
33

at the end of the year and then there is a reconciliation 

period that takes place after that.

And so, when we think about applying this model to 

a personal Social Security account proposal, we have to think 

a little bit about the changes in the contribution system 

that employers have, otherwise we are left with a system that 

simply effectively makes the deposits for individuals and 

credits those deposits to individual accounts a year after 

those deposits are made.

MR. MEHLE: Is there a question there?

DR. COGAN: Yes. Just comment on it. I mean, it 

does seem to me that we have got this problem where we seem 

to say -- well, we say that the administrative cost of this 

system is low, and therefore, we say that, gee, all we have 

to do is apply the same system to importers at large and the 

community for personal Social Security accounts.

And yet, what we miss is that this current 

system -- we don’t know what the costs to the agencies are 

associated with making deposits once a month.

MR. MEHLE: That is true.

DR. COGAN: Right?

MR. MEHLE: That is true.

DR. COGAN: And it seems to me that we should know 

that if we are going to use this model for a personal Social 

Security account proposal, because if we don’t, we are going 

to end up with a system where, in effect, we make deposits 
34

once a year, as we do now in the Social Security system.

MR. MEHLE: Well, we have a very important 

statutory front end system obligations on the part of the 

employing agency to work with their employees; so that they 

may contribute to their retirement fund. 

As a matter of fact, FERSA requires that each 

employing agency have a retirement counselor program that it 

run. It is part of FERSA, but it is an obligation on the 

agencies, not on the Thrift Investment Board.

DR. COGAN: Right.

MR. MEHLE: So your observation; that you would 

want to know if you could or it could be known, what it costs 

separately for an agency to do the work that it must do to 

get the information to its employees, your observation along 

those lines, yes. I think it would be good to know that. 

Whether that is immediately transferable to the private 

sector, of course, is another question. 

We have very sophisticated agencies that are the 

front end. They are staffed with people whose only job, in 

some instances, is to deal with the Thrift Savings Plan. Or 

the major job, the Thrift Savings Plan coordinator.

Whether such a person could be replicated in the 

private sector in every employer organization is another 

question. Whether that is advisable is another question. I 

mean, there are all kinds of questions obviously.

CO-CHAIRMAN PARSONS: I am going to ask each 
35

commissioner to limit himself or herself to one question, 

since we have lots of interest in the TSP, Roger. We have 

got Sam and then Tim, Bob Pozen and Gwen.

DR. JAMES: I have got a quickie.

MR. BEARD: My question is simple. It is obvious 

that we are considering private accounts as part of saving 

Social Security, and people who don’t like that idea talk 

about risk and they say that people don’t nothing about 

investing. 

Just, please, comment. I mean, if you were to 

advise us -- all federal government employees are not 

financial geniuses. Is this a roadblock for Apeople who 

don’t know anything about investing?@

MR. MEHLE: Well, to get the information to the 

individual is a statutory obligation on our part, and what I 

told you we do we feel fulfills the statutory obligation and 

is practically effective as well.

So, from our point of view, we have done what needs 

to be done, both in terms of satisfying the law and in terms 

of the practical requirements.

As you can tell, we have a very integrated 

organization. We have the rest of the United States

Government to be the front end of our program for us. 

Without the employing agencies we clearly could not do this.

MR. BEARD: Do you get a lot of complaints from the 

employees? We don’t know how to invest. Please keep us out?
36

MR. MEHLE: No. Very, very seldom. Perhaps we 

would have had a lot more complaints if the market had been 

negative 14 percent for 10 years instead of positive 14 

percent. We are, after all, operating in a virtually 

unparalleled environment for the Thrift Savings Plan, and so 

that is the only experience that we have.

MR. PARSKY: Just to interrupt for one second. 

What 10-year period, going back, has every been minus?

MR. MEHLE: No. I didn’t say that there was one. 

I said that if there were one, I’m not sure everybody would 

be cheering us as loudly as they do. But that is human 

nature.

We are happy to get accolades that we are doing a 

great job. I frequently get accolades. AWhat a wonderful 

job you are doing.@ And I say thanks. But fundamentally, I 

have nothing to do with it. It is the market that has done 

this because these are not choices that are being made by us 

to pick stocks. They are index funds.

CO-CHAIRMAN PARSONS: Tim.

MR. PENNY: You will soon begin enrolling the 

Department of Defense employees, which will more than double 

-- or could more than double the number of participants in 

your program.

Can you talk just a bit about the steps you are 

taking and the challenges that you have encountered in 

expanding the program to that degree.
37

MR. MEHLE: There are about 2.7 million potential 

enrollees in the Uniformed Services, and that includes, Army, 

Navy, Air Force, Marine Corps, Coast Guard, public health 

service and the National Oceanic and Atmospheric 

Administration. That is not only those who are on active 

duty, but it is also those who are members of the Ready 

Reserve.

Fundamentally, what we have done is, in cooperation 

with the Department of Defense and the other cognizant 

cabinet agencies, developed an information and communications 

program for them, and in particular, a plan summary like this 

one, but for the Uniformed Services.

Their program is very much like that available to 

civilians, but there are some significant differences, and 

thus, it is necessary to develop a separate document. That 

document will be distributed, before the enrollment period, 

or it should be, to every one of the 2.7 million potential 

enrollees.

No one expects that every one of those people or 

even the majority of those people at the beginning is going 

to enroll. But the way we get to them is the way we get to 

everybody. Through this document, which is the military 

corollary, the Uniformed Services corollary. And, of course, 

as I say, all of this is on the website.

The Department of Defense and the other cabinet 

agencies are making their own efforts because they do have an 
38

obligation on their own to advise their -- all of the 

military personnel and Uniformed Services personnel what it 

is that they can expect to enroll.

This enrollment period will run from October, 

October the 9th, to January the 31st of next year. 

Thereafter, there will be the semiannual enrollment options 

that are available to civilians as well.

When we got started in 1986/87, the enrollment 

initially in the first enrollment period, as you might 

expect, was not large because nobody knew anything about it. 

 The word of mouth was powerful thereafter and, of course, 

the performance of the funds was a strong inducement as well.

And we kept seeing every successive so-called open 

season the enrollment going up and up and up, and I think we 

will see that as well with the Uniformed Services.

CO-CHAIRMAN PARSONS: Bob.

MR. POZEN: Thank you. I want to congratulate you 

on your very low administrative expenses. I see the 

administrative expenses here between five basis points and 

seven basis points per fund, with seven basis points meaning 

seven 100th of one percent.

I have a little experience with 401K plans, and a 

lot of the expense in the administrative side is related to 

plan loans for people, in-service withdrawals and other 

things that you perform for your participants, and these are 

perfectly appropriate in a 401K atmosphere where people are 
39

taking loans out and are taking in-service withdrawals.

I was wondering whether you had any estimate of 

what portion of these expenses could be -- how much your 

expenses could be reduced if you did not have to do employee 

loans and in-service withdraws.

MR. MEHLE: No. No. We have had these programs 

from the beginning. We have never made any effort to do 

that, and I think it would probably be virtually impossible, 

knowing what I know about the cost accounting systems that we 

have. I can’t tell you that.

The amount of money that we pay for record keeping 

services to the National Finance Center is about $50 to $60 

million per year. Those expenses are strict record keeping 

expenses. We have some further expenses, our own. That is, 

to say the expenses of the board. But no effort is managed 

to try fight off costs and attribute them to one function or 

another function or a third function.

MR. POZEN: Most processors charge per loan or per 

in-service withdraw. You have no administrative cost that 

way?

MR. MEHLE: No. We aren’t fee based. We are cost 

based. So all of our costs for operations are distributed 

progressively by account balance.

MR. POZEN: Thank you. 

CO-CHAIRMAN PARSON: Gwen.

MS. KING: Thank you, Mr. Chairman, and thank you, 
40

Mr. Mehle, for coming. You mentioned that many people 

participate in the program because of the performance of the 

program.

I will tell you that prior to my retirement from 

the Federal Government I was a Thrift saver, and my incentive 

did not come from the informational packet I was provided. 

That was one more piece of information I didn’t read. My 

incentive was the one percent that you kept putting into my 

account.

And so, as I think about some of the work that we 

are trying to do right now, I have a couple of questions. I 

have a couple of very quick questions.

CO-CHAIRMAN PARSONS: She has what is called a 

compound question.

(Laughter.)

MS. KING: The first is how often do employees get 

a record of what is in their savings account? Do they see it 

on an ongoing basis? And by way of portability, are they 

able to close that account whenever they leave the Federal 

Government? Or are they obliged to leave that account intact 

until they reach a certain retirement age?

MR. MEHLE: We issue semiannual statements for 

balances. We issue quarterly statements for those who have 

loans. We will be, under our new system, issuing quarterly 

statements for account balances, which will include the loan 

accounting.
41

As far as the portability is concerned, when an 

individual separates from the Federal Government, the 

individual may leave the balance in the Thrift Savings Plans 

up until the time he or she becomes 70 and a half when, as 

with all 401K balances, there must begin a distribution under 

Internal Revenue -- under the Internal Revenue Code.

If the individual doesn’t want to leave the balance 

on account, he or she may take it out in a number of 

withdrawal methods. Lump sum is one. Monthly payments is 

another. The balance may be used to purchase an annuity. 

When we have our new system next year, these will be 

permitted in combination. Presently they are permitted only 

singly.

Also, the individual who takes a lump sum or, under 

certain circumstances, monthly payments, may ask the Thrift 

Savings Plan to transfer the balance to an individual 

retirement account.

MS. KING: Thank you very much.

CO-CHAIRMAN PARSONS: We have two more questions of 

this witness. Estelle and Mario.

DR. JAMES: This is just a very quick follow up 

question to what John asked. John asked about the investment 

managers, and you mentioned that Barkley’s Global Investment 

is the current manager and also was the previous manager.

I am curious if they have been the manager of the 

index fund all the way through, or have you had period 
42

changes? The reason I am curious is if we were to adopt this 

kind of system, for example, if we were to have only one 

manager for each index fund, one question that arises is do 

you basically have competition up front when the contract is 

originally awarded and then does that additional winner have 

an advantage thereafter in maintaining the position of 

manager.

So I am curious how the competitive bidding process 

has worked every three years. And have you had a turnover of 

investment managers? Or has Barkley simply been there from 

the beginning.

MR. MEHLE: Barkley’s has won ever competition that 

there has been, and we have competed it every time a contract 

has run out. The competition is primarily in terms of 

management fees, because we are --

DR. JAMES: And tracking errors. Yes. I know. It 

is an index fund. I understand. 

MR. MEHLE: So they have won every time. I might 

add that all of our procurements are audited by the 

Department of Labor, but they have won each time.

DR. JAMES: They also won for the new funds?

MR. MEHLE: They did. They are reaching very hard, 

which is delightful. We have very aggressive competition, 

and this is good for plan participants.

DR. JAMES: Thank you. 

CO-CHAIRMAN PARSONS: Okay. Mario.
43

MR. RODRIGUEZ: I just want to make sure I 

understand. These are owned by the individual. So that 

makes you accountable to the individuals. So by doing this, 

this would completely free you up from any political 

influence whatsoever?

MR. MEHLE: That is the way that FERSA was 

structured; is structured. We are fiduciaries, the highest 

legal duty known. We act only and always in the interest of 

participants and beneficiaries. Were we to act otherwise, we 

would be liable for breach of fiduciary duty. It is a very 

sober obligation that we all feel that we have.

MR. RODRIGUEZ: Okay. Thank you. 

CO-CHAIRMAN PARSONS: Mr. Mehle, as you can see, 

your testimony sparked a fair amount of interest and 

questions on the part of the commission. We appreciate very 

much you willingness to come and spend some time with us, and 

thank you for being here and I congratulate you on what is 

obviously a highly successful and beneficial program for 

those who participate and those who work for all of us in 

this United States Government. Thank you again.

MR. MEHLE: Thank you. 

CO-CHAIRMAN PARSONS: We were going to take a short 

break, but we are not because we are running a little behind 

time, and I suspect that our next speaker will probably 

provoke as many questions as our previous speaker did.

He is James Wolf. Jim is the executive vice 
44

president of TIAA-CREF, the Teachers Insurance and Annuity 

Association and the College Retirement Equity Fund. It is 

the world’s largest private retirement system, and it is 

probably one of the world’s oldest, certainly from the point 

of view of managing a system that involves or embodies the 

notion of portability of benefits.

So, Jim, thank you for being with us, and we look 

forward to not only hearing to what you have to say, but 

having an opportunity to dialogue with you and ask you some 

questions.

HISTORICAL EXPERIENCE IN ADMINISTERING 

PORTABLE PERSONAL ACCOUNTS

By James Wolf

MR. WOLF: Thank you and good afternoon, Chairman 

Parsons, Senator Moynihan and other members of the 

commission. 

I am Jim Wolf, and I am the president of TIAA-CREF 

Retirement Services. TIAA-CREF covers almost three million 

educators and retirees of 11,000 organizations in a defined 

contribution pension system that has evolved over the last 80 

years.

TIAA-CREF’s current asset base of $280 billion 

enables us to deliver quality administrative service and 

financial education, as well as to offer flexible retirement 

pay outs at a low cost because of our economies of scale.

My comments focus on TIAA-CREF’s experience in 
45

providing a successful, portable system. I hope the 

commission finds our experience helpful as it considers a 

similar program for individual accounts in Social Security on 

a much larger scale.

As a point of introduction, let me also state that 

my organization does not have a position in favor of or in 

opposition to creating individual accounts.

TIAA-CREF operates a national portable retirement 

system that offers a bundled array of retirement plan 

services, including account administration, professional 

asset management, financial education and distribution of 

retirement benefits. In order to provide an adequate 

pension, our employer plan contributions typically equal 10 

percent or more of a participant’s compensation.

In 2000 our average annual premium was $5,600. 

Thus, TIAA-CREF accounts, which had an average balance of 

$90,000 at year end 2000, reach a level that supports our 

overall costs.

The work place offers a convenient conduit to build 

the retirement savings for all Americans, but over the years 

pension plans have grown more complex. Employees today are 

actively involved in setting the course of their retirement 

security and also have greatly expanded range of investment 

choices to choose from.

For example, within TIAA-CREF, the one 

straightforward choice between TIAA’s fixed income and CREF’s 
46

equity investments now involves 10 funds covering a range of 

asset classes and investment objective. Because of this 

level of choice and complexity, comprehensive financial 

education is a must today.

In defining contribution plans, the long-term 

investment result directly impact the level of retirement 

income that the pension plan will generate. Thus, 

TIAA-CREF’s founding charter established financial education 

as an important part of our mission.

Today we use a variety of tools, techniques and 

media to carry out this role. Our publications include 

stuffers, pamphlets, newsletters and a full financial 

education library series. They cover topics such as 

investment options, retirement income needs and tax issues. 

The May 2001 Participant that we sent to you is just one 

example of our education publications.

Seminars and individual counseling by registered 

representatives support these written materials. In 

addition, TIAA-CREF uses Internet technology to deliver an 

interactive tool box for financial education. As a result of 

our diversified education efforts, our participants allocate 

their funds in an appropriate manner, according to a recent 

economic analysis.

We have noticed that as participants are more 

involved and knowledgeable about retirement issues, they 

demand more quality service, spanning 24 hours a day, seven 
47

days a week. A significant investment in technology 

underlies the services that TIAA-CREF provides our customers 

by phone, on the Internet and in person.

Our total call volume in 2000 was 6.4 million phone 

calls, and at the same time the use of our website has surged 

to 13 million visits. During 2000 the website’s interact 

facility automatically handled over nine million account 

inquiries and over 400,000 financial transactions.

To keep our participants better informed, we have 

also regularly revised our computerized reporting systems. 

For example, we recently revamped the annual benefit report 

and altered its mailing schedule to coordinate with the 

Social Security Administration’s benefit statement.

Providing these kinds of services at low expenses, 

we think, is very important. Our low expenses insure that 

more money works in our participants’ accounts to improve 

retirement benefits.

The asset fees reflect a different investment in 

administrative expenses incurred to manage the funds 

according to the account’s investment objective. For 

example, the total annual asset charges for the CREF money 

market account is .34 percent or 34 basis points, while the 

CREF global equities account has a 46 basis point charge.

Part of these charges include approximately 25 

basis points to cover the cost of our administrative 

services. 
48

Turning briefly to the distribution of retirement 

benefits, more choice and flexibility at retirement has also 

added complexity for retirees. Prior to 1989 TIAA-CREF 

required annuitization from the retirement accounts used to 

fund employer sponsored pension plans.

Since then, employers can choose to allow lump sum 

pay outs at retirement or termination. The majority of 

participants still decide to start an ongoing income stream 

however.

A recent survey of TIAA-CREF participants revealed 

that this greater choice has caused a greater need for 

advice. In fact, 84 percent of participants age 50 and over 

wanted advice on retirement decisions.

TIAA-CREF firmly believes that a lifetime annuity 

based upon a participant’s needs is appropriate for most 

people. An annuity will provide the maximum amount of 

monthly income and still assure retirees that they will not 

outlive their benefits. This protection is key to TIAA-CREF 

retirees with limited resources to meet their income needs.

People tend to underestimate their longevity, not 

expecting to live 25 years or more after the age of 65. 

Retirees focused on preserving their principal may take too 

little income and not meet living expenses. Conversely, 

withdrawing too much can deplete retirement funds too soon.

We counsel retirees to make their decision in 

accord with a number of fundamental principles, and let me 
49

expand on just one, the impact of inflation.

In TIAA-CREF individual accounts members use 

various asset combinations to help protect purchasing power. 

Treasury, inflation, index, securities and real estate can 

be a good hedge against rising prices. While equity accounts 

could also prove to be an excellent inflation hedge, that, as 

we know, is not always the case. As an alternative, TIAA’s 

graded benefit payment method offers a more stable way to 

increase income over time.

In conclusion, it is clear that our nation’s 

retirement income policy is a challenging and complex topic, 

and the details are a very important part of the solution. 

TIAA-CREF is willing to serve as a resource for the 

commission as you proceed to develop and create a final 

report.

Thank you, and I look forward to your questions at 

this point.

CO-CHAIRMAN PARSONS: Thank you, Jim. 

Mr. Chairman.

CHAIRMAN MOYNIHAN: Yes. What an extraordinary 

achievement. One of the other things. Is there any end to 

what the United States owes Andrew Carnegie? When you think 

about it, he began this in 1918.

Sir, we associate TIAA-CREF with college and 

university teachers and administrators and so forth, but I 

believe that your membership, if that is the term, is much 
50

wider than you might at first understand. 

MR. WOLF: Yes. Our primary market has been higher 

education. In fact, within that existing market only about a 

third of our participants are faculty. The remainders are 

administrators or clerical help on campus.

In addition to that, we also provide retirements 

services to hospitals and other non-profit research 

institutions. So members of the hospital areas traditionally 

have also -- teaching hospitals especially have been 

available for our services.

Roughly a year ago we modified our charter to now 

make government employees, primarily looking for an 

opportunity within the K to 12 marketplace, to be also 

eligible for our products, and we also have made other 

not-for-profit institutions eligible as well. So we have 

made some changes in the most recent past to broaden that 

market.

CHAIRMAN MOYNIHAN: Thank you. 

CO-CHAIRMAN PARSONS: Questions? Bob.

MR. POZEN: I am just trying to get a little more 

information on the expenses here. You have expenses for 

annuities and then you have expenses for mutual funds. Your 

mutual fund business is a relatively new business for you, 

and I see that in your equity index fund your expense charge 

is 26 basis points, but your assets are less than 100 

million.
51

Two questions. Do you have a sense of what your 

expense charge would be if your equity index on your mutual 

funds were to -- like your other accounts meant like the CREF 

account -- were to be one billion, two billion, three 

billion? Do you have a sense of how much you could bring 

those down?

MR. WOLF: Yes. I would assume that we would have 

the same scale issues that I think we are all going to 

wrestle with this afternoon and as you go forward, because 

the size of accounts that we have in mutual funds are 

relatively small. That business is relatively new.

I don’t have the number off of the top of my head, 

but I would say, as we gain scale and as they become more and 

more popular, those expenses should go down, as we have seen 

on the retirement side over the years.

MR. POZEN: I mean, would you think they could go 

down to 15 or 10 basis points? Is that the range?

MR. WOLF: I would hesitate to guess, not knowing 

that much about the mutual fund side of the house.

MR. POZEN: The other thing is, again, you allow 

loans in a lot of these programs, loans and in-service 

withdraws. Do you have a sense of how much less expense you 

would have if you didn’t have these programs of loans and 

in-service withdraws? Do you have a sense of what portion 

they are?

MR. WOLF: I listened to that earlier question, and 
52

I was wondering, when you asked me, what my response would be 

at that point in time.

MR. POZEN: Well, at least I am consistent.

MR. WOLF: That is right, and it is a good 

question.

In reality, because we are a bundle provider, we 

don’t fine cut it that much. I can give you some 

generalities on other aspects of our retirement plan. Loans 

frankly, although they have become more popular recently, are 

not a major part of our service demand, and I am not so sure, 

if we cut that out right now, there would be a dramatic 

impact on reducing our expenses. Only because it is not a 

big part of what we do.

MR. POZEN: Thank you.

CO-CHAIRMAN PARSONS: Estelle.

DR. JAMES: I have a follow up question to Bob’s 

question, and also, I would then like to ask you one of the 

same questions that I asked the TSP about investment options.

But my question about administrative costs pertains 

to the little detail of telephone calls, because that is 

another important expense item. And I noticed, from looking 

at your numbers, that you have an average of one personal 

telephone call per participant to a person and two automated 

telephone calls per participant per year, according to your 

written document.

MR. WOLF: Yes.
53

DR. JAMES: I am curious -- and personal telephone 

calls can add a lot to expenses. I am curious if you know 

how much of that is attributable to the annuity phase, that 

is, the withdraw phase, and how much of that is attributable 

to the investment phase.

I am also a TIAA participant, TIAA-CREF, and I have 

made some telephone calls recently, and they are all in 

connection with a possible withdrawal phase. So I am curious 

how you have allocated some of these joint expenses between 

those two parts.

And when you finish that question, my other 

question has to do with the investment options people have 

chosen and how that has changed through time and how that may 

differ between men and women and high and low earners.

MR. WOLF: Okay. Let me start with the 

administrative costs and telephones. I did a quick kind of 

back of the envelope calculation to try to bring that down to 

a participant kind of a level, and frankly, we think a phone 

call costs us in the neighborhood of $10.00 per call.

Now, the great majority of our calls are about the 

pay-in side of your retirement plan. If you look at the fact 

that we have over two million participants in the pay-in 

stage, if you will, versus 400,000 on the payout side, that 

kind of a ratio, you can see that that is perfectly 

reasonable and understandable.

If an average phone call costs us about $10.00, if 
54

I was to say how about a discussion about your retirement 

options, which is a much more complex conversation -- in 

fact, we send out a lot of information about what the options 

are. We send out a lot of pamphlets. We send out a lot of 

illustrations, we have web facilities, et cetera.

So when we get a phone call about retirement 

options, it is usually a pretty long phone calls. Where our 

average call might be an 11 minute kind of time frame today, 

a retirement phone call is more like 35 to 45 minutes. 

So, taking that $10.00 an average call, I would say 

for a retirement call you are more in the neighborhood of 

$35.00 to $45.00, and I don’t think that is too far out of 

whack with what the industry would probably zero in on. 

Although we are a very low cost provider.

DR. JAMES: And many of your phone calls are about 

retirement issues, rather than about investment issues?

MR. WOLF: Well, I would say a great majority or 

more about the options in their current allocation setting 

versus in retirement.

DR. JAMES: I see. Okay. 

MR. WOLF: Although, if you look at the 

demographics, clearly we are going to start to get more of 

those retirements phone calls. And that is why we are 

spending a lot of time and effort and resources on those 

facilities being available through the web. To minimize 

those phone calls. Number one.
55

But preferably, when the individual calls about 

retirement, they are much more informed about their options 

and we can have a much more intelligent conversation to 

minimize the amount of time it takes to meet their 

objectives.

DR. JAMES: Okay. Now, could you just briefly 

summarize the stock versus bond investment choices, the

breakdowns that people have made and how that has evolved 

through time? And are there differences between the gender 

and income groups?

MR. WOLF: Okay. Let me give you kind of the 

35,000 point of view of that as well. 

DR. JAMES: Yes.

MR. WOLF: If you think about our company starting 

in 1918 and your only option was really on the retirement 

fixed income side, you get a sense that if we look at even 

some of our -- a big percentage of our pay-in people, it is 

very heavily weighted for the older folks, in some cases, 

toward the TIAA fixed income side of the house.

Now, having said that, I will say since 1952, when 

we had the initial CREF variable accounts, now almost 70 

percent of our participants have greater than 50 percent of 

their premiums going to the equity side of the house. So it 

is a very big percentage.

I will tell you, anecdotally, that has shrunken a 

little bit over the last six to nine months where equities 
56

has fallen back just a little bit and people are starting to 

invest in some of other options, including inflation link 

bond account and our real estate account. But still, the 

equity side of the house is, by far, the biggest percentage.

If you look at male versus female, I don’t think it 

will be a surprise to find out that males are a little bit 

more aggressive on the equities than females are.

DR. JAMES: And by income group, have you noticed 

any differences?

MR. WOLF: By income group the lower incomes are a 

little bit more conservative. A little bit more 

conservative. Although we would counsel the younger people 

and, almost by definition, the lower income people that they 

should take a little bit more of an equity view because of 

the time horizon that they have. So we would counsel them to 

do more.

But I think -- if we look at some of the low income 

groups that you are referring to specifically, I think you 

would see they are a little bit more conservative.

DR. JAMES: Including younger people? 

MR. WOLF: Yes. 

CO-CHAIRMAN PARSONS: Yes. People tend not to be 

stupid, but ...

MS. KING: Just a very quick question. What 

percentage of your participants are women and what percent 

men? Is there a disproportionate membership?
57

MR. WOLF: I don’t know off the top of my head. 

Fifty-three percent female.

MS. KING: Fifty-three percent female.

CO-CHAIRMAN PARSONS: Bob.

MR. POZEN: I notice that you have, in your 

participant book, different allocations between equities, 

real estate bonds, et cetera, for conservative, progressive, 

et cetera. 

If you have participants who come to you and say, 

we are not sure what to do, we would like you to put together 

for us an allocation, will you give them an allocation? Will 

you do a lifestyle for them so that you can sort of help them 

if they really feel they are a little at sea?

MR. WOLF: What we have tried to do is have these 

sample models available and pamphlets and brochures, like we 

have here. More importantly, we have web facilities that 

will enable an individual to go through and respond to a 

certain number of questions and determine whether they are 

conservative, moderately conservative, moderately aggressive 

or aggressive.

And by doing that, the person can get a real sense 

of playing with it; what does it do to the specific 

allocations that we would recommend.

You may know that we do not have lifestyle 

investment options available through TIAA-CREF. But, in 

effect, some of what we are talking about is lifestyle 
58

oriented, where earlier in the game they should be a little 

more aggressive on equities and at the later stages they 

should start to get a little bit more conservative. We make 

that apparent when looking at the web facilities that we 

have.

CO-CHAIRMAN PARSONS: Sam.

MR. BEARD: I have two quick questions. One thing 

is you recommend that people, when they retire, consider an 

annuity. People who are against the idea of private accounts 

lay out charges on the table; that when the private sector 

annuitizes money -- and they use wonderful words like they 

rip off 20 percent. So I am wondering. Do you rip off 20 

percent?

(Laughter.)

MR. WOLF: No. I think we have a reputation of 

being a low cost provider because we are. In fact, if --

MR. BEARD: That is a question of advice to us. If 

one of our options is to set up private accounts and one of 

our options is annuity, what might the eventual cost of 

annuity -- let’s say someone builds up and they have a 

portfolio of $200,000 and now they choose an annuity. What 

happens?

MR. WOLF: The ongoing payout is a very simple, 

inexpensive, if you will, approach at paying an annuity over 

the rest of their lifetime. Those investments are being 

tracked. They still get ongoing, you know, interest building 
59

up. You can look at what the typical expenses are.

But paying out annuity is not a big part of the 

equation. What exactly that would be, compared to several 

other options, I don’t have off of the top of my head. But 

it is not because that is what we are designed to do.

MR. BEARD: So it shouldn’t exorbitant fees?

MR. WOLF: I would say it should not be exorbitant.

MR. BEARD: The next question is -- when I read 

your stuff, it is wonderful. You have 500,000 retirees and 

they are setting aside an average of $5,600 a year. 

If I am a $30,000 worker, and I set aside 10 

percent a year, that is $3,000 a year, and I start at the 

workforce at age 20 and I do that for 45 years, how much 

money do I accumulate in an account that I would own? I know 

there is no way absolutely of saying that.

MR. WOLF: Yes.

MR. BEARD: But is there any rule of thumb or 

models that you have?

MR. WOLF: Yes. The models that we typically refer 

to, if we were starting today and talking with an individual, 

we would say they would probably look at something in the 

neighborhood of 40 to 45 percent of income replacement at 

retirement time looking at annuity.

And that is with assumptions like you are starting 

at about 30 years old, you are getting five percent salary 

increases and you are getting a return on your investment. 
60

Roughly in the seven percent range.

And we would say that by the time you retire, you 

are probably replacing something in the 40 to 45 percent of 

your then salary.

MR. BEARD: So the day before I retire, about how 

much money am I to have in my account? What could a $30,000 

-- assume an average.

MR. WOLF: Well, I would have to do the 

calculations starting from the start to go out there, and the 

variables you can change all along the way to come up with a 

totally different number based on salary increases and what 

you use as your assumptions.

But right now, our average retiree has $90,000 in 

their account. And, in fact, if we look backwards and find 

out, over the last 30 years, that people have worked at age 

65 our retirees now are replacing 80 percent of their current 

salaries. And that is a dramatic change and it is a 

function, as was heard earlier, of the stock market over the 

past 20 years.

CO-CHAIRMAN PARSONS: Let me ask a question. It is 

sort of crude and maybe even dumb, but it does strike me that 

TIAA-CREF has been around, as you say, since 1918. You have, 

that time, had million of participants come through the 

system. You have been in existence through all the cycles, 

through the Great Depression, through the recessions of the 

>60s and >70s.
61

To your knowledge, has any participant in TIAA-CREF 

ever lost all of his money?

MR. WOLF: To my knowledge? No. One of the 

reasons is we try to have a very balanced, small number of 

investment choices on the equity side that, hopefully, limits 

that exposure. And, of course, the TIAA side of the house is 

a fixed return, and we have other fixed returns that people 

also invest in.

And to my knowledge, that is almost impossible to 

have happen. Even in that time frame that you are talking 

about.

If you looked at CREF, and CREF has been around 

since 1952, since inception that has returned over 11 

percent. In the last 10 years it is over 12.4 percent. So, 

even with all of the ups and downs, since 1952 CREF’s classic 

stock fund is returning over a 12-percent return, and that is 

pretty good.

CO-CHAIRMAN PARSONS: I understand that. I used to 

be a trustee of TIAA-CREF.

MR. WOLF: I understand that. Yes.

CO-CHAIRMAN PARSONS: But I am just trying to, at 

some conceptual level, understand and get your sense of how 

much risk do these kinds of programs actually entail. And I 

would agree with you. I don’t know how it would be possible, 

given the structure of TIAA-CREF, for somebody to literally 

lose all of their money.
62

Do you have any sense or can you give us any 

approximation of the percentage of those millions of people 

who have participated over those 80-plus years how many 

people would have actually lost money? 

MR. WOLF: Off the top of my head I don’t know. 

We could maybe do some calculations for you and get back to 

you. But the market has come up and down. 

I would say, if you started today and put 100 

percent in equities and that particular equity investment 

didn’t return anything positive for the next 30 years, yes, 

you could be in trouble. But what is the likelihood? So...

CO-CHAIRMAN PARSONS: I realize one can only 

theorize anything. But you have got, as I say, 80-plus years 

of experience over millions of participants. So I would have 

some confidence in the sort of statistical validity of your 

experience.

So if you might -- and I realize this is putting a 

little bit of a burden on your colleagues. But if you might, 

just go back and see if over that span of history you can 

give us some quantification of how many people actually lost 

money. I would think the percentage would be some fraction 

of one percent, if at all. But I would be interested to 

know.

MR. WOLF: We will do the analysis and get back to 

you.

CO-CHAIRMAN PARSONS: I would be interested to 
63

know. Thank you.

MR. WOLF: But we are really talking a long-term 

horizon. That is the positive things we have working for us.

CO-CHAIRMAN PARSONS: I understand

MR. WOLF: I mean, any particular short period of 

time you could have a harsh view of the world, but it is not 

your --

CO-CHAIRMAN PARSONS: I am not talking about over 

an artificial period. I am talking about a real person with 

a real account who had a real experience.

MR. WOLF: We would be happy to do that.

CO-CHAIRMAN PARSONS: Gwen.

MS. KING: Just one final quick question for me. 

You mentioned $10.00 a phone call, and that number intrigues 

me. I don’t really know how much or if we have costed it 

out. Steve Gauss is going, please, don’t let her finger me 

here.

I don’t know if we have costed out what phone call 

costs at Social Security, but it would be interesting to do 

the comparison there. But my assumption is that you have 

people answering those phones who are very well informed and 

who have a breadth of knowledge across the number of areas 

just in case the question comes in and they have to handle 

it.

What about foreign language operators? Do you do 

that too with your telephones? Do you have people who speak 
64

different languages?

MR. WOLF: Because we are primarily domestic, we do 

have Spanish, but we don’t have a wide breadth of other 

available languages currently on the phone right now. But we 

can deal with Spanish requests and we will be, in fact, 

building that capacity up even more so over the near term. 

But we are basically domestic. So we try to stay with 

English and Spanish at this point.

MS. KING: I was just in Chicago last week, and the 

Social Security Administration people out there are dealing 

with domestic issues as well. B ut in that one area of 

Chicago they have some 15 languages of people who are in the 

country and working and that they are trying to handle. 

I just wonder if that complicates the amount of 

money per telephone call that we would have to look at. But 

so many of our Americans, as you know, are speaking a lot of 

different languages these days. So it is just a question I 

wanted to get checked with you.

CO-CHAIRMAN PARSONS: Bob.

MR. POZEN: Just a point of clarification. I am 

sure TIAA-CREF has the same position as most financial 

services providers. 

With the rise of the Internet and automated phone 

calls, including Natural Voice, more and more of the 

inquiries are handled extremely cheaply, at the 50 cents 

range, by these sorts of automated inquiry systems and the 
65

web, which is very good.

That has led to the somewhat ironic and anomalous 

result; that when people actually call, they call because 

they have a very complicated question, because most of their 

questions, account balances, you know, various rules, et 

cetera, are taken care of; so that the $10.00 per phone call 

has to be viewed in that context. You sort of say what is 

your overall service cost.

Most of the service cost for customers are very, 

very low because most of the inquiries can be handled in 

these automated or net procedures. But then, if somebody 

can’t be satisfied with that, then they might have a very 

complicated retirement planning question or something like 

that.

MR. WOLF: I think that is a valid point when it 

comes to the retirement questions. But we still have a big 

cohort that likes to talk to a real person, and that 

transition is going on.

But clearly, the web, clearly automated telephone 

facilities and what you can do with a cell phone these days 

can answer a lot of those questions. 

MR. POZEN: And Natural Voice, which is coming.

MR. WOLF: Natural Voice is also a valid one.

MS. KING: So you are saying your average telephone 

cost is $10.00?

MR. WOLF: Yes.
66

DR. JAMES: With a person, not because --

MR. WOLF: With a person.

DR. JAMES: Two out of three telephone calls are 

automated, according to his document. One out of three is 

with a person, and that is the $10.00 one. Right? 

MR. WOLF: And that basically is including the cost 

of the person who is responding. You know, their salary, 

their benefits, their training expenses. It is not including 

the cost of the building and some of the infrastructure 

behind it. It is really zeroed on the person, which is 60 to 

70 percent of the expense anyway.

CO-CHAIRMAN PARSONS: John.

DR. COGAN: You mentioned that you don’t have a 

lifestyle fund, which is, I take it, a fund that I invest 

more heavily in stocks at the early ages and then later on 

more heavily in fixed income securities. Had you considered 

it and rejected it? If so, why?

MR. WOLF: No. We have considered it. It is 

something that we would like to do. What we have right now 

enables you to do that yourself. It is just not one that you 

point to and say that is the one I want. I am retiring in 20 

or 30; give me this particular fund. 

We can do it now. It is not that difficult to do. 

 It is very simple. We have all of the investment accounts 

that would be necessary to do it. It is just we have been 

spending our resources on some new and exciting different 
67

things than doing that automatically, to some degree, for our 

new or existing participants.

DR. COGAN: Do you impose restrictions on shifting 

money between funds? Bond funds to stock funds?

MR. WOLF: No.

DR. COGAN: None?

MR. WOLF: No. Not between the equity funds.

DR. COGAN: Between TIAA and let’s say --

MR. WOLF: Right. But there is between the TIAA 

and the equity funds. Yes. There are restrictions there 

because what we try to do in TIAA is long-term investing. So 

we give you the opportunity to earn more in the TIAA 

guaranteed side of the house. 

But as a result of that, you have some limitations 

that are there versus an equity side.

DR. JAMES: Would you describe the limitations just 

so we all know what they are?

MR. WOLF: Yes. Because we are looking to offer a 

better return on TIAA, we typically invest in long-term type 

investments that are not particularly liquid. So, should you 

want those long-term returns, you have to give up some amount 

of liquidity as well in order to get that higher return, and 

that is not an unusual function in the financial services 

marketplace.

What we enable you to do on the pay-in side, 

however, is to transfer out of the TIAA side to our equity 
68

accounts over a 10-year period of time.

DR. JAMES: So the balance gets transferred out 

gradually over 10 years rather than immediately?

MR. WOLF: That is correct. It is spread over a 

10-year period of time, and the objective is not penalize the 

people that are still in TIAA that are looking for that 

better return over the longer period of time. So it is to 

balance the return versus the flexibility.

CO-CHAIRMAN PARSONS: Okay. We have got time for 

one more question, if there is one.

(No response.)

CO-CHAIRMAN PARSONS: If not, --

CHAIRMAN MOYNIHAN: Mr. Chairman, can I just say 

that if it wasn’t for TIAA-CREF, I might just now be getting 

out of jail. After the 1988 election I owed the American 

Express Credit Card $23,000, and I didn’t have a dime. 

Somebody suggested why don’t you just call up --

CO-CHAIRMAN PARSONS: Call Jim.

CHAIRMAN MOYNIHAN: My God. They do things for me. 

I mean, I got the $23,000 the next day, and I was a free man. 

 I could walk around without fear. They erased this and they 

erased that, and they couldn’t have been more generous. And, 

thank you. 

(Laughter.)

MR. WOLF: I am glad we could help, Senator.

CO-CHAIRMAN PARSONS: Well, thank you very much. I 
69

do think it is an exemplar for all of us, in terms of -- we 

haven’t really talked about portability and the advantage 

that comes from being able to move from employer to employer.

CHAIRMAN MOYNIHAN: It changed higher education in 

the United States. 

CO-CHAIRMAN PARSONS: Right. Without having to 

worry about whether your pension gets terminated or truncated 

or lost or stolen or spindled and mutilated. I mean, those 

aspects of the program. It has been a real leader and a 

beacon, and I think that you have much to teach as we go down 

the road here.

And I would be very interested in looking at some 

of the results that we talked about before, in terms of how 

people, in fact, have fared, and therefore, what the risk is.

We thank you for coming. I appreciate your 

testimony and your willingness to answer our questions. 

Thanks a lot.

MR. WOLF: Thank you. 

DISCUSSION OF PUBLIC HEARINGS

CO-CHAIRMAN PARSONS: Okay. We are going to, I 

think, press on, as opposed to taking a little break, because 

we don’t have all that much to do. I am going to, in a 

minute, call on my fellow commissioners to see if anybody has 

any wrap up comments they want to share with their fellow 

commissioners or with this audience.

I would say this: We have talked about it before, 
70

but just so that it is a matter of public record, the 

commission’s next phase would be to move into public 

hearings. We have scheduled all day hearings in San Diego on 

the 6th of September and another hearing on the 21st of 

September in Cincinnati, Ohio.

We asked last time for people to submit requests to 

appear and some synopsis of their testimony. We are working 

with staff now to sort of go through that to sort of create 

as broad a range and as balanced a range of input as we can. 

 We are looking forward to hearing from the public and 

various interest groups and constituencies on those dates and 

in those hearings.

And the door hasn’t closed yet. So anyone who is 

still out there who thinks they might like to testify before 

the commission, if you would be in touch with us, we will see 

if we can’t squeeze you into one of those two hearings.

Having said that, Mr. Chairman, I have nothing 

further to contribute. But I do think I will just swing 

around the table and see if any of our fellow commissioners 

do.

CHAIRMAN MOYNIHAN: Mario is down there. Come on 

down.

CO-CHAIRMAN PARSONS: Now, you shouldn’t feel 

compelled to speak. But if you do, this is your moment.

MR. RODRIGUEZ: This is my moment. I just think 

that we have listened to today was very interesting, and I 
71

was very impressed to see all the numbers that they showed us 

on the return on the investment. And I am really looking 

forward to the September 6th hearing in San Diego, because I 

think it is really important that we hear what the general 

public has to say because it is very important to us.

CO-CHAIRMAN PARSONS: Tom.

DR. SAVING: Well, I have a -- I think this has 

been very interesting in giving us a feel for what two very 

broadly based investment funds are like and what the 

administrative costs are, and it is consistent with the other 

materials that we have had that have come to our attention, 

and hopefully, in the public hearing will come further to our 

attention.

That is, what the relatively low administrative 

costs that very broadly based, meaning very large 

participation funds, can have, in contrast to the level of 

administrative costs that have been brought out by 

individuals who appear not to be in favor of any kind of a 

system like this.

CO-CHAIRMAN PARSONS: Roberto.

MR. POZEN: Well, I just want to mention that the 

Congressional Research Service has come out with this report 

over the last few days in which they evaluate various 

approaches to Social Security, and I was concerned that this 

has been reported by some people in the media as suggesting 

that somehow reform is problematic.
72

But I think to the contrary, that this report show 

that if we do nothing, that there will be a 32 percent 

benefit cut, according to this report. And that shows that 

if various other things are done, various reform measures, 

one of them being some sort of personal account, that then 

there is a possibility of a modest benefit cut, such as five 

or 10 percent.

But there is actually a possibility that overall 

the total will be positive. So I think that I just wanted to 

emphasize that people should take a look at this report.

And instead of saying, well, even if various 

reforms are done, there still might be a little in the way of 

benefit cut to realize that the do nothing plan involves a 

benefit cut of 32 percent in the out years and that while 

none of these approaches, including personal accounts, are 

panacea or perfect, they do involve a much better deal for 

people, meaning much lower cuts and possibly some positive 

returns.

CO-CHAIRMAN PARSONS: John.

DR. COGAN: Let me just echo what Tom said. We 

should keep our eye on the ball it seems, and the ball is the 

return value that personal accounts can provide. Yes, 

administrative cost are important, but from what we have 

heard today there are ways of structuring the system so the 

administrative costs are just very, very small fraction of 

the returns that the system can generate.
73

CO-CHAIRMAN PARSONS: Ms. Gwen.

MS. KING: I thought, Mr. Chairman, that today’s 

session was very useful. As you know, I have been focused 

quite a good deal on communicating with the public and making 

sure that we give participants sufficient information about 

these plans so that they will know what it is that they are 

doing with their money, and I think the testimony today has 

been very helpful in pointing out that communication and 

public information is a very important part of any plan.

And I would hope that going forward we would keep 

that in mind, because it is going to be very, very important 

for people who are investing and who are putting these 

accounts together to know exactly what the impact is for them 

in the future.

CO-CHAIRMAN PARSONS: We are going to go, I guess, 

down to the other end. Sam.

MR. BEARD: One of the things I would like to cede 

my time basically to Senator Moynihan. One of the issues 

that has come up is if you talk about trying to save Social 

Security and one option is to add funded accounts, some 

people characterize this as a brand new, shocking or even 

radical idea.

And I know that from my perspective -- I have been 

working in this now for 10 years. President Clinton’s Social 

Security Advisory Council, in 1994 and 1996, all members, all 

members of that said we need to x-ray the return from the 
74

private sector.

So the choice was not whether to invest in the 

private sector or not. The choice was do we want the Federal 

Government to invest many trillions of dollars, and one third 

of the members of that commission favored that.

And the other two thirds said I don’t think the 

idea of the Federal Government investing many trillions of 

dollars is good. Let’s have people have individual accounts. 

 I am paying my money to Social Security. Let a part of my 

money go into an account which I own.

And, Senator, what I would refer back to you is you 

had mentioned to me that President Roosevelt, going all the 

way back to the 1930s, had talked about a system of this 

nature. Can you comment on that?

CO-CHAIRMAN PARSONS: Exactly how much of your time 

did you cede?

(Laughter.)

MR. BEARD: My intentions were better than reality.

CHAIRMAN MOYNIHAN: Well, actually it is in our 

book, today’s book, at tab three. It is the message to 

Congress on Social Security, January 17, 1935, a few weeks 

after the Committee on Economic Security, headed by Francis 

Perkins, had reported to him.

And President Roosevelt states, AAt this time I 

recommend the following types of legislation looking to 

economic security:@ One, unemployment compensation. And 
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that came first in 1935 obviously.

Two, old age benefits, including compulsory and 

voluntary annuities. On the next page he says, and I am not 

going through the details of this, voluntary, contributory 

annuities by which individual initiative can increase the 

annual amounts received in old age. It is proposed that the 

Federal Government assume one half of the cost of the old age 

pension plan, which ought ultimately to be supplanted by 

self-supporting annuity plans.

I mean, this is present at the creation. We have 

not brought in some monstrous proposal for letting Wall 

Street rip off the Americans. For what it is worth, if I 

could just use my minute that is left, --

CO-CHAIRMAN PARSONS: Now you are on your own time.

CHAIRMAN MOYNIHAN: My own time. To tell the other 

panel that we had a good meeting this morning with the 

Treasury Department officials. In the last administration, 

in 1997 and 1998, they did a very great deal of work at the 

request of the White House on how you might create personal 

savings accounts in the Social Security System.

There were two options that they presented. They 

are going to send them over to us, and then they are going to 

do some more work for us. They couldn’t have been more 

cooperative, and we are very, very grateful to them.

CO-CHAIRMAN PARSONS: Thank you. Estelle.

DR. JAMES: I would just like to comment on a 
76

couple of things that I took away from the session today.

I think it is interesting that the two 

organizations that were represented are serving groups that 

are often thought to be quite risk averse and conservative in 

their investments. That is, government employees and college 

professors.

Yet these two groups took full advantage of the 

opportunity to invest in individual accounts when they were 

given that option, and in particular, the opportunity to 

invest in equities. We see that more than half of the money 

is going into equities and this has increased over time.

These organizations both have adopted measures that 

reduce the risk attached to equity investment so people are 

able to invest in equities and earn the higher return at a 

contained sort of risk, and also, they have undertaken 

measures to keep administrative costs low.

I think there are three measures that they have 

undertaken that we should think about seriously. One is 

limited investment options. There are choices, but there are 

not an infinite number of choices. There are five to 10 

choices in each case.

Secondly, each of these choices requires broad 

diversification, because ultimately broad diversification is 

the best protection against risk.

And third, there is a heavy emphasis on index funds 

or quasi index funds, a large emphasis on having all or a 
77

large proportion of the portfolio indexed, which keeps 

administrative costs low.

So I think we should think about these three design 

features, limited choice, large diversification and use of 

index funds, as measures that will enable the workers of a 

country to invest in equities, earn the equity premium, while 

keeping costs and risks under control.

CO-CHAIRMAN PARSONS: Fidel.

MR. VARGAS: Well, first of all, I just want to say 

that today was a feeling of work beginning, because now I 

think we are beginning to talk about the specifics of what we 

might consider in terms of making any specific 

recommendations.

And from my personal perspective, I am beginning 

now to really look at the specifics of the proposals, and 

more specifically for me to look at. And we have talked 

about this before: strengthening Social Security and having 

the recommendations that we make really continuing the true 

spirit of what Social Security was initially intending to do.

And I know there has been some mention of the 

progressivity of the system being threatened, and I, for one, 

want to do everything that I can in terms of looking at those 

proposals to make sure that that is maintained.

So, I am thankful for today, and I think we had a 

productive session.

CO-CHAIRMAN PARSONS: Tim.
78

MR. PENNY: I was going to highlight the same point 

that Mr. Beard and Senator Moynihan stressed. So I guess I 

would ask the Chairman that I can put my allotted time in 

some sort of trust fund and retrieve it with compound 

interest at a future commission meeting. 

CO-CHAIRMAN PARSONS: That is right. I owe you 

(Laughter.)

DR. COGAN: A penny for the lock box.

CO-CHAIRMAN PARSONS: Let me just write you an IOU. 

 Thank you. 

I will say two things, because we did have two 

different panels this morning, one of which Senator Moynihan 

led, which focused on learning more about the administrative 

side, and one which I chaired, which focused on some of the 

alternative to assure fiscal stability over time. It was 

informative.

We are trying to get our arms around what are the 

various levers and knobs and dials that one can turn, pull 

and push to hopefully do what Bob Pozen talked about; 

strengthen the system and create sense of confidence in the 

system by making it -- by restructuring the way that it is 

sustainable, which the current system isn’t over time, 

without impacting or reducing benefits and maybe creating an 

opportunity for Americans to create wealth for themselves, 

and it is on that last point that I think today’s session was 

most helpful.
79

It does strike me that the TIAA-CREF model in 

particular has some real lessons for us. I mean, the 

commission itself has been accused, even though we put out an 

interim report that had no recommendations, of trying to 

scaremonger and alarm the American people.

One of the arguments that one hears all the time is 

we can’t trust people to manage private accounts. They will 

somehow fritter their money away and the government will have 

to come in, at the end of the day, and step in to save them. 

 And I think that the TIAA-CREF model suggests, quite 

powerfully, the exact opposite; that millions of people over 

eight decades or more -- and not just college professors, 

Estelle, but clerks grounds keepers and all people, 

administrators at colleges, have been exposed to the 

opportunity to sort of manage funds in the marketplace for 

themselves, properly structured and carefully administered in 

a way that it appears that not one of them has lost 

everything.

And I am going to bet, when the results of that 

study comes in, we are going to find that very few, if any of 

them, have lost money against what they have put in.

I mean, I think you will find that for those 

millions of people this was a way to create something of a 

nest egg for themselves and their heirs, and I think that is 

part of what we are about. So I was very encouraged to hear 

that. 
80

I look forward to our public hearings, and we will 

soldier on. So, if there is nothing else, thank you all for 

your attendance, and we look forward to seeing some of you in 

San Diego.

(Applause.)

CHAIRMAN MOYNIHAN: Or Cincinnati.

(Whereupon, at 3:11 p.m., the hearing was 

concluded.)