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Camp Announces Hearing on Tax Reform and Tax-Favored Retirement Accounts

April 17, 2012

Hearing on Tax Reform and Tax-Favored Retirement Accounts








April 17, 2012

SERIAL 112-24

Printed for the use of the Committee on Ways and Means


DAVE CAMP, Michigan, Chairman

WALLY HERGER, California
PAUL RYAN, Wisconsin
DEVIN NUNES, California
JIM GERLACH, Pennsylvania
TOM PRICE, Georgia
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

RICHARD E. NEAL, Massachusetts
JOHN B. LARSON, Connecticut
RON KIND, Wisconsin

JENNIFER M. SAFAVIAN, Staff Director and General Counsel
JANICE MAYS, Minority Chief Counsel





Dr. Jack VanDerhei
Research Director, Employee Benefit Research Institute

Ms. Judy A. Miller
Chief of Actuarial Issues and Director of Retirement Policy, American Society of Pension Professionals and Actuaries

Mr. William Sweetnam
Principal, Groom Law Group

Mr. David John
Senior Research Fellow in Retirement Security and Financial Institutions, The Heritage Foundation

Mr. Randy H. Hardock
Partner, Davis & Harman LLP, testifying on behalf of the American Benefits Council


Tuesday, April 17, 2012
U.S. House of Representatives,
Committee on Ways and Means,
Washington, D.C.


[The  advisory of the hearing follows:]


The committee met, pursuant to call, at 10:02 a.m., in Room 1100, Longworth House Office Building, Hon. Dave Camp [chairman of the committee] presiding.

Chairman Camp.  Good morning.  We meet today to continue our dialogue about what I hope will result in a bipartisan path forward to reform our Federal income tax system.  In recent weeks much of the discussion about tax reform has centered on the corporate side, especially after Japan lowered its corporate rate on April 1st, leaving America with the dubious distinction of having the highest corporate tax rate in the industrialized world.  It is simply unacceptable that American employers face such an undue burden at a time when we desperately need them to get the economy growing and get almost 13 million unemployed people back to work.  But as tax filing day reminds us, only comprehensive tax reform ensures that we address the needs of American families and all job creators, regardless of how they are structured, and as such we must consider the individual side of the Tax Code if we are to transform today’s broken code from one that impedes to one that improves prospects for job creation. 

Last year the IRS processed 142 million tax returns.  They also received 10.5 million extension forms, at least in part due to the complex, costly, and time‑consuming nature of the Tax Code.  With nearly 4,500 changes in the last decade, 579 of them in 2010 alone, the code is far too complex, and this complexity has led to ever‑increasing costs of complying with the Federal Tax Code. 

According to the National Taxpayer Advocate, in 2008, taxpayers spent $163 billion complying with the individual and corporate income tax rules.  American families are not only spending more money complying with the Tax Code, they are also spending more time.  Navigating through the tangled web of tax rules has resulted in taxpayers spending over 6 billion hours annually to comply with the code.  Whether it is the compliance and administrative burdens, the impact of temporary and expiring tax provisions, or the effect of convoluted rules on financial planning decisions, today’s Tax Code is not just hampering employers, but it is hampering the ability of individuals and families to plan their finances with reasonable certainty. 

Turning to the topic of today’s hearing, tax incentives for retirement saving, it quickly becomes clear why we are taking the time to lay the foundation for comprehensive tax reform by gathering input from experts.  As many Americans work to meet the tax filing deadline, today’s testimony reinforces the wide popularity of these savings vehicles.  The overwhelming majority of American workers with access to a workplace retirement plan are participating in that plan.  According to the Bureau of Labor Statistics, 78 percent of full‑time workers have access to a workplace retirement plan, and 84 percent of those workers participate in the plan, meaning 66 percent of all full‑time workers participate.  The plans benefit taxpayers of all income levels and from all walks of life. 

In 2010, over 70 percent of workers earning $30,000 to $50,000 participated in an employer‑sponsored retirement plan if such a plan was available to them, according to data from the Employee Benefit Research Institute.  Similarly, IRS data indicates that 38 percent of those participating in defined contribution plans make less than $50,000 a year, while almost three‑quarters make less than $100,000 annually. 

The proliferation of tax‑favored retirement accounts has occurred as specific needs have led Congress to create new types of plans with different rules.  Some, however, have questioned whether the large number of plans with different rules and eligibility criteria leads to confusion, reducing effectiveness of the incentives and increasing retirement savings. 

In addition, many commentators have offered ideas for increasing participation in retirement plans and better targeting the incentives.  These ideas range from simplification and consolidation of existing plans and accounts to changing the default rules governing whether an employee participates, to additional incentives such as the saver’s credit.  As the committee continues its work toward comprehensive tax reform, it is important to keep in mind that these savings vehicles affect average people who depend on these resources for their retirement, and we must ensure that we do not inadvertently take steps that result in unintended consequences that could threaten the retirement security of ordinary families. 

As this committee considers tax reform, I believe there are three important principles to keep in mind when evaluating tax‑favored retirement vehicles:  one, simplification; two, increased participation, particularly by low‑ and middle‑income taxpayers; and three, whether the tax benefits are effectively and properly targeted. 

Regarding the first of these principles, in August 2010 the President’s Economic Recovery Advisory Board, also known as the Volcker Commission, presented options for simplifying savings and retirement incentives in their report on tax reform options.  These options are worthy of consideration and discussion.  We also have an expert panel of witnesses before us today that will evaluate how existing tax rules measure up to these criteria. 

I would like to emphasize that today’s hearing isn’t about drawing conclusions, but it is about making sure that as Congress approaches comprehensive tax reform, that we do so well armed with information.  Washington has spent too much time in previous years acting first and asking later.  That has proven to be the wrong approach.  America’s families and job creators deserve better than a trial‑and‑error approach to crafting policy.  This is our opportunity to gather input and get the facts, and I look forward to the discussion. 

Chairman Camp.  And I will now yield to the ranking member Mr. Levin for the purpose of an opening statement. 

Mr. Levin.  Thank you, Mr. Chairman.  Welcome.  Thank you for coming. 

Today’s hearing is this committee’s initial examination of what tax reform might mean for a very specific set of tax provisions, those designed to promote retirement savings.  Tax‑preferred retirement savings have benefited tens of millions of American families.  The estimates of exactly how many vary, but most find that 40 to 50 percent of all workers are covered by an employer‑sponsored retirement plan, some 60 to 70 million people.  Employer‑sponsored plans, including defined contribution and defined benefit plans, private and public sector, hold assets of $9.3 trillion, held that amount as of the end of last year, and an additional 49 million households hold $4.7 trillion in IRAs. 

The tax‑preferred retirement system is voluntary.  Employers are not required to offer retirement plans, but I think we will hear today that employers basically understand the current system and that it works for them in terms of allowing them to offer retirement benefits to their workers.  I note that most of this committee agrees with that. 

Mr. Gerlach and Mr. Neal have introduced a resolution essentially in support of our current system.  It has been cosponsored by 115 Members, including 26 members of this committee, reflecting, I think, bipartisan agreement that these provisions are vital to encouraging retirement savings. 

That is not to say the current system cannot be improved.  Of course it can be.  Today I believe we will hear about several ways to do that, including proposals to expand enrollment in 401(k)s and IRAs, and to expand the saver’s credit.  But what should be clear is that the basic structure of our current system should be preserved, and that this structure should not be repealed to pay for tax reform.  Tax reform should approach retirement savings incentives with an eye towards strengthening our current system and expanding participation, not as an opportunity to find revenue. 

I think one of our witnesses Mr. Hardock summed this up very nicely in his ‑‑ in your written testimony, and I quote, The retirement savings tax expenditures should not be reduced or tinkered with to pay for other initiatives, whether inside or outside of tax reform process.  Those funds are the primary retirement nest egg of millions of American families.  They should not be taxed in order to finance more government spending, deficit reduction or to offset other tax initiatives, including lower marginal tax rates. 

Finally, I want to just note that while today’s hearing is focused on defined contribution plans, our retirement security policy in this country has traditionally been a three‑legged stool.  Personal savings constitute just one of those legs.  The other two legs, defined pension benefit pensions and Social Security, are indeed also vital components of ensuring Americans’ retirement security. 

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

Chairman Camp.  Thank you, Ranking Member Levin. 

Chairman Camp.  Next it is my pleasure to welcome the excellent panel of witnesses seated before us today.  Today’s witnesses have extensive experience studying or working with tax‑favored retirement accounts, and their experience will be helpful as we take a look at how the complexities in this part of the Tax Code affect individuals and employers. 

First I would like to welcome and introduce Dr. Jack VanDerhei, the research director at the Employee Benefit Research Institute in Washington, D.C.  Dr. VanDerhei has been with the Employee Benefit Research Institute since 1988 and has published more than 100 papers on employee benefits. 

Second we will hear from Ms. Judy Miller, the chief of actuarial issues and director of retirement policy at the American Society of Pension Professionals and Actuaries.  Ms. Miller has specialized in employer‑sponsored retirement programs for nearly 40 years. 

Third we will welcome Mr. Bill Sweetnam, a principal at the Groom Law Group in Washington, D.C.  Mr. Sweetnam specialized in retirement security at Groom and served as benefits tax counsel at the George W. Bush Treasury Department. 

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

Finally, we welcome Mr. Randy Hardock, a partner at Davis & Harman LLP in Washington, D.C.  Mr. Hardock is an ERISA and regulatory compliance specialist who maintains a practice focused on advising employers and institutions on retirement and savings issues.  Mr. Hardock is testifying today on behalf of the American Benefits Council. 

Thank you all again for your time today.  The committee has received each of your written statements, and they will be made a part of the formal hearing record.  Each of you will be recognized for 5 minutes for your oral remarks, and, Mr. VanDerhei, we will begin with you, and you are recognized for 5 minutes. 


Mr. VanDerhei.  Thank you.  Chairman Camp, Ranking Member Levin, and members of the committee, thank you for the opportunity to speak with you today on the issues involved in tax reform and tax‑favored retirement accounts.  I am Jack VanDerhei, research director of the Employee Benefit Research Institute.  EBRI is a nonpartisan institute that has been conducting original research on retirement and health benefits for the past 34 years.  EBRI does not take policy positions and does not lobby. 

My testimony today draws on extensive research conducted by EBRI over the last 13 years with its Retirement Security Projection Model as well as annual analysis of the behavior of tens of millions of individual participants from tens of thousands of 401(k) plans dating back in some cases as far as 1996. 

Measuring retirement income adequacy is an extremely important and complex topic, and EBRI started to provide this type of measurement in the late 1990s.  Figure 1 of my written testimony shows that when we modeled the baby boomers and Gen X‑ers earlier this year, 43 to 44 percent of the households were projected to be at risk of not having adequate retirement income for basic retirement expenses plus uninsured healthcare costs.  Even though this number is quite large, the good news is that this is 5 to 8 percentage points lower than what we found in 2003. 

It would be my pleasure to explain in more detail later why American households are better off today than they were 9 years ago, even after the financial and real estate market crises in 2008 and 2009, but the short answer is the extremely positive impact from automatic enrollment in 401(k) plans. 

It is difficult to imagine any voluntary strategy more effective at dealing with retirement income adequacy than increasing the likelihood of eligibility in a qualified retirement plan.  Figure 5 of my written testimony shows the importance of defined benefit plans for retirement income adequacy, and figure 6 shows a similar analysis for 401(k) plans.  We see that the number of future years that workers are eligible for participation in a defined contribution plan makes a tremendous difference in their at‑risk ratings.  Gen X‑ers, for example, with no future years of eligibility, are simulated to run short of money 61 percent of the time, whereas those with 20 or more years of future eligibility would experience the situation only 18 percent of the time. 

Knowing the percentage of households that will be at risk for inadequate retirement income is important for public policy analysis; however, equally important is knowing just how large the accumulated deficits are likely to be.  The aggregate deficit number is estimated to be $4.3 trillion for all baby boomers and Gen X‑ers. 

While trillion‑dollar deficits are useful in focusing attention on this problem, they do little to help policymakers understand exactly where these deficits are coming from.  For example, figure 3 of my written testimony provides information on the retirement savings shortfalls for Gen X‑ers.  The average deficit decreases substantially with additional years of future eligibility in a defined contribution plan, and Gen X‑ers fortunate enough to have at least 20 years of future eligibility find their average deficits reduced more than 70 percent of the average deficits for those with no future years of eligibility. 

EBRI research has shown repeatedly that the additional type of 401(k) plan under current tax incentives has the potential to generate a sum that, when combined with Social Security benefits, would replace a sizable portion of the employee’s preretirement income for those with continuous coverage.  Our research has also shown that the automatic enrollment type of 401(k) plan, when combined with automatic escalation provisions, appears to have the potential to produce even larger retirement accumulations for most of those covered by such plans. 

Recently, however, there have been proposals to modify the existing tax incentives for defined contribution plans by either capping annual contributions or changing the before‑tax nature of employee and employer contributions in exchange for a government matching contribution. 

Last September the Senate Finance Committee held a hearing that focused to a large extent on the second type of proposal.  EBRI presented preliminary evidence at that time of the possible impact of such a proposal on future 401(k) accumulations.  In recent months results from two new surveys have allowed EBRI to model these effects even more accurately, and last month we published our new results showing the projected changes in 401(k) balance at retirement age due to expected modifications of plan sponsors and participants in reaction to that proposal.  Figure 11 of my written testimony shows a 22 percent reduction in 401(k) balances at retirement for young workers in the lowest income quartile, those most at risk for insufficient retirement income.  Results are even more dramatic for small plans.  Figure 12 shows the average reduction for low‑income employees in these plans are 36 and 40 percent. 

In conclusion, given that the financial fate of future generations of retirees appears to be so strongly tied to whether they are eligible to participate in employer‑sponsored retirement plans, the logic of modifying either completely or marginally the incentive structure of employees or employers for defined contribution plans at this time needs to be thoroughly examined.  The potential decrease of retirement income resulting from either employer modifications to existing retirement plans or employees reducing future contributions to these plans needs to be analyzed carefully when considering the overall impact of such proposals. 

Thank you, and I look forward to your questions. 

Chairman Camp.  Thank you very much.

Chairman Camp.  Ms. Miller, you are recognized for 5 minutes.

Ms. Miller.  Thank you, Chairman Camp, Ranking Member Levin, and members of the committee.  I am Judy Miller, chief of actuarial issues and director of retirement policy for the American Society of Pension Professionals and Actuaries.  ASPPA’s more than 8,000 members work with retirement plans of employers of all types, but our primary focus is plans for small business. 

Two key features distinguish retirement savings tax incentives from other incentives in the code:  the deferral nature of the incentive and the nondiscrimination rules that make employer‑sponsored plans very efficient at delivering benefits across the income spectrum. 

First, unlike other tax incentives, incentives for retirement savings are deferrals, they are not permanent exclusions.  When employer‑paid health benefits are excluded from income or mortgage interest is deducted, those amounts will never be taxed.  With the traditional retirement savings account, no income taxes are paid on contributions when they are added to the account, but those same contributions are included in taxable income when the amounts are paid from the plan.  In other words, every single dollar that is exempt from tax now will be subject to income tax in the future.  Since most of those retirement years are outside the government’s 5‑ or 10‑year budget window, looking at the so‑called tax expenditure for defined contribution retirement plans on a short‑term cash basis greatly overstates the cost of this incentive.  In fact, new estimates by former JCT staff show that a better measure of the expenditure for defined contribution plans is more than 50 percent less than the JCT cash‑basis estimate over a 5‑year period.  So as you consider these issues, let us not forget that this is a deferral.  The amount of revenue you might think you are raising if you cut retirement savings incentives today is not real revenue gain.  It is a bookkeeping fiction. 

The second distinguishing feature is the nondiscrimination rules that make sure incentives for retirement plans don’t discriminate in favor of the highly paid.  The result is this tax incentive is more progressive than the current progressive Tax Code.  Households making less than $100,000 pay 26 percent of all income taxes, but they get over 60 percent of the tax benefit of this incentive for defined contribution plans, and this analysis actually understates the benefits for these households because it doesn’t recognize that a good part of a small business owner’s so‑called tax savings is actually transferred to workers in the form of contributions.  Let me explain. 

A small business owner usually considers a plan when the businesses finally become profitable.  The owner has shown how setting up a retirement plan can save enough money on their personal income taxes to pay most of the cost of contributions, like matching contributions that are going to be required for employees by nondiscrimination rules.  It is a beautiful thing really.  Deferred income taxes for the owner become current contributions for the workers. 

Data clearly shows the key to promoting retirement security is workplace savings.  Over 70 percent of workers earning from $30‑ to $50,000 do participate in a plan at work, but less than 5 percent go save on an IRA on their own.  Bureau of Labor Statistics data show 78 percent of full‑time workers have access to a workplace retirement plan, with 84 percent participating.

Almost 80 percent coverage is a success story.  More needs to be done, but the committee should build on the success of the system.  We support the Auto IRA proposal in Mr. Neal’s bill, for example, as a way to expand workplace savings by building on the current structure. 

Recent tax reform proposals include dramatic cuts in maximum contribution limits, a cap on the value of the current year’s exclusion for households making over a certain dollar amount, or conversion of the current year’s income exclusion to a credit.  All of these proposals would reduce the incentive for small business owners to sponsor a workplace retirement plan and would be a big step in the wrong direction. 

I have over 20 years experience actually selling plans to small business owners.  With rare exceptions, the current year’s tax savings was a critical factor and often the only factor supporting their decision to put in a plan.  Now, it is not that small business owners are selfish.  Quite the contrary.  But in real life they aren’t sitting on lots of cash.  Savings generated from the retirement plan tax incentives provides cash to help make contributions required by the nondiscrimination rules.  Reducing the incentive literally reduces the cash the small business owner has to work with.  Now, there is not a doubt in my mind that reduced incentives would mean fewer plans and less contributions toward workers’ retirement. 

One of the questions posed for this hearing is whether or not there are too many types of plans.  The simple answer is no.  A proposal to combine all defined contribution plans into a single type of plan might look like simplification on paper, but in practice combining 401(k), 403(b), and 457(b)s into a single plan would disrupt savings for employees of State and local governments and other nonprofits.  And believe me, when you are talking to an employer about setting up a plan, options and flexibility are not the enemy, and one size definitely does not fit all. 

Now, that is not to say simplification isn’t needed.  For example, we support the Small Business Pension Promotion Act sponsored by Representatives Gerlach, Kind and others, and would be pleased to work with the committee on these and other simplifications. 

In summary, the road to improved retirement security for working Americans is expanded workplace savings.  Reducing incentives for small business owners to sponsor retirement plans is the opposite of what needs to be done. 

I would be pleased to discuss these issues further with the committee or to answer any questions that you may have.  Thank you very much. 

Chairman Camp.  Thank you very much. 

Chairman Camp.  Mr. Sweetnam, you are recognized for 5 minutes. 


Mr. Sweetnam.  Chairman Camp and Ranking Member Levin, thank you for the opportunity to testify at this hearing.  I am a principal in the Groom Law Group, a law firm that focuses exclusively on employee benefits law.  Prior to joining Groom, I was the benefits tax counsel at the Office of Tax Policy at the Department of Treasury from 2001 to 2005.  I will testify today about the simplification proposals for retirement savings accounts that we developed at the Office of Tax Policy and that were included in the Bush administration’s budget proposals for fiscal years 2004 and 2005.  Please note that I am speaking today on my own behalf and not speaking on behalf of the firm or any firm client in my testimony. 

One of the reasons to simplify, the code currently provides various incentives for individual retirement savings, for employer‑based retirement savings, and for other savings objectives, such as the payment of medical expenses or educational expenses.  All these savings vehicles have different eligibility requirements, and the amount of the tax benefits could change based on the individual’s income status or his or her participation in other savings programs. 

Employer‑provided retirement savings vehicles present their own level of complexity.  Under the Internal Revenue Code, there are a number of retirement savings vehicles that employers can adopt, including 401(k) plans, 403(b) plans, and 457(b) plans.  Some rules vary depending on the type of plan, and there are limitations on the type of entity that can adopt certain types of plans. 

Multiple nondiscrimination rules add complexity to the administration of these plans.  While nondiscrimination rules are a means of making sure that lower‑paid employees share in the benefits provided under these savings plans, some commentators argue that the level of complexity is excessive in relation to the benefits that lower‑paid employees receive. 

The administration’s 2004 budget proposal outlined a simplified system of retirement savings, with only three types of tax‑favored vehicles:  Lifetime savings accounts, LSAs; retirement savings accounts, RSAs; and employer retirement savings account, ERSAs. 

Lifetime savings accounts.  Individuals would be able to contribute $5,000 on an after‑tax basis to an LSA.  Amounts contributed would grow on a tax‑free basis.  There would be no income limitations on who could contribute to an LSA.  Distributions from these accounts could be made at any time regardless of the individual’s age and could be used for any reason by the account owner.  Those individuals with limited means to save might be more willing to contribute to an LSA because they could access the money saved in the LSA in the event of an emergency, which is different than making contributions to a retirement‑based system. 

Our next was retirement savings account, RSAs.  Individuals could contribute $5,000 on an after‑tax basis to an RSA, with account earnings growing on a tax‑free basis.  Like the LSA, no income limits would apply to contributions to an RSA.  Qualified distributions, i.e., those made after an individual attained age 58 or in the event of death or disability, would be tax free.  All other distributions would be considered nonqualified distributions and would be included in income to the extent that the distribution exceeds basis. 

Finally, employer retirement savings accounts, ERSAs, would be available to all employees regardless of the type of employee entity.  ERSAs generally would follow the existing rules for 401(k) plans, including the 401(k) contribution limit, the catch‑up contribution limit for employees age 50 and above, and the availability of Roth contributions.  The nondiscrimination testing rules would be simplified and would be eliminated if lower‑paid employees had high savings rates under the plan.  Although these simplification efforts did not advance in Congress, our efforts to review and recommend comprehensive changes to the current retirement savings system was, I believe, worthwhile. 

Any effort to advance tax reform will likely include a review of retirement savings initiatives.  If one goal of tax reform is to simplify the current system, I would recommend that the committee examine the work of the Office of Tax Policy during the Bush administration. 

Thank you for this opportunity to address the committee.  I will be happy to answer any of your questions. 

Chairman Camp.  Thank you, Mr. Sweetnam. 

Chairman Camp.  Mr. John, you are recognized for 5 minutes. 


Mr. John.  Thank you.  Chairman Camp and Ranking Member Levin, I appreciate the opportunity to testify before you this morning on ways to ensure that all Americans have the opportunity to save for retirement.  I am David John, a senior research fellow at the Heritage Foundation and also the deputy director of the Retirement Security Project. 

This is an issue that transcends ideological and partisan differences.  For those who have access to a payroll deduction retirement savings account, the current system works fairly well.  However, millions of Americans still lack that ability.  In theory they can save in an IRA, but as Jack and Judy have shown, only a maximum of about 5 percent actually do so on a regular basis.  Many of these workers who lack the ability to save through payroll deduction are part‑time employees of smaller businesses, women, members of minority groups, younger workers, or all four. 

Social Security, even if it was fully funded, only provides about half the retirement income needs of an average‑income worker.  Either we can ensure that everyone has the ability to save to provide for themselves in retirement, or a Congress in the near future will face demands for additional taxpayer‑paid benefits.  Those demands will be very hard to resist. 

Ensuring that all Americans have the opportunity to save will require some hard decisions.  The proposal developed by Mark Iwry, who was then at Brookings, and I for automatic IRAs would provide a relatively simple, cost‑effective way to increase retirement security for millions of Americans.  The automatic IRA would enable these Americans to save for retirement by allowing them to regularly contribute amounts from their own paychecks to an IRA.  The plan is simple for both employers and employees.  Employees would be automatically enrolled into their employer’s automatic IRA.  Automatic enrollment is a process that has proven to build participation, which employees like, and under which employees have complete control ultimately of their own retirement savings decisions. 

To avoid confusion and to keep costs low, all automatic IRAs would offer three, and only three, investment choices.  For employers, the plan is also very simple.  They would be asked to do the same thing they now do, to withhold income and other taxes from an employee’s paycheck, except that the money would go into an IRA instead of to the Treasury.  Employer contributions would neither be required nor permitted.  Employers would not be required to comply with ERISA rules or other types of regulations that apply to 401(k)s or a variety of other things.  These simplifications eliminate almost all the costs associated with an automatic IRA, but the plan also includes a tax credit designed to cover any remaining start‑up and administrative costs. 

While the automatic IRA is especially valuable for new savers, it would be equally valuable for older savers who change jobs from a company that offers a 401(k) plan to a smaller company that currently has no type of retirement savings plan.  Right now these workers stand to have gaps, which cripple their ability to build retirement security.  However, under the automatic IRA, they could roll their 401(k)‑type accounts into the automatic IRA and continue savings.  That would also work if they went to a larger company. 

This is not a partisan or an ideological proposal.  The concept has been endorsed by a number of varied publications, such as National Review and the New York Times.  It has been endorsed by significant conservative and liberal officials and other types of officials. 

Earlier this year Representative Richard Neal introduced H.R. 4049, the Automatic IRA Act of 2012.  While the Heritage Foundation, as a 501(c)(3) nonprofit, does not and cannot endorse any legislation, let me say that the policy contained in his bill would significantly improve our retirement savings system. 

My written statement also discusses the value of simplifying the current confusing series of retirement savings accounts so that ordinary Americans and employers can better understand them.  In addition, my statement discusses two modest proposals, first to use tax information to encourage taxpayers to consolidate their retirement accounts if they desire to do so, and second to include Social Security Administration on an annual 401(k) or IRA statement so that the account owner has a complete picture of their expected total retirement income in time to make a change so that they could actually increase savings and improve their potential outcome.  It also discusses the desirability of allowing multiple employers to share a retirement savings platform, and a thought or two about the tax treatment of retirement savings.  I would be happy to discuss them at any point. 

Thank you for giving me this opportunity to testify.  I look forward to your questions. 

Chairman Camp.  Thank you very much. 

Chairman Camp.  Mr. Hardock, you are recognized for 5 minutes. 


Mr. Hardock.  Thank you for the opportunity to speak with you today on behalf of the American Benefits Council.  I am an attorney with over 30 years experience specializing in retirement plans.  I served as Benefits Tax Counsel at the Treasury Department and was the Senate Finance Committee’s tax counsel responsible for retirement issues during consideration of the 1986 Tax Reform Act. 

This committee, the Ways and Means Committee, has been responsible for every major improvement in the retirement system.  That includes the bipartisan Retirement Security Act passed in 2001, the legislation that established the successful framework for defined contribution plans and IRAs that is still in place today.  That 2001 bill was cosponsored by you, Chairman Camp, by you, Ranking Member Levin.  We thank you both for that.  It was cosponsored by every senior Republican still serving on this committee and by 10 of the 15 Democrats now serving on this committee.  It was cosponsored by Speaker Boehner, Minority Leader Pelosi, Majority Leader Cantor, and Minority Leader Hoyer.  Promoting retirement savings is an area where Republicans and Democrats have long been able to agree, and we urge you to continue your support in the context of tax reform. 

The current retirement system is working.  It is working for the almost 80 percent of full‑time employees with access to retirement plans at work.  It works for the almost 100 million Americans who have saved through workplace retirement plans or IRAs.  So, the first and most important principle to consider when you discuss tax reform and the retirement system is do no harm. 

In 2012, 80 percent of households with defined contribution plans said that tax savings were a big incentive to contribute.  Almost half said they would not contribute at all to any retirement savings if it weren’t for their defined contribution plan. 

Today, coverage and nondiscrimination requirements, the saver’s credit, and various other rules ensure that the benefits in defined contribution plans are delivered fairly across all income groups.  Current rules also provide balanced incentives that encourage business owners to voluntarily maintain retirement plans and encourage employee participation. 

Any major restructuring of the system that reduces or tries to reallocate existing retirement tax incentives is a gamble we cannot afford to take when dealing with the retirement security of working and retired Americans.  Reducing retirement savings tax incentives to pay for other initiatives would be counterproductive.  Proposals that appear to increase short‑term Federal tax revenue from changes in the retirement savings incentives generally get those additional revenues because individuals are saving less for retirement.  Making matters worse, as Ms. Miller indicated, short‑term revenue gain from changes in the retirement incentives under the current budget rules is an illusion because when a worker saves less money today, it will mean smaller distributions and less tax revenue when the person retires. 

Just like the short‑term budget scoring conventions, the tax expenditure scorekeeping also does not paint an accurate picture.  The bulk of today’s estimated retirement tax expenditure comes from savings that are already in retirement plans and IRAs, not from new contributions.  So that big tax expenditure number cannot be turned into big new tax revenues without retroactively taxing the existing retirement savings nest eggs of Americans.  That action would rightly be seen as a breach of trust by those workers who contributed (and those employers who contributed) on the assumption that this money would grow tax free and be taxed only at distribution. 

Still, the retirement system can and should be improved for all Americans, and especially those with lower incomes who find it most difficult to save.  Tax reform offers the opportunity to do just that–by building on the existing system, not by tearing it apart.  Today, employer‑sponsored plans make effective use of payroll deduction, provide fiduciary oversight, and typically include an employer contribution.  More Americans need access to those workplace retirement savings plans, and all Americans should be encouraged to save at higher levels. 

One area that deserves particular attention is automatic enrollment and automatic increase strategies.  Those are plan designs where workers must opt out of plan participation rather than opt in and where the default contribution levels are increased each year.  These plan designs increase participation and savings rates significantly, especially for low‑income, younger, and minority workers.  More employers are adopting these designs each year, but greater incentives should be considered to accelerate that trend. 

We also believe much could be done to reduce the costs of plan administration.  For example, regulations on delivery of required notices should be brought into the 21st century to better accommodate electronic delivery. 

We stand ready to work with the members of this committee to assist this committee in continuing its long history of promoting retirement savings.  Thank you. 

Chairman Camp.  Well, thank you.

Chairman Camp.  Thank you all for that excellent testimony. 

Today is tax filing day, and it is a deadline which Americans have to spend millions of hours preparing their taxes because our system is a complex one, and not only is compliance complicated, but long‑term financial planning is complicated as well because of our code.  And I would like to just explore and ask each of you how the Tax Code is performing in the area of retirement security.  Employers who want to offer a retirement plan, as many of you ‑‑ retirement savings option, as you mentioned, they have a choice, as many of you said, of many different proposals out there with different rules.  And certainly individuals trying to save for retirement have one set of rules; individuals trying to save for health have another system with another set of rules; and families trying to save for education also have many options available, each with its own set of rules. 

But my question is, should the system ‑‑ and why don’t I start with Mr. Hardock and go down the line.  But should the system of existing tax‑advantaged retirement savings, should those be consolidated to make it easier for individuals to save, if you have an opinion on that? 

Mr. Hardock.  Most Americans that have retirement plans are quite happy with the plans they have.  The fact is that plan participants and most employers do not choose between a 401(k) plan or 403(b) plan or 457 plan; they simply have one.  Those choices are not particularly difficult, and when they do come into play, they are made by employers. 

What you get if you try to consolidate is you make everyone reconsider and everyone amend their plans.  That can be very disruptive, disruptive for the individuals involved and expensive for the employers that have to do that.  I would add that the members of the American Benefits Council are also very concerned about any proposals that would consolidate retirement savings options with savings vehicles for other purposes like education or health.  Most people save for a purpose, and confusing that retirement savings message could be very counterproductive. 

Chairman Camp.  All right.  Mr. John. 

Mr. John.  I understand what my colleague just said, but the fact is when we talked to multiple small businesses and the like, the number of different types of savings plans and, frankly, their rather confusing numbers and names cause a fairly great anxiety among small businesses that were considering starting some sort of a plan, especially the ones that were fairly early in that process.  So something that would consolidate, something that would simplify, not the least of which ‑‑ as I say, it is a simple marketing technique ‑‑ just changing the name of the blasted things ‑‑ I mean, what is a 401(k) when it comes right down to it ‑‑ would be exceedingly useful. 

There is another aspect to this, though, which is that you referred to savings for different things, and as you pointed out, there are a wide variety of different types of advantages or Tax Code treatments of this.  It would actually be much simpler if you just created all real savings the same way and exempted it from income without necessarily having to have one level for a 401(k), one for college savings, one for various and sundry other savings.  Savings that is not consumption is actually an exceedingly valuable thing and should be encouraged.  So to the point that you look at simplification, it is not just the matter of the accounts, it is the matter of savings itself. 

Chairman Camp.  All right.  Thank you. 

Mr. Sweetnam. 

Mr. Sweetnam.  Thank you. 

Well, let me first focus in on the individual retirement savings vehicles.  First off, I think one of the things that we tried to do in the administration’s proposal was to eliminate the income limits, because when you have those income limits, you really weren’t quite sure whether you were eligible to make a contribution to an IRA.  In fact, if any of you remember prior to the income limits being put on, banks used to stay open on tax day until midnight in order to accept people’s IRA contributions.  There used to be lines in banks to make IRA contributions on April 15th.  Once we put in the income limits, those lines went away.  So I think that was one of the things that we tried to do in our proposal. 

The second thing that we tried to do, and I think David alluded to this, was with our RSA and LSA proposal.  Our LSA proposal was a means for people to save for any reason and to pull money out of those accounts to use for any reason. 

I think one of the things that people have to realize is that people’s savings needs change over time.  Younger people may be thinking about savings, but they may not be thinking about retirement savings.  I have a 30‑year‑old son now, and he is doing saving, but what is he saving for?  He is saving to buy that house, which I think would be a really good thing.  But when he gets a little bit older, he is going to be saving for retirement.  What we tried to do with our LSA proposal was to give lower‑income people or people who were at the margins of savings a way to have a tax‑favored vehicle in order to have savings. 

On the retirement side, I think one of the things that you have seen ‑‑ I have probably been practicing as long as Randy, and what we have seen over the years is Congress legislating to make the differences between the various types of retirement plans less and less and less, and so that what we were trying to do in our proposal was just take that final step.  We had all of the plans have the same contribution amounts.  We said, let us just take the final step and eliminate the various code differences between the two.  But Congress has been going that way over the last few years.

Chairman Camp.  Thank you. 

Ms. Miller. 

Ms. Miller.  Thank you. 

I would like to focus on the employer side of this, and I think it actually ties into the individual, too, in that when you are talking to a small employer, it really isn’t that confusing.  I mean, if you poll somebody that is not thinking about a retirement plan and say, here is this, this, this, but if you are actually talking to an employer saying, do you want to put in a retirement plan, you are really saying, do you want to have an IRA‑based plan, or do you want to have one that has a trust that your employees are more likely to leave the money in?  You know, if you put your money into a 401(k) for them, they can’t pull it out right away.  If you put it into a SIMPLE plan, they might run off with it.  So you are drawing those distinctions.  Then you are really talking about how much can you afford and what would you like to do. 

This is where I get concerned about the proposals for individual savings in that right now we have the $5,000 IRA limit, and then you can go up to $10,000 for a SIMPLE plan, and then you can go up to $17,000 for the individual deferral in a qualified retirement plan.  So there really are rewards for stepping up and providing better benefits, and I think that is why the system really has been working so well. 

If you have ‑‑ and there is a proposal for, I am sorry, a deferral‑only safe harbor of like 8‑ or $10,000.  What happens is if you have somebody that can put $5,000 ‑‑ a small business owner can put $5,000 in an IRA, $5,000 in an LSA.  Suddenly there is absolutely no reason in the world in terms of what they can save on a tax‑favored basis for them to put in a SIMPLE plan.  Right now they have the $5,000 IRA.  If they want to put in $10,000, they are going up to a SIMPLE plan.  So you have to be careful that what you do on the individual savings side doesn’t disrupt the structure that really works pretty well on the individual employer side. 

And I think when you look at it from an employer’s perspective in selling them a plan, there are options, there are things you can do as opposed to the IRA charts at the beginning of Bill’s testimony where it is basically telling you when you can’t do something.  With the employer side, it is here is what you can do, here are your options.  So it is very positive on the employer’s side. 

Chairman Camp.  All right.  Thank you. 

Mr. VanDerhei. 

Mr. VanDerhei.  Thank you. 

While EBRI doesn’t take positions on proposals of this sort, I find a lot to agree with in what Randy and Judy just said, and I think from a rather abstract viewpoint, if you look at what is happening with respect to employers, you would introduce a whole new set of nondiscrimination testing if you did something like this. 

The other thing you have to keep in mind is many employees are very targeted in what they are saving for, and I think what you would need to keep in mind is if you make it rather amorphous as far as an overall savings target, it is going to be much more difficult for any individual to find out whether or not they are basically on track for a specific retirement income. 

Chairman Camp.  All right.  Thank you. 

Mr. Levin may inquire. 

Mr. Levin.  Well, thank you very, very much for your testimony. 

Mr. Chairman, I think this is a hearing that has significance for tax reform for this issue and beyond, because while there are some differences among you, and while I think everyone believes that we can improve the system, I think your testimony issues a warning to those who propose to eliminate all tax expenditures or those who equate tax expenditures loosely with tax loopholes.  Because this tax expenditure, I think, is not a loophole.  It is a policy.  And some have essentially said, let us start by eliminating them all and go on from there, and some propose getting down to a certain point, assuming the elimination of all tax expenditures.  And do any of you favor eliminating this tax expenditure?  No. 

Mr. Hardock.  That is a big no from this end of the table. 

Mr. Sweetnam.  No. 

Ms. Miller.  No.

Mr. Levin.  And I am not sure that this is quite the way to put it, but, Mr. Hardock, you said here after talking about the importance of retirement savings, you say for that reason the first and most important principle you urge this committee to consider in the context of tax reform is to do no harm.  I am not quite sure I would put it that way.  But maybe as to this area I think that is true, and the same is true in other areas relating to policies embraced in tax expenditures. 

So maybe I will leave it at that except to say, Mr. Sweetnam, I think there is a distinction between what you save for‑-I am all in favor of supporting, for example, savings for education purposes and for buying a house.  I think the proposals to eliminate the present provision for purchasing a house and home ownership, again eliminating that without reference to any income level or anything else, is a mistake. 

But I do think you all feel that the retirement structure is more or less working, while we still need to improve it. I think we need to be careful not to lump everything together and lose the emphasis on having a strong Social Security system, which is added to by savings for retirement.  I think we need that combination, and I think the point we want to drive home (you mentioned that the percentage now saved for retirement has improved a bit) is that we need to try to build that up not by eliminating Social Security, but by adding on to it. 

So I really think your testimony has importance today for this issue and all other issues relating to tax reform.  We need to look at it, but with care, and not with such broad strokes that we would sweep away a system like retirement savings that is working, basically working.  Thank you. 

Mr. Sweetnam.  May I respond? 

Chairman Camp.  Thank you.  Well, I will do that on somebody else’s time.  I do want to say, though, that I think we are having a very good discussion today.  I do think it is important to point out that I don’t think there is anyone who is proposing eliminating this area.  The closest thing that came to it was Simpson‑Bowles, the President’s Commission on Fiscal Responsibility, which capped this, did not eliminate this, and there is no proposal to do such a thing itself. 

Mr. Levin.  Mr. Chairman, let me just say, in the chart that is on page 29 of Simpson‑Bowles, it has a number of alternatives ‑‑

Chairman Camp.  Yes. 

Mr. Levin.  ‑‑ including eliminating all tax expenditures. 

Chairman Camp.  Yes, and that is one reason why I voted against the Simpson‑Bowles Commission, as did Mr. Ryan. 

So Mr. Herger, you are recognized for 5 minutes. 

Mr. Herger.  Thank you, Mr. Chairman. 

Mr. John, I want to thank you for your work you put in on an automatic IRA proposal.  As someone who comes from a small business background, I know the first question that many small business owners will have about any kind of mandated automatic IRA is what is this going to cost me.  Would automatic IRAs create any significant new costs or burdens on employers who offer the IRAs? 

Mr. John.  No, it actually would not.  The way that it is structured, it is simple enough that most employers that are covered with this, roughly 97 percent according to studies by a variety of firms, actually already use some form of payroll‑processing software or an outside payroll processor, and for those, having had many discussions with both of those industries, this would just simply be a new module that would be added. 

Plus the fact there is a tax credit.  The tax credit has two components to it, one part which applies for 2 years which would cover any capital costs of setting up an auto IRA, and the other, which would last for 6 and could be extended if Congress chose to do so during that period of time, would provide a certain amount to cover the costs of actually putting employees on and off the system.  It is a very simple, easy‑to‑understand system, and we found ‑‑ a major insurance company did some market research with employers for us, and they found that the more they discussed it with the employers, the stronger the employer support for the proposal went up. 

Mr. Herger.  Do the rest of you agree with this or have any additional thoughts? 

Ms. Miller.  I definitely would agree with that.  Even for those that don’t use a current payroll provider, we have members who are very interested in providing this.  An employer could do it strictly over the phone.  The credits should more than cover any cost incurred by the employer. 

Mr. Herger.  Thank you. 

Mr. John, I understand your proposal would utilize private financial institutions to administer the automatic IRAs.  In the past there has been proposals to create personal retirement accounts that would be administered by the Social Security Administration, and some might argue that it would be simpler for small businesses if this could be tied in to the existing payroll tax withholding process.  Could you comment on the pros and cons of these different approaches? 

Mr. John.  Sure.  This is a very different ‑‑ this is completely separate from the proposal in 2005 and before to set up personal retirement accounts in Social Security.  There is a private sector funds management industry which works exceedingly well.  We don’t see any reason to supplant it by government entity for that. 

We do have the ability if the private sector provider so chooses to have what is called an R bond, which is a retirement savings account.  It is somewhat similar to the I bond, which has been a U.S. Treasury savings account for a number of years now, and that would allow small savers to accumulate roughly $5,000, but at that point then that would be rolled into the private sector.  We feel that the private sector is going to be more innovative, it is going to create more jobs, and frankly it will do a better job of keeping costs lower. 

Mr. Herger.  Thank you. 

Thank you, Mr. Chairman. 

Chairman Camp.  Thank you. 

Mr. Tiberi. 

Mr. Tiberi.  Thank you, Mr. Chairman.  Thank you for holding this hearing today and your leadership on these issues as well as overall tax reform.  As someone who has been interested in pension and retirement issues since I have been here, I look forward to working with you, Mr. Chairman, and others on this issue. 

I think strongly that we need to make sure that Americans have the tools and the education necessary to feel as though they can make the right choices with respect to retirement, and one of our panelists did a study with the Employee Benefits Research Institute, and only in that study, Mr. VanDerhei, only 14 percent of Americans are confident they will be able to afford a comfortable retirement in the study that you did, and more than half of all workers reported they have not calculated how much they will need to live during retirement.  And you are nodding your head in agreement.  Those are pretty unbelievable numbers. 

I find out there ‑‑ anecdotally, I have a friend of mine who is a lawyer who took a 401(k) plan and put it into an IRA, and then ultimately put his IRA into a real estate investment that he has a third party, pretty sophisticated and doing really well according to him, versus others who have not quite an understanding of how much ‑‑ it has been talked about before ‑‑ how much they can put in because of the contribution limits or what they can put it in. 

My question to all of you, and I will start here on my right, is whether it is simplification, whether it is reform, whatever it is ‑‑ how do we get more Americans to change that 14 percent number so they have a better understanding, and can make better choices, and can have that ‑‑ so we can have that 14 percent number be something substantial, like 75 percent of Americans feel they comfortably can live in retirement and understand what they need in retirement?  How do we get there as policymakers?  Starting here. 

Mr. Hardock.  Well, I like to think of the American people as falling into three buckets.  There are the folks who really aren’t going to save no matter what you do.  If you force them to save, they will borrow more money somewhere else.  There are the folks I call the squirrels, who will save no matter what.  That is my mother.  And then there is almost everyone else, certainly including me, that wants to do the right thing, knows they need to save, doesn’t know quite how to do it, doesn’t want the government telling them how to do it, but wants to do the right thing.  Strategies like auto-enrollment and auto-escalation send a signal to that vast group of people that these are the levels you should be achieving to get to retirement security. 

So, earlier Mr. Sweetnam talked about his son who felt that saving for his first home was more important.  Well, my son is 25 years old.  He asked me, I want to buy a home, but I have this 401(k) plan at work, and there is a match.  I said, put the money in the 401(k) plan first.  And that goes back to the issue I mentioned earlier, people save for a purpose-for retirement.  We need to set up structures and incentives that let people know how much to save, and we will see Mr. VanDerhei’s savings numbers for the Gen X‑ers and others start to go up even more.  We need to start them young, get them involved and get them into the habit of saving. Ultimately changing the culture of saving in this country.

Mr. Tiberi.  Thanks. 

Mr. John. 

Mr. John.  I actually have four thoughts in this.  They will repeat, and I imagine you are going to hear much of the same thing here.  Number one is obviously everyone has to have access.  If you don’t have access, we can talk all we want to about doing it on your own, but 95 percent of people don’t. 

Second is, of course, start young.  That is absolutely crucial with that. 

Another thing is the auto structures, autoenrollment, and particularly autoescalation.  And one of the things that this committee can do as part of its discussion of tax simplification, tax reform is to look at the 3 percent default rate for autoenrollment.  There are a number of studies out there that show that people will have precisely the same participation rate if it is 5 percent, 6 percent and the like to start.  People think that they are doing the right thing, and that 3 percent, since that is the way it starts, that must be the right amount for them to save, and they find themselves in a trap later on. 

Mr. Tiberi.  Mr. Sweetnam. 

Mr. Sweetnam.  One of the things that we were looking at when we did our retirement simplification proposals is that we thought that we were trying to harness the industry to do a lot more advertising with regard to savings, and one of the things that we looked at was by eliminating the income restrictions for IRAs, that people ‑‑ that there would be advertisements to get people to come in and do this. 

You know, we actually saw this happen when Congress enacted the Roth IRA.  I was working on Senator Roth’s staff at that time.  And when the Roth IRA was enacted, we saw for all different types of IRAs savings additional because everybody was promoting it.

Mr. Tiberi.  All right. 

Chairman Camp.  Thank you. 

I see we are over the time.  Mr. McDermott is recognized. 

Mr. McDermott.  Thank you, Mr. Chairman. 

I think this is a very important hearing to have to talk about, and I agree, Mr. Tiberi and I probably come at the same concern over having people’s security.  But I fly back and forth from Seattle, where United Airlines has its largest base, its oldest base.  Most of the flight attendants are about 55 to 60 years old, and one of them told me a story, and I would like you guys to respond, and ladies to respond to this. 

Her husband worked for a big bank in Seattle, Washington Mutual, and one day they closed the bank, and he lost his entire 401(k).  Boom, gone.  All gone because it was invested in the bank.  Right?  Because he was required to invest it in the bank.  Now she flies for United Airlines.  They have gone into bankruptcy twice, and each time they go into bankruptcy, the first thing the bankruptcy judge does in response to the company’s pleadings is to scrape off the retirement.  So this woman who has flown for United Airlines for 29 years now has a guarantee of $231 a month from the PBGC on top of her Social Security. 

Now, here are middle‑class Americans who did everything right, and they got clobbered by the system, and I want to hear that this automatic system that we are going to enroll everybody in is going to protect those people.  This woman said to me, I and my husband are going to work until we die because we have nothing but Social Security. 

Ms. Miller.  I would like to take a first stab at that, because the situations you described are just horrible, and Congress has acted to prevent a company forcing an employee to put all their money into employer stock.

Ms. Miller.  That is no longer permissible.  And that was ‑‑ you know, the ability was phased out.  And you guys did a great job on that.  So hopefully that one won’t happen again. 

I think the key on automatic enrollment is really all the defaults, and one of those defaults is investment.  And in PPA, that was ‑‑

Mr. McDermott.  Let me stop you, though.  You heard Mr. Tiberi talk about how many people know how to invest or understand, 14 percent. 

Ms. Miller.  Right.  Uh‑huh. 

Mr. McDermott.  So how in the world can anybody sit up here and sensibly believe that we can design a system that says we are going to give all of you a choice, but only 14 percent of them understand what in the world they are in? 

Ms. Miller.  Most people don’t take advantage of that choice; they will stay where you put them.  If you automatically enroll them, they will stay in your default investment.  So I think the key is having a secure and appropriate default investment.  And again, there were changes made in PPA, and I think there has been a recent study ‑‑

Mr. McDermott.  Does that mean then, that the company, the small business or whatever, has certain places they could put the money that is safe?  They will be restricted as well?  Or can they do whatever they want? 

Ms. Miller.  They choose the provider, but the type of investment that is the default investment is defined.  It is like a target‑date fund.  Or you could, frankly, that is something that you could be considering, what should that be?  But there is ample evidence that whatever you say the default investment can be is where most people are going to end up putting their money. 

Mr. McDermott.  So the automatic investment or the automatic enrollment would put it into something that is judged to be ‑‑ by whom?  Who would say that this is a safe investment?  Because I would like to know who those people are. 

Ms. Miller.  You define the parameters in terms of the individual companies. 

Mr. McDermott.  The Treasury will ultimately put the blessing, they will bless the company that is going to make these investments; right? 

Ms. Miller.  Right now, it would be the plan sponsor or if you are in ‑‑ would be the one that is choosing their investment advisor, and the investment advisor, if they hire an investment advisor, would accept fiduciary responsibility would have fiduciary responsibility for choosing a company that provides ‑‑

Mr. McDermott.  Who is on the hook if they made a bad choice? 

Ms. Miller.  The fiduciary that is responsible for that decision. 

Mr. McDermott.  So any investment counselor would then be responsible for making the patient ‑‑ the patient, I am a doctor ‑‑ would be making the client whole? 

Ms. Miller.  Well, in theory.  You know, fortunately, there aren’t very many situations ‑‑ now that employer stock is off the table ‑‑ there aren’t many situations where you have a company that the investment has gone down to zero.  When you do have responsible people choosing investment providers, it is not ‑‑ there are ‑‑ horror stories are more and more rare. 

Mr. McDermott.  And the flight attendants, I should just tell them tough luck; 231 is what you are going to get? 

Ms. Miller.  The defined benefit system is a whole other ‑‑

Mr. McDermott.  It seems to me they ought to be connected somehow.  Or we should take away the ability of the companies to take off the pension at bankruptcy.

Chairman Camp.  Thank you.  Time has expired.

Dr. Boustany is recognized. 

Mr. Boustany.  Thank you, Chairman Camp, for holding this very important hearing. 

As we look at tax reform and the very equally important area of retirement security, I have taken away a few things just from all of this discussion:  Number one being that, obviously, we need to look at how you can promote personal responsibility and savings.  Secondly, whatever we do, I certainly appreciate the adage of, first do no harm how.  So how do you avoid major disruptions?  And thirdly, can we simplify yet maintain flexibility. 

And so as I am trying to think through this I remember when I was running a small medical practice and dealing with some of these issues after a full day in the operating room and focusing on the clinical side of my practice, oftentimes individuals come in to work for you, and they have worked somewhere else.  They have a retirement account, multiple retirement accounts.  And yet ‑‑ and they may also have an IRA on top of that.  And there are a variety of rules that govern this.  And I remember having to make phone calls to figure out, how do you incorporate somebody into your business structure when they have had these other outside arrangements in the past. 

Talk to me about the rules, the complexity that these rules really present to a business owner trying to work with incoming employees and is this an area that we can really simplify?  Any of you, please. 

Mr. Hardock.  I will just start by saying that the problem you describe has been around for a while.  The changes made in 2001 on portability of assets allowed individuals to combine, when they switched jobs, assets from one employer plan to the next employer’s plan-or an IRA to consolidate those assets in one plan.  That was a major improvement and really streamlined the process and made it possible for a business owner to take those assets in for new hires.

It is still complicated because you have items that may have been contributed as pre-tax dollars and others as post‑tax.  Those are issues we have to deal with no matter what because they exist today and you can’t take away someone’s pretax treatment or post‑tax treatment.  But we have made enormous strides since 2001 in improving those rules. 

Ms. Miller.  Yes, I think there has been an awful lot of progress made.  And I also think that if you look at the options that are available, these days you are more likely to have somebody that comes into your practice that also had a 401(k) plan at their other arrangement.  And so there is a little more simplicity.  Because I think sometimes when we talk about consolidation, then you are talking about a 403(b), 457, 401(k); in the medical practice, maybe there was a 403(b), but as Randy said, the rules have been simplified to make that an easier process. 

But in most instances, you now will have somebody coming from a similar type plan to your current arrangement.  And I think that real smoothes it.  I do think ‑‑ in our written testimony, there are some comments on there are rules that can be changed that make it a little easier for small business to not get themselves in trouble.  And I think we should get rid of those rules that trip people up.  Frankly, they are rules that apply whether it was an ERSA or 401(k).  Just plain common sense stuff. 

Mr. John.  And if I may add, the real serious problem is the fact that people forget to combine.  I have actually an IRA that was rolled over from TSP 20‑plus years ago, and I keep meaning to roll it into Heritage’s plan, but I have yet to do that.  What we see is we have a significant number of people who lose their accounts, especially over the years, whether employers go out of business, the providers change and the like.  And there is some suggestion in my written testimony about a way to use tax information to enable people to find their lost accounts and to encourage them to combine them. 

Mr. Boustany.  Thank you. 

One last question.  Are there incremental steps that would make it easier for employers to offer annuity options as part of a defined contribution plan? 

Mr. Sweetnam.  Well, I think that this is something that the IRS and the Treasury Department are currently looking at.  And I think that it has been something that the policymakers are really looking to give people that ability to address, to use an annuity. 

Now I am not speaking for the current Treasury Department or the IRS, but I think what they have been trying to do is to eliminate some of the difficulties under the current law to go and to move into an annuity product.  And that is something that I think policymakers have been looking at over a number of years. 

Mr. Boustany.  Thank you. 

Chairman Camp.  Thank you very much. 

Ms. Jenkins is recognized. 

Ms. Jenkins.  Thank you, Mr. Chairman. 

Thank you for holding this hearing, and thank you to all the panel for participating.  I have a question for you, Ms. Miller.  The President’s 2013 budget proposal includes a proposal capping certain individuals’ itemized deductions to 28 percent. 

Ms. Miller.  Right.

Ms. Jenkins.  And the limitation on deductions under the proposal include the exclusion or above‑the‑line deduction for pretax employee contributions to defined contribution plans and contributions to traditional IRAs.  Given that the tax break for retirement savings is a deferral, not a permanent write‑off, wouldn’t limiting deduction on the front end but not when the amount is distributed result in double taxation?  And what are your thoughts on how the President’s proposal would affect retirement savings rates and also on small business owners’ decision to set up or maintain retirement plans for their employees? 

Ms. Miller.  I appreciate that question. 

I was very disappointed to see retirement savings included in that proposal because you are right, it would be double taxation if you have someone who ‑‑ because this is a deferral.  So if you have someone who is at a 31 percent marginal rate and you are giving them 28 percent cap on that, then they are paying that 3 percent now.  But when they pull it out, there is no special accounting.  I am not saying there should be because that would be a wreck.  But when you pull it out, they are paying taxes on it again.  So it really literally is double taxation. 

And if you are being honest when you are talking to an employer, why would they want to put themselves in that position?  So I do think it would be harmful and anything that reduces the tax incentive for a small business owner, to me, I think will discourage coverage. 

Ms. Jenkins.  Okay.  Thank you. 

Mr.  Sweetnam, your testimony mentioned that following the Bush administration’s proposal simplifying this area, many interested parties were concerned about the proposal resulting in fewer savings opportunities being available to small businesses, causing them to opt out of offering an employer‑based savings vehicle.  You also mentioned that the 2005 budget proposal addressed some of those concerns.  Can you just elaborate for us on what you heard during your proposal and what changes you made to the 2005 budget?  And if Congress were to move forward to meaningful reforms, what are some of the transition rules that you might advise us to keep in mind? 

Mr. Sweetnam.  Well, the two big things that were problems, one, in 2004, we had the LSA and the RSA contribution amount at $7,500, and we reduced it to $5,000.  And what we heard from some of the policy folks, particularly ASPPA being one, was that by having that high of a tax‑favored savings amount, some smaller businesspeople might say, well, you know what, I can put in $7,500 in my LSA, $7,500 in my RSA.  I have sheltered everything; I don’t need any further savings through an employer‑provided plan. 

The other thing that we did was in our ERSA proposal, we tried to simplify some of the nondiscrimination rules.  And one of the things that we did was we eliminated all the various testing methodologies that are currently available, thinking that that was simplification.  Well, as I think Judy has said before, one person’s simplification is another person’s opportunity to make various changes.  And so we listened to them and what we did was we just reduced the general complexity of the test.  We didn’t reduce some of the opportunities that small businesses would have in order to create more flexible types of plans. 

Ms. Jenkins.  Thank you. 

I yield back. 

Chairman Camp.  Thank you, Mr. Neal is recognized. 

Mr. Neal.  Thank you, Mr. Chairman. 

Mr. Chairman, I have had a long‑standing issue and I think pretty strong credentials in this area.  Just to recount quickly, I worked with Bill Thomas before he was chairman of this committee on raising IRS rates.  As you recall, that was not a favor of Mr. Rostenkowski at the time.  And carried the RSA proposal for the Clinton administration with Bob Rubin, recalling that the Clinton proposal in terms of differentiating itself from the Bush proposal was, the Clinton RSA proposal was as an addition to Social Security; the Bush RSA proposal was as a substitute for Social Security. 

And I have carried this auto‑IRA proposal for a long period of time.  Now, I introduced this bill 5 years ago, and as least three of the panelists I know have already endorsed it, and I suspect the other two have some sympathy for it.  Now this proposal would raise the national savings rate by nearly $8 billion a year.  Endorsed by Brookings and now with hard work from David John and the Heritage Foundation, we have developed this proposal.  I have kidded David many times; it is not every day that a Massachusetts Democrat’s legislation is endorsed by the Heritage Foundation.  We have done just that. 

Let me tell you who else support this is legislation.  The AARP, Latinos for a Secure Retirement, the Black U.S. Chamber of Commerce, Putnam Prudential, Natixis.  And I must say with some grave disappointment, since Phil English left, I can’t get one Republican to sign on to this legislation. 

Mr. Herger I thought was headed in the right direction.  He was headed in the right direction as he began to question Mr. John.  Couldn’t bring himself to say it was the Neal proposal, but came very close to going to the altar without saying “I do.”

Now, David, why does Heritage support this proposal? 

Mr. John.  Heritage supports this for two reasons.  And we have enjoyed working with you over the years.  Although, for some of my colleagues, it has been a little ‑‑ I tell some of them I just went to a bar.

I have also enjoyed working with your staff, both Melissa initially and Kara Getz now. 

Conservatives support the auto IRA for two very good reasons.  Number one is that savings changes behavior.  It takes people and it brings them closer to the community.  It makes them more future‑oriented and a variety of cultural changes that are very important. 

A second one which is equally important, crucial that every American has the opportunity to save, is the alternative:  If we don’t have a retirement savings system that applies to all and allows people to start at one company and move to another and continuously save, inevitably, we are going to see the data that Jack had initially, where people do not have sufficient retirement savings, and they are going to come to Congress, and they are going to say:  Please, sir, we need more taxpayer benefits.  We don’t have the money for that right now. 

Mr. Neal.  Also endorsed by The Brookings Institution, that is important. 

Ms. Miller, could you tell me why you have endorsed the IRA proposal that I have offered? 

Ms. Miller.  Yes, we are very supportive because it really does build on the current employer structure.  And we think once employers ‑‑ first of all, people need to have an opportunity to save at work and you just can’t do that without having the employer involved.  When you get over that hurdle, then we feel that once employers are used to doing payroll deductions and feel comfortable with that, it will be easier to approach them and say, listen, you have been doing this; can you afford to do a little more?  Maybe a simple plan would work for you or a 401(k).  And once they are in the system, they will more comfortable moving up and providing some employer contributions as well.

Mr. Neal.  It would require no matching contributions from the employer. 

Ms. Miller.  It would require no matching contributions from the employer.  And just the way ‑‑ you know, 30 years ago, it was a different story, but right now with the development of electronic systems, it would be so easy and so little trouble for the employer to make this work. 

Mr. Neal.  Particularly good for the small employer. 

Mr. Hardock, why do you like the proposal? 

Mr. Hardock.  The good thing about the proposal is that it sends a signal that we need to do get more employers into auto- enrollment and auto-escalation.  The proposal is one way to move in that direction. 

As Dr. John indicated, providing incentives to employers to do that–making it attractive to employers to go in that direction–is something that I think is well worth exploring.  Providing those incentives, getting more employers to do it, and giving employees that option of the auto IRA if they don’t have a plan of their own, is valuable.  So it expands the reach. 

I think there is a question of how quickly you can get there.

Chairman Camp.  Thank you. 

Mr. Buchanan is recognized. 

Mr. Buchanan.  Thank you, Mr. Chairman. 

And I also want to thank our witnesses today. 

As you know, we have got 10,000 Baby Boomers retiring every day, they claim, for the next 30 years, 20 years.  But a lot of them are very uptight frankly about planning on retiring with all of these concepts that they had, and now they are getting to the point where they can retire, 60, 65; they don’t know if they are going to have enough money, if they are going to get the return on their assets because they like to put them in more conservative assets going forward.  And then the other thing is they are not sure, maybe at one point, they thought they were going to live to 75; now my mother‑in‑law is 92.  They are all concerned about it. 

What can Congress do, do you think, if anything, to help bring a little bit more security and dignity?  What incentives or what would be one thing that we could do that we are not doing to make a difference?  I can tell you I am slowly getting to that age, and a lot of our friends who thought they were fine 10 years ago in terms of retirement are very, very concerned today.  They are working longer; they are not sure.  Any thoughts on that. 

I will start with you, Ms. Miller? 

Ms. Miller.  Yes, thank you.  When we are talking Baby Boomers with such a short time frame, I think one thing that you should do is, when you are looking at tax reform, keep those catchup contributions in from.  Because as a Baby Boomer, I can say that I am a lot more conscious of how much I need to save now that it is too late.  And it would be very good to keep those options there.

I think looking further down the road, it is really important to engage younger people.  And automatic enrollment and auto escalation are critical. 

But I also think we need to look more at e‑delivery of things.  We are all very supportive of all sorts of disclosures, but when people get a stack of paper, they don’t necessarily look.  And if we could approach people more with something that is interactive, it could be easier for them to plan, easier for them to get engaged, and really would like you to enable more electronic delivery. 

Mr. Buchanan.  Mr. John, would you comment? 

But Let me just mention, I was reading in USA Today, they were talking about where they are at in terms of retirement.  I think it was 60 percent, an enormous number, that was just relying on Social Security, and they don’t have much beyond that.  It is pretty scary to think you worked 40 years of your life, and there is not something in place.  Do you have anything you want to add to that? 

Mr. John.  Let me add two things if I may.  First, of course, is to take this as an object lesson.  The fact is if you reach 55 or 60, you don’t have nearly the flexibility that you used to have.  And we need to make sure through the auto IRA and a wide variety of other things to make sure that this doesn’t happen to the next generation. 

But we have a second crisis that is coming with the Baby Boomers.  The first one is not going to be not having enough money, and the second is not managing it properly so that they run out of money at the time when they are 80 or 85.  We need to very carefully examine question of guaranteed lifetime income, annuity type products, whether they are ones that kick in at the age of 80, whether they are ones that are purchased at the time of retirement, to make sure that we don’t have the same individuals who are worried now even more worried when they are 85 and their bank account is empty.  

Mr. Buchanan.  Let me ask one more quick question just in terms of Congress helping small business.  I am concerned there are a lot of small employers out there where employees would like to have some kind of retirement; they don’t offer it.  What ‑‑ you know, that is tax deductible ‑‑ what incentive can we help with small businesses in terms of making sure that as many of them would provide some kind of retirement package 401(k) or whatever else that is available out there. 

Mr. Hardock, do you have any comments on that? 

Mr. Hardock.  I think many members of this committee, both Republicans and Democrats, have supported incentives, for example start‑up credits for small business to send the signal that if you set up this kind of plan the government will help you with that initial administrative expense.  I think doing more on that front would be helpful. 

I think Mr. Neal now has a bill in.  But others on this committee have in the past supported that concept, and it could easily be expanded on because that is where our problem is. Small businesses that are not covering their employees partly because of the costs.  Electronic delivery would help there, too.  It is amazing how expensive it is to send out all of this paper. 

Mr. Buchanan.  Thank you. 

Mr. Chairman, I yield back. 

Chairman Camp.  Thank you. 

Mr. Marchant is recognized. 

Mr. Marchant.  Thank you, Mr. Chairman. 

Mr. VanDerhei and Ms. Miller, you both state in your testimony that despite what some may claim, studies show that current tax incentives for savings for retirement are quite progressive.  What would be the effect on progressivity if you lowered the top marginal rate to 25 percent? 

Ms. Miller.  That is a very complicated question and depends in part on what else you have done when you have lowered that marginal rate to 25 percent.  I mean, it is a fact that as the top rate declines, there is less incentive for tax deferral because you are saving less money when you contribute.  But there are other competing ways to save.  It depends in part on what is happening with capital gains and dividends.  If you have no tax to be paid on an investment, as David would like to see generally, then it becomes very difficult to incentivize an employer to put in a plan unless you specifically have a targeted tax credit or some other specific benefit to encourage that employer to put in a plan. 

So I think that this is something that is particularly sensitive to what else is happening.  But it is true that as the rate declines, the incentive, cash that is freed up by putting it in this plan, also declines.  So you have to be careful not to give it a double hit certainly by also ‑‑ maybe you need to increase the contribution limits in order to maintain an incentive there for employers to put in plans. 

Mr. Marchant.  Thank you. 

Mr. VanDerhei.  I agree with what Judy said and would like to amplify it a bit.  We had done some work last summer looking more at the Simpson‑Bowles type proposal, but a lot of that could be expanded to this type of proposal.  If you are reducing the marginal tax rates, especially for the small business owners, you are changing the calculus of what their cost‑benefit analysis is of providing that to the employees.  And Judy has in her written testimony a graph that we worked on last year that actually shows ‑‑ I believe we had as much as an 11 percent decrease in the number of small plans, defined as plans with less than 100 employees, because of the 20‑20 limits.  If that is something you would be interested in, we could very easily modify that to look at what the impact of decreasing marginal tax rate would be apart from the 20‑20 limits.  I could get back to you on that if you are interested. 

Mr. Marchant.  I think we would be interested in that in all our proposals, that that tax rate be capped at 25 percent.  And for Mr. John, what would be the overall effect on retirement savings of adopting the 20‑20 proposal as was proposed by the Bowles commission? 

Mr. John.  I am not a micro or macro economist, so I have not really modeled it.  I usually tend to defer to Jack on issues along that line. 

Mr. Marchant.  Okay.  Well, Jack? 

Mr. VanDerhei.  The 20‑20?  Actually, we have a figure in the written testimony that takes a look at what would happen.  I don’t think, surprisingly, the biggest hit would be on the highest income quartile.  We found, for example, that people currently 36 to 45 if it were applied today would have a 15 percent reduction on average in their retirement balances.  What I think comes as a surprised to many, though, is that the second biggest hit actually comes on the lowest‑income quartile and that is because of the 20 percent, not the 20,000.  And one thing that many people ignore is that oftentimes, people will come back into the workforce later on in their age.  They may be a spouse, and they may find that because of catchup or whatever, they have the ability to put much more of their income in.  We find that they are the ones who typically end up triggering the 20 percent as opposed to the high income, who trigger the 20,000.  But even for what we found for 36 to 45, almost 10 percent for the lowest‑income quartile, 10 percent reduction in average account balances because of 20‑20. 

Ms. Miller.  I think that is actually understated for the lower paid, because small business owners, they would have about zero incentive for putting a plan in, and the safe harbor contributions they make for rank and file workers would be gone.  And so I think that really understates the negative impact. 

Mr. Marchant.  Thank you, Mr. Chairman.

Chairman Camp.  Thank you. 

Mr. Thompson is recognized. 

Mr. Thompson.  Thank you, Mr. Chairman.

And thank you for holding this hearing.  I think it is extremely important, and it is an area where we ought to have a lot of common agreement.  This is something we can actually do to help people.  A lot of young folks out there who could really benefit from good work that this committee could do. 

I want to follow‑up on a couple of questions that were asked by other members.  Mr. Buchanan asked about what to do to encourage small business folks to participate. 

Ms. Miller, in your written testimony, you mentioned that employers who don’t offer any sort of retirement plan for their employees cite business concerns.  Could you elaborate on what those business concerns are?  And did your research show any downturn or any of the folks who were offering it, did they jettison those programs during this recession? 

Ms. Miller.  Sure, I don’t have any data on that last piece, although our members certainly anecdotally if a business goes out of business, obviously, the plan is gone.  And certainly as a small business, when your resources are drained, you will cut back on contributions if nothing else. 

But when employers say they are not putting a plan in for business reasons, there are a few that are top line reasons.  One is that they don’t think the employees care.  And if the employees say, give me cash, then the employer would rather just give them cash if they have it. 

The second is that small businesses are notorious for not lasting very long.  And if you aren’t sure you are going to survive, then you are hesitant to do something that really says, hey, I have arrived, I can plan long term, too. 

And the third is the cost.  I think there is ‑‑ some employers don’t understand how inexpensive it is to actually set up a plan.  But most commonly the issue is that they don’t feel they can afford to make a contribution or to promise to make a contribution.  And that is why really we are supportive of the auto‑IRA proposal, because it could get employers in without out‑of‑pocket costs themselves.  And we think that they will find that employees do actually appreciate it, and we can get over a couple of hurdles at the same time. 

Mr. Thompson.  I think Mr. Neal’s bill would speak to that issue. 

Ms. Miller.  Absolutely.  Yes.  Yes. 

Mr. Thompson.  For public record, I told him a minute ago that I would coauthor the bill.  I think it is a good one. 

Mr. John, you have done some research on retirement savings plans in other countries.  Was there anything there that really knocked your socks off? 

Mr. John.  There were actually a couple both good and bad.  If we look, for instance, at New Zealand, New Zealand has a form of the auto IRA, but given the fact that they only have 3 million people, it is a much more centralized form.  But it works exceedingly well early on. 

The one that is a huge mistake is the United Kingdom.  The United Kingdom went through and back in1997, then Chancellor of the Exchequer, Gordon Brown, increased the taxes of retirement plans by about 5 billion pounds a year.  The net result obviously was a collapse.  The second thing they did was the U.K. continuously tinkers.  They come up, they set up a program, they actually have a brilliant program called NEST, National Employment Savings Trust, that starts to go into effect this fall, except that the government just announced within the last week or so that now they are looking at a completely different approach.  And what that does is to breed confusion and distress. 

Mr. Thompson.  Is there anything that we should take from the different foreign programs that you evaluated and look at putting in place here? 

Mr. John.  The ones that work the best are the ones that have the broadest coverage and start people young and keep them saving throughout.  Australia has a mandatory system which works exceedingly well.  I am not suggesting that the United States move to something along that line, but the broader the coverage, the better it is.  And it is possible to do a very simple system, like the auto IRA, and keep it cheap.  Frankly, we studied overseas systems very extensively in developing it. 

Mr. Thompson.  Thank you all very much for being here. 

Thank you, Mr. Chairman. 

Chairman Camp.  Mr. Berg is recognized. 

Mr. Berg.  Thank you, Mr. Chairman. 

You know, obviously, the goal in this whole thing is, how do you make it simple and easy to pick the right plan for each individual?  And you know, obviously someone’s understanding of financial markets and what is best for them and trying to make a lifelong decision rather than a short‑term decision, so I was intrigued by the automatic IRAs. 

And in part of your testimony, Mr. John, you talked about simplifying things but also having an automatic IRA.  So kind of my question to you, does the simplification come first, or do you do the automatic IRAs and then simplification after that? 

Mr. John.  I anticipate that, given the direction of things, that the auto IRA comes first.  The auto IRA is crucial, because if people don’t save, if they do not get started early on, it doesn’t matter if you simplify or not. 

Mr. Berg.  Thank you. 

I just had one kind of out‑of‑the‑box question.  And it seems like so many people are going through a lot of different jobs today and sort of the new normal is several different careers, several different jobs.  And a lot of younger people that I know have been to two or three different employers in a short period of time.  So each time you are trying to analyze what is the best retirement program?  Here is what the employer is offering.  Has there been anything done like out of the box and looking at a plan that would just be an individual’s plan, and this plan would follow the individual, even though they are an employee, but again, they would make the decisions on what is the right package for them for their working career?  And as they went in and out of different careers and different jobs, those employers might pay into their individual plan rather than the employer sponsoring a separate plan? 

Mr. John.  There have been some examinations of that sort of thing, but the key factor is that most people, especially when they are starting out, don’t have the expertise to make that kind of choice.  And the natural human reaction when you are faced with a choice that you don’t understand is that you do nothing.  So people stop.  That is the value of both an employer‑sponsored plan, where you have the payroll deduction and the auto enrollment and the auto escalation.  And what we find as time goes on that a certain proportion of people who started out in auto enrollment later learn and take more control over their activities. 

Mr. Berg.  Any other comments on more of an individual plan that follows an individual? 

Ms. Miller.  I think it is very hard to motivate an employer to participate in that kind of an arrangement, because the employer, once they feel financially secure enough to put in a plan, they are looking at the tax benefits.  They are also looking at what works for their company.  And what sometimes, I think, gets forgotten in talk about a single, simple plan is that employers will use ‑‑ they still use vesting schedules.  If they are putting in a contribution for workers, it might be fully vested because it is a safe harbor, but if there is something more than that, they don’t like the idea of giving money to somebody that is coming and going right away.  And so the money won’t necessarily all be vested right away.  And it will vest after a few years, or maybe a graduated schedule, it is 5 years. 

So that really doesn’t work when you have an individual account.  And so there are things that employer ‑‑ flexibility that the employer has under an employer‑based arrangement that would disappear and I think make them less engaged. 

Mr. Berg.  Thank you. 

I yield back. 

Chairman Camp.  Mr. Reed is recognized. 

Mr. Reed.  Thank you, Mr. Chairman.  To follow up on Mr. Berg’s sentiment, one of the issues I see is the need ‑‑ we talk a lot about employers and the government here in Washington being the ones to choose best what individuals should do with their futures, especially when it comes to retirement.  And we kind of have this attitude up here sometimes that I try to fight every day that Washington knows best; just trust us, we will take care of it.  And I want to get to ways to try to enhance individual accountability and responsibility for people, allowing them to control their own destiny. 

So are there things that we could be doing to encourage literacy when it comes to financial planning?  Any ideas, thoughts from the panel as to where we could really change the mind set of individuals as they go into the workplace of actually being aware that 20, 30 years will come, and we need to have something in the bank to take care of us?  Are there any proposals that anyone could share with us that they would say we should be taking a real close look at and advancing? 

Ms. Miller.  I have to get back to electronic delivery and really getting people engaged.  There are some amazing things going on out there in terms of enrolling people and having their own individual information set up on their iPad or handing them out when people come in to get enrolled and letting them work through and see what it is really going to be like. 

And yet there are constraints on how everything has to be handled right now that minimizes what you can do.  And so it almost ties ‑‑ you know, this market is incredibly competitive and creative and can’t always get to do everything it could do because ‑‑

Mr. Reed.  Could you give me some examples of those constraints?  When you say there are constraints, are they regulatory constraints? 

Ms. Miller.  Yes, regulatory constraints.  For example, right now, we have all of this paper that is due out for disclosure on investments, and it is going to be ‑‑ we support the disclosure, but people are going to be getting a stack of paper, and I don’t think they are going to read it. 

And if you were able to ‑‑ if you had their email address, I mean, we give people at work an email address.  You can’t necessarily use that if they aren’t ‑‑ you know, that is not a routine part of their job and all of this other stuff and even though they may have used our Web site.  So if somebody uses the Web site, you should be able to drive them to that Web site to get this information.  Once they are there, there are fun things you can do.  There are people working on games to encourage people to save.  We need to really be able to get them involved. 

But right now, you have to send them that stack of paper unless they went through certain steps.  And it is just really a major expense, and it really discourages creativity and truly engaging people, especially younger people that are so much into electronics.  If we can’t deliver this information on their iPhone, they are not reading it.  And right now, we can’t.

Mr. Reed.  Mr. John, I see you nodding over there. 

Mr. John.  I agree with everything that Judy has said, as I usually do. 

But there are other areas ‑‑ for instance, the U.K. has something called the Platform Account, which combines the retirement savings account with a variety of other types of savings and investment vehicles.  And one of the things that they have found that works exceptionally well over there is that because the employer knows how old this employee is and what stage of life they are, they can shoot them little target videos.  So if the individual has just got a child, they can shoot them a video talking in 2 minutes about, here is what you can do to start saving for your child’s future.  Or if you just married, here is what you can do to start saving for a house.  And we found in studies that these work exceptionally well, and they work even better if the person who is being recorded is someone that is someone like a coworker or someone who has some sort of a connection to that individual. 

Mr. Reed.  How about in the educational, like our high schools, elementary school?  Any thoughts on that type of forum? 

Mr. John.  Yes, my older daughter, who is 25, went through one of the finest high schools in the United States up in Montgomery County.  And she took a variety of courses in photography, cooking with amazing results, and I think she didn’t have to take a single financial literacy course. 

Mr. Reed.  That is a great point. 

With that, I yield back, Mr. Chairman. 

Chairman Camp.  Thank you. 

Mr. Lewis is recognized. 

Mr. Lewis.  Thank you very much, Mr. Chairman. 

Mr. Chairman, I want to apologize to members of the panel.  I had to run out and speak to a group of eighth grade students.  So they kept me for a while. 

I heard your testimony, and I want to thank you all for being here.  And thank you for your service. 

Ms. Miller, it is good to see you again.  Thank you also for all that you do. 

Ms. Miller, many of the people who criticize or question our tax incentives for retirement savings argue that they are for the wealthy.  They say that these laws favor high‑income people.  In your experience and research, do you find this to be true?  Do you have any ideas as how we can further increase participation among lower‑ and middle‑income workers?  How can we make it easier for people to save for retirement? 

Ms. Miller.  That is a very good question.  I think if you look at the retirement savings incentives, first of all there is it a cap on compensation that can be considered.  It is at $250,000.  So when we hear a lot of talk about let’s cut incentives for people who make over $250,000, I cannot help but think, we already cap it.  We can’t include compensation over $250,000. 

And that also when you are testing for nondiscrimination.  So somebody might make a million dollars, but when you are comparing their percentage of pay in this plan to the lower‑income person’s percentage of pay, you use the $250,000.  So we already have something that is built in to limit that. 

The nondiscrimination rules generally will say that if the business owner wants to put in the maximum of $50,000, those workers are going to be getting a contribution; 3 percent, 5 percent, you know, depending on the arrangement.  They are going to be getting the employer money.  And it really is additional money. 

There have been some people who will say, oh, they would have been getting that as pay anyway, but there was a really good recent look at this by Eric Toder and somebody else, I forget, showing that for lower‑income groups, if there is a 401(k) plan, it is new money.  It is largely new money.  They have like 89 percent, but for small business, it is more like 100.  It is really is additional money. 

So I think these nondiscrimination rules do that.  It is a matter of getting access to more people, and that is why we are strongly supportive of something like the auto‑IRA program, that would make these arrangements available to more workers and just grow what we have here. 

Mr. Lewis.  Mr. Sweetnam, you mentioned that in another time in another period, that the banks would stay open.  And I remember rushing down to the bank when I was much younger, had all my hair, with my wife before the banks closed to get a $2,000 IRA.  What happened to that spirit?  What happened?  Should we bring it back? 

Mr. Sweetnam.  That was one of the things that we proposed doing in the Bush administration simplification proposals. 

What happened was that we put income limits on who could make contributions to IRAs.  So when you and I were seeing the lines going in and the banks staying open, it meant that everyone could make a $2,000 IRA contribution.  Now, everyone cannot make a $2,000 or ‑‑ can’t make a deductible IRA contribution.  It depends on what their adjusted modified adjusted gross income is and whether they are an active participant in an employer plan. 

You will see in my testimony, I have two pages worth of charts that talk about who can and can’t make contributions.  Before, you didn’t have that, and everyone could go in, and the banks it could say, come on in, and we will set up your IRA.  That is the difference.  That is the difference now.

Mr. Lewis.  Thank you. 

Mr. Chairman, could I yield the balance of my time to the gentleman from Oregon? 

Chairman Camp.  There is only 30 seconds left, but you will get your own time in a few minutes.

Mr. Blumenauer.  Then I will wait. 

Chairman Camp.  Mr. Paulsen is recognized. 

Mr. Paulsen.  Thank you, Mr. Chairman.  We have had a lot of good discussion.  I appreciate the testimony in the hearing.  One thing that we haven’t talked about is ESOPs, Employer Stock Ownership programs that enable workers to accumulate substantial amounts of retirement savings, as compared to some of these other defined‑contribution retirement plans.  And there are studies that even show that the value of the retirement accounts of an employee that works for, say, an S ESOP, as an example, for that firm, would average $100,000 in 2008, and you compare that to only about a $45,000 average of an employee with an average 401(k) account.  So I think these statistics definitely show that ESOPs have been tremendously successful when it comes to helping workers save for retirement. 

Mr. Sweetman, if I can just ask you, should Congress make sure that we protect ESOPs in the context of successful retirement savings vehicles as we tackle tax reform and also attempt to simplify the defined‑contribution retirement system as well? 

Mr. Sweetnam.  When we looked at the retirement simplification when I was part of the Treasury Department, we thought that the ESOPs worked perfectly fine, and we didn’t try to modify them at all.  I have dealt with ESOPs and S ESOPs over my career, and they have provided very good benefits for people.  So I think that one of the things you are hearing from everyone here is that we shouldn’t be cutting back on retirement benefits and ESOPs and S corporation ESOPs are an important benefit, and I think that everybody is fine with continuing on. 

Mr. Paulsen.  Ms. Miller, you are nodding your head a little bit, too.  But should ESOPs or S ESOPs be used, that structure serve a little bit as a model for tax reform or just having that encompass? 

Ms. Miller.  I think that it is important to maintain them.  I am not sure that I could say they are a model because when you are dealing with an employer and what they should be doing, when it fits a situation, it is a wonderful thing, but it doesn’t always fit a situation.  I think it sits alongside other retirement programs.

Mr. Paulsen.  Let me ask a question for some of the other panelists, too.  There has been a lot of mention of some of the current ‑‑ or some mention, I should say, of some of the current law, the nondiscrimination rules that apply to 401(k) plans that make sure that lower‑income workers also can benefit from these plans.  Can you talk a little bit about how these rules work from the perspective of how a tax incentive could help the owner of a small business owner afford the contributions that would be required for those type of rules?  Anyone? 

Ms. Miller.  I can speak to that.  I think, most commonly, if you are dealing with a small business who has ‑‑ probably their accountant has said, go see so‑and‑so about putting in this retirement plan, and they have gotten to the point where they are finally making some money, and they are coming to the end of the year, and they are going, wow, I have this $30,000 sitting there.  I am going to take it out as a bonus, and I am going to pay all sorts of income tax on that money. 

You can show them if they put in a qualified retirement plan and make a contribution for themselves and save on that for income tax purposes, they can use some or close to all of that tax savings to make the required contributions for other people.  And that way, then you say to them, okay, you can take this bonus home and you can write out a check to Uncle Sam for 28 or 31 percent of it or 36.  Or you can put in this plan and give that money ‑‑ you find out the receptionist’s name when you go in, of course, you can give that money to your employees.  And most times, they are very eager to have retirement savings themselves and help their employees save as well.  So that tax incentive, though, is a key part of it.  You have to show them how it can be better used than to just take it home. 

Mr. Paulsen.  Anyone else? 

Thank you, Mr. Chairman. 

Chairman Camp.  Mr. Blumenauer is recognized. 

Mr. Blumenauer.  Thank you very much, Mr. Chairman. 

I apologize, I have been in the Budget Committee defending the interests of the Ways and Means Committee. 

Chairman Camp.  Thank you for that service. 

Mr. Blumenauer.  It is a pleasure. 

And I am sorry that I was not able to be more of a part of this.  I had a chance to review some of the material.  It strikes me as something that would be ‑‑ our time is well spent.  With all of the vagaries that are surrounding tax changes, some of the budget pressures, retirement security seems to me to loom very large. 

And I appreciate advice and admonition from the panel members about looking at the big picture, about things that encourage employers to provide a range of choices.  I know at times, it may be bewildering, which is why I have supported the automatic IRA enrollment.  It is why I am a lead co‑sponsor on the ESOP; where it is appropriate, it is very powerful. 

But I was struck by something Mr. John said about the experience in Great Britain.  Be careful about tinkering ‑‑ about taking an already confused and confusing system and, with all the best of intentions, changing it again. 

It seems to me that with your help and advice, and Mr. Chairman and the committee, zeroing in on things that truly are refinements, not sea change, I am willing to explore all sorts of modifications in the Tax Code, including in some cases, raising taxes on myself and others.  But I think that the investments that have been made in the Tax Code to incent retirement savings, insurance, these are things that a lot of people are relying on.  These are things that it takes a while for the consumer to be educated.  And there are opportunities for a whole host of unintended consequences if we are not careful. 

So I just wanted to express my strong support for the committee working on this for the advice and counsel about refinement at a time when Americans have hit choppy water economically; where millions of people have lost what they thought was the value of their home, maybe it was artificially inflated, but they borrowed against it, and they were counting on it; where retirement savings and college education accounts have been diminished. 

I think the advice that we are getting here about refinement, not tinkering, moving forward is well taken.  And I hope it is something that we can work on together to strengthen these retirement opportunities, send clear signals, automatically enroll, incent innovative approaches but have continuity and follow through.  It seems very, very important to me. 

And I appreciate the courtesy.  I am sorry I wasn’t with you more, but I think your contribution is very important, and this hearing I think is very important. 

Thank you very much, Mr. Chairman.

Chairman Camp.  Thank you very much.  And to another Ways and Means member who also serves on Budget Committee, Dr. Price. 

Mr. Price.  Thank you, Mr. Chairman, and I, too, apologize for not being here for the entire hearing. 

I want to thank you for your testimony on what is, I think, an incredibly important issue.  And I want to hone in, and it may have already been discussed, but ask Mr. VanDerhei and Ms. Miller, if you would, my sense, the small business folks at home, people that I talk to tell me that there are impediments and obstructions into both the employer and the employee being able to contribute to what might be a more open, flexible, and I think you called it creative plan, Ms. Miller.  If you had to identify the greatest impediment that the government puts in place to either the employer or the employee for setting up a flexible, responsive retirement plan, what would that be?  Mr. VanDerhei? 

Mr. VanDerhei.  Well, I will focus on the responsive part of that.  One of the major improvements we have had in the retirement system in this country, certainly since 2006, is the increased adoption of automatic enrollment and automatic escalation of contributions.  For a variety of reasons, a number of employers have adopted a safe harbor approach, this automatic escalation, which unfortunately currently has a maximum cap of 10 percent. 

I think if you talk to most financial planners, they would say that in addition to what the employer is probably matching, perhaps 3 percent, you need, especially for employees who are starting this process late in their careers, something more than just a 10 percent contribution per year, and I think if there were ways to not only, first of all, have employers increase the default contribution rate, as David had already mentioned, from perhaps 3 percent to 6 percent or more, but to allow those employees who want to automatically allow their contributions to escalate over time, to go beyond the 10 percent. 

Mr. Price.  You would increase the cap? 

Mr. VanDerhei.  Yes. 

Mr. Price.  Increase the cap. 

Mr. Hardock.  Mr. Price, on that same issue there is some data in our testimony that shows that when you do that, it is like telling your kid a C is a good enough grade, you will get a C.  If you tell him an A is the grade you want, you are going to get closer to an A.  And then the data we have seen shows that if you set that bar higher, even the people who don’t do the automatic escalation do more because they see the bar, and they say, oh, that is what I am supposed to do.

Mr. Price.  Ms. Miller. 

Ms. Miller.  Yeah.  I think one important point to make here is that autoenrollment isn’t as popular with smaller employers as it is with larger ones, and the reason is that it is too easy ‑‑ practitioners don’t recommend it to them because it is too easy to trip up, and then you get hit with penalties on it. 

And I think we need to take a look at some issues that would make it easier for small employers to do this kind of thing without incurring additional expense.  And, you know, an example is if you are automatically enrolling, then when someone completes their year of service, you sign them up.  With a small business, sometimes you forget that, that date passes, and you didn’t do it, and you get to the end of the year, and whoever is doing your retirement plan work says, oh, so‑and‑so should have been enrolled.  Well, if they happen to only have missed a few months, that is okay, you can get them signed up, but if they were out for close to a year, the small business owner, to do this automatic ‑‑ this safe harbor correction not only has to put in whatever match they would have made, but they have to put in the automatic enrollment contribution, too, so the employee got their salary, but they also get the employer money.  And it just is so much hassle that they just don’t want to bother, and that makes no sense.  If they have to make the match, yes, but not to have to put the contribution in. 

Also, small business deals with top‑heavy rules where if over 60 percent of benefits are for key people, then there is a minimum contribution of 3 percent of pay, which is fine, but if the owner wants to be nice and let everybody contribute to the plan, even if they haven’t had a year of service in, suddenly they have to make the contribution for everybody, which, as I mentioned, if they are going to be short term, they really don’t want to.  So they really are constrained by some of these things that are particularly difficult for small business and really would be pretty easy to clean up. 

Mr. Price.  Thank you. 

My sense is that there has to be a right balance between this competitive and creative market that we want out there and regulation. 

Ms. Miller, would you say that that balance has been struck right now, or are we out of balance? 

Ms. Miller.  There is room for improvement, let me ‑‑ definitely room for improvement. 

Mr. Price.  Great. 

I thank you.  I would appreciate each of the panelists, if you desire, to follow up on that score, identifying those areas where the regulatory environment is actually less helpful to employers and employees. 

Thank you, Mr. Chairman. 

Chairman Camp.  Thank you, Dr. Price. 

Again, I want to thank our panelists for excellent testimony today.  Some good information was transmitted to us as many good points were made.  And with that, this hearing is now adjourned. 

[Whereupon, at 12:06 p.m., the committee was adjourned.]

Public Submissions For The Record

Kevin Wiggins
Phillip Swagel
Putnam Funds
Savings Coalition
Susan Crase