Statement of M. Kay Grenz, Vice President, Human Resources, 3M Company, St. Paul, Minnesota

On behalf of 3M, I am pleased to submit, for the record, written comments in response to the hearing on Employee and Employer Views on Retirement Security, which was held on March 5, 2002, before the Subcommittee on Oversight of the U.S. House of Representatives Ways and Means Committee.  My name is M. Kay Grenz, and I am vice president, 3M Human Resources.

3M is a large multinational corporation with 2001 worldwide annual sales of just over $16 billion.  We produce more than 50,000 products that are sold in nearly every country in the world. We have approximately 35,000 employees in the United States and a similar number abroad.

I’m proud to note that, in a few months, we will celebrate our centennial. Over our 100-year history, we have been intimately involved in the evolution of the current retirement security system.  Today, we have a large number of 3M retirees who are reaping its benefits. In my statement, I would like to draw on 3M’s decades of experience while addressing the general issue of retirement security.

The retirement security system that has evolved in the United States is an impressive achievement. It combines: (1)a very successful federal program (Social Security); (2) an extensive, voluntary employer-based pension system; and (3) individual savings.

For tens of millions of Americans, this three-part approach is the basis for a secure and comfortable retirement.  The system works -in large part -because it provides incentives for employees and employers to participate.

Can the system be improved?  Certainly.  But I urge the members of this subcommittee, and all in Congress, to undertake any changes with great care. Changes should ensure that current protections and incentives are preserved and that all three parts of the current system continue to work in harmony. In particular, if changes were to discourage employer contributions to pension and 401(k) funds, a greater burden would be placed on individual savings and Social Security.  This would be detrimental to the millions of Americans now saving for their retirement and to the nation as a whole.

The Current System Works for Millions of Americans

The current, three-part approach to retirement security works for the 56 million Americans who participate in 401(k), profit sharing and employee stock ownership plans (also known as ESOPs).  Pension legislation enacted in June 2001 is expected to increase that number.

This system currently helps 60,000 U.S. 3M employees, retirees and their survivors build the resources they need for a comfortable and secure retirement. I would like to take a moment to describe 3M’s Total Retirement Program.

The 3M pension plan:  The foundation of the 3M Total Retirement Program is the 3M pension plan, which provides a lifetime, fixed monthly pension to retirees and their survivors. Currently, 25,000 U.S. retirees, survivors and former employees receive monthly pension checks from the company’s defined benefit plan. This year, 3M pension payments will total about $375 million. These payments are secured by a pension trust that currently holds over $6.1 billion in assets.

This plan is funded entirely by 3M contributions and returns on fund investments. When returns on fund investments are not sufficient to cover the growth of fund obligations, 3M makes cash contributions to the fund to ensure that it has the assets to cover its obligations.

In each of the past six years, 3M has made a cash contribution to the pension fund. These contributions have ranged between $80 and $150 million annually. As of September 2001, the pension plan had assets equal to 103 percent of accumulated benefit obligations (the present value of pension benefits attributed to service to date) and 96 percent of projected benefit obligations (the accumulated benefit obligations including assumptions of future compensation levels).

3M’s 35,000 U.S. employees bear none of the cost and none of the investment risk of the pension plan.

The 401(k) plan: 3M’s Total Retirement Program also includes a voluntary retirement savings program or 401(k) plan. The plan currently has $4.7 billion in assets.

Over a year ago, 3M introduced a new program of retirement benefits designed to attract early-career job candidates; current employees were given the option of remaining with their original retirement program or moving to the new program. Both programs include a 401(k) plan, in which employees can invest up to 35 percent of their payon a before-tax basis (up to $11,000) and up to 9 percent of their pay on an after-tax basis. For the first 6 percent of their pay, 3M will match 35 cents or 50 cents for each dollar the employee invests (depending on which pension program the employee is under). 

In addition, regardless of whether they choose to contribute to the 401(k), employees receive company-paid contributions based on 3M’s financial performance.

Other benefits: 3M also offers retirees life insurance and access to low-cost medical, pharmaceutical and dental insurance.

To summarize, 3M offers a comprehensive retirement program that includes a pension plan, a 401(k) plan and low-cost medical, pharmaceutical, dental and life insurance. While every investment program involves some risk, the 3M retirement program allows participants to adjust the level of risk to suit their tolerance and their personal investment objectives.

In other words, for 3M employees, retirees and their families, the current system works well.

The 3M Retirement Program Promotes Diversification of Assets

A central issue in the discussion of retirement security is the concern over an excessive concentration of company stock in an individual’s overall retirement portfolio.  Specifically, the concern is that a lack of diversification could jeopardize the employee’s security if the value of the company’s stock were to drop precipitously.

At 3M, we have stressed the advantages of diversification in our pension investments, in the rules by which we operate our 401(k) plans and in our communications to employees.

3M’s pension fund contains a minimal holding in 3M stock. Although federal law allows up to 10 percent of a pension fund to be invested in company stock, less than 1 percent of the fund’s $6.1 billion in assets are in 3M stock or 3M stock futures.

3M also encourages employees to build a diversified portfolio of investments within their 401(k) accounts. Although company contributions (matches and performance-based) are in 3M stock, 3M does not permit employee contributions to be invested into 3M stock. Instead, employees can choose from 11 core investment funds and can access more than 2,000 additional mutual funds (but not individual stocks) through a brokerage account.

Furthermore, employees can sell up to 50 percent of their 3M stock and transfer the proceeds into these 401(k) investment funds after they have completed five years of service with 3M, regardless of the employee’s age. (Federal ESOP law mandates only that employees over age 55 be allowed to transfer up to 50 percent of their employer’s stock into other investments.) Allowing employees to diversify the investments of more than 50 percent of their 3M stock could make it impossible for the plan’s ESOP to satisfy the U.S. tax code’s requirement that an ESOP be designed to invest primarily in employer stock.

Finally, 3M strives to inform and educate employees on the opportunities for and importance of a balanced investment strategy.  Among other tools, the company provides employees with access to an online investment advice tool that offers investment recommendations and helps employees develop a comprehensive retirement plan consistent with their personal tolerance for risk. Nevertheless, employees are responsible for the development and application of such a strategy.

As a result of this emphasis on diversification, 3M employees -as a group -appear to have well-balanced retirement portfolios.

If one looks only at 401(k) accounts, 3M employees currently hold about 30 percent (or $1.5 billion) of total assets in 3M stock. By diversifying to the fullest extent allowable under current plan provisions, employees could reduce the 3M stock in their 401(k) accounts to 15 to 20 percent.

A final important note: If one looks at a typical 3M retiree’s total retirement income portfolio -which includes the 3M pension plan, 401(k) accounts, Social Security and personal savings -we estimate that 3M stock constitutes less than 5 percent of total assets.

America Needs a Strong and Balanced Retirement System

I am sure the subcommittee appreciates the need for a strong and viable retirement system in this country, so I won’t dwell on this point. I would like to make two observations, however.

First:  This critical system has three parts, and changes to any one part will surely reverberate throughout the entire system.  Changes that diminish the appeal of and participation in 401(k) and pension plans, for example, will necessarily increase Americans’ reliance on private savings and Social Security.  At a time when Congress is concerned about the solvency of Social Security and when the savings rate among Americans is at historic lows, such a change would seem to be unwise public policy.

Second:  The legal and regulatory framework behind the current system is, like the system itself, an impressive achievement.  It is richly complex and difficult to understand. The repercussions of a change in one area may not be immediately evident. Modifying such a system requires careful and thorough consideration.  A well-meaning change could produce unintended but, nevertheless, harmful burdens that would be shouldered by our retirees and by those who are working hard to save for their retirement.

A Voluntary System Relies on Incentives

The current U.S. retirement security system combines a compulsory component (working Americans and their employers contribute to Social Security) and two voluntary components, which are individual retirement savings -including 401(k) accounts -and private pension funds established and maintained by corporations.

The point has often been made that the compulsory component -Social Security -was designed as a supplement to voluntary efforts, such as individual savings and company pension plans.  One of the reasons why this voluntary system has worked so well for so long is that it provides reasonable and attractive incentives for both employees and employers.

For employees, the incentives are emotional and financial.  Obviously, one of the primary emotional motivators is the desire for a secure and comfortable retirement.  This desire alone would prompt many individuals to save for their later years.  Unfortunately, many would not. To further encourage these individuals, Congress has created financial incentives in the form of savings plans that offer tax deferral as a benefit of participation.

For companies, the incentives are similarly emotional and financial.  Many companies, including 3M, established their pension funds because we felt a loyalty to employees and wanted to reward them for their years of service. We also recognize that employees often feel a corresponding loyalty to companies that establish and fund meaningful pension benefits.

In addition, we recognize that employee ownership of company stock -which, as I mentioned, we provide as a match for employee contributions to their 401(k) plans -gives employees a stake in the company’s financial performance. This provides a powerful incentive for the innovative thinking, diligence and dedication needed for success in today’s competitive markets. Also, because they are aware of the company’s goals and strategies, employees are usually highly supportive investors.

Many companies establish mechanisms that promote employee stock ownership; these mechanisms include discounted stock purchases, stock options and awards tied to financial performance.  In addition to the emotional benefits, Congress has crafted additional tax provisions that make it financially beneficial for companies to contribute stock to employees’ 401(k) programs. This tax benefit varies depending on the number of shares held in the plan and other factors. In 2001, the tax benefit to 3M was approximately $15 million.

If the tax benefits enjoyed by employees and employers did not exist, many individuals would still save for retirement and many companies would still provide pension benefits and promote employee stock ownership.  But far fewer would do so, for obvious reasons. 

For individuals, it is always hard to balance immediate needs, such as a mortgage or car payment, against long-term needs, such as retirement. The one need is pressing; the other is easy to set aside.

Corporations, too, must balance needs.  They must allot their limited funds among salaries, health care and pension benefits, dividends, capital investments and so on.  The amount that is contributed to 401(k) plans is clearly influenced by the tax advantages that companies receive for making these voluntary contributions. Absent those advantages, the balance among competing needs would be recalculated.

In short, we believe that the company’s contributions to 401(k) plans are good for 3M employees.  We believe that those contributions are particularly valuable when they come in the form of 3M stock, because the tax advantages allow a larger contribution than we could otherwise make and because the company benefits when employees have an ownership interest in the company’s performance.  We think that a 30 percent concentration of 3M stock in the 401(k) program is not unreasonable, in the context of a broader retirement portfolio.  And we recognize that the loss of tax advantages would lead to a reevaluation of the amount 3M can responsibly contribute to employees’ 401(k) accounts.

Recommendations for Congressional Action

Recent events show us that America’s overall retirement system can be improved. Millions of American workers rely on their employer’s pension and 401(k) plans as the foundation of their retirement savings, and recent events show that careful additional steps may need to be taken to ensure retirement security.

3M supports changes that increase worker protections when those changes preserve the incentives for employer contributions and the benefits that come from employee stock ownership.

As I mentioned earlier, 3M allows employees the maximum diversification permitted under ESOP regulations -that is, 50 percent of employer-contributed stock -as soon as the employee has spent five years with the company.  This approach has yielded a very appealing outcome.

Because of the tax treatment of 401(k) programs, 3M is able to make a significantly more generous contribution to employees’ retirement funds than would be possible under other circumstances.  Employees have had a reasonable opportunity to diversify -such that 3M stock constitutes about 30 percent of their 401(k) plans and about 5 percent of their overall retirement portfolio -and yet they still have the motivation that comes from owning company stock. 

Changes that would adversely affect this program -including additional limits on employee stock ownership, reduced incentives for employee saving and reduced tax benefits for employer contributions -would likely produce adverse effects on our employees.

We also support equal treatment for all employees during the blackout periods that are periodically necessary for administrative and other reasons. We believe that participants and beneficiaries should be given reasonable advance notice of an approaching blackout. We oppose arbitrary limits on the length of blackouts. 

Finally, we think that it is logical and most convenient for participants and beneficiaries if employers are able to offer them access to balanced, professional investment and other financial education.  So that participants have the tools to diversify wisely, any changes in diversification requirements should permit employers to provide access to meaningful, cost-effective investment advice, without employers incurring liability.

The Importance of Balance

In closing, I would like to commend Congress for tackling a complex issue that is of great importance to all Americans. As you proceed, I urge you to be guided by a “do no harm” approach so as to avoid any changes that might harm a system that works so well for so many.  Furthermore, I would like to reemphasize that America’s retirement security system is based on a balanced reliance on compulsory Social Security, voluntary individual savings and voluntary corporate contributions. We need all three.  Any changes to the system should not change the balance among these three components. If one is impaired in any way, an unsustainable burden will be placed on the others.

Thank you for the opportunity to submit this statement.

For additional information, contact: Tom Beddow, vice president, 3M Public Affairs and Government Markets, Tel: (202) 331-6948, or June D’Zurilla, manager, 3M Federal Government Affairs, (202) 331-6950