The Working Group Report, submitted to the ERISA
Advisory Council on Nov. 13, 1998, was approved by the full body and
subsequently forwarded to the Secretary of Labor. The ERISA Advisory
Council was established by Section 512(a)(1) of the Employee Retirement
Income Security Act to advise the Secretary with respect to carrying out
his/her functions under ERISA.
November 13, 1998
TABLE OF CONTENTS
I. Working Group's Purpose and Scope
A. Executive Summary
II. Recommendations
III. Background and Findings
A. Impact of Demographics on Retirement Security
B. Three-Legged Stool of Retirement
C. Social Security
D. Trends in Personal Savings
E. Lack of Retirement Planning by Workers
F. Shift to Defined Contribution Plans
G. Obstacles for Small Employers
H Impact of Globalization
I. Difference in Coverage Between Large and Small
Employers
J. Summit on Retirement Savings
K. How to Motivate Americans to Save
L. Contingent Workforce and Small Employer Plan
Sponsorship
M. Conclusion
IV. Working Group Proceedings and Summary of Oral
Testimony
V. Exhibits and Written Materials Received
A. Index for Small Business Working Group
VI. 1998 Small Business Working Group Members
WORKING GROUP ON SMALL BUSINESS: HOW TO ENHANCE AND
ENCOURAGE THE ESTABLISHMENT OF PENSION PLANS.
The Small Business Working Group respectfully submits
the following report to the 1998 ERISA Advisory Council.
1. WORKING GROUP’S PURPOSE AND SCOPE.A. Executive
Summary.
The 1998 Advisory Council on Employee Welfare and
Pension Benefit Plans created a Working Group to study the pension
coverage of employees who are employed by small businesses. In choosing
this topic, council members expressed concern that pension coverage for
many working Americans is eroding. For a large majority who are working
for small employers it is nonexistent. This universe of constituents,
employers and employees need more education about the pension plan options
available and incentives to establish worker retirement savings.
The primary objective of this study is to focus on the
small employer community and: (1) evaluate the reasons for such paltry
coverage, (2) make recommendations from the information gathered to
embellish on what the Department of Labor is already doing in this area,
and (3) suggest a methodology to enhance and encourage the education of
workers and their employers about the need for more pension coverage. This
effort is truly a laudable social and economic goal as we wrestle with the
notion of a national retirement policy.
The Department of Labor has had a commitment to the
small business community recognizing the need for American workers to be
educated as to the importance of retirement planning and saving. The
Department’s strategic goal of providing protection of workers’
benefits and the recognition that a secure work force provides economic
security for workers and their families represents a strong impetus for
the Working Group’s mission.Achieving financial security for retirement
is a complex process that is not getting easier. The need to educate
American workers and employers on the importance of planning and saving
for a secure, comfortable and dignified retirement is critical. The
private voluntary retirement system came into being in the last century
and was enhanced following the adoption of legislation of substantive tax
incentives after the establishment of the Tax Code in 1913. The growth and
development of the organized trade union movement as a powerful advocate
of social and economic policy for working Americans in the early 20th
century fostered the need of increasing worker security. Two main tenets
and perspectives of pension policy early on were working people’s
security and preventing tax abuse. ERISA reinforces these principles.The
Working Group heard testimony from eighteen individuals from the public
and the private sectors. These individuals have recited from their varied
experiences and perspectives why they believe there is a significant gap
in pension program coverage for employees of small employers. They have
offered comments, statistics, observations and proposed recommendations as
to how our Working Group might proceed in offering definitive and specific
recommendations to encourage and enhance the establishment of pension
plans by the small employer community in order to provide their employees
with an opportunity to reach their “golden years” with sufficient
financial resources. Private retirement savings may not have the same
political “sizzle” as Social Security. However, it is terribly
important to make private pension plans for small employers part of the
national Social Security debate. Now is the time to re-strengthen all
three legs of the proverbial three-legged stool and to make a serious
effort to provide a large segment of the working American public with an
opportunity to fully participate in a wholesome retirement program. It is
important to approach this dilemma with a single- minded focus and a sense
of urgency.All of that said, the Working Group makes the following
recommendations that will be elaborated on in the next section. Briefly,
those recommendations include:
-
Repeal of the Top-Heavy Rules
-
Eliminate User Fees
-
Increasing the Limits on Benefits
and Contributions
-
Increasing the Limits on Includable
Compensation
-
Develop a National Retirement Policy
-
Coalitions
-
Tax Incentives
-
Simplified Defined Benefit Plans
II RECOMMENDATIONS
As a result of the Working Group’s findings, it is
clear that there is a need for marketing to promote the creation of plans;
for education of employers and employees; and for legislation to deal with
regulatory obstacles, as well as the need to create tax and financial
incentives. The Working Group offers the following RECOMMENDATIONS:
A. Repeal of the Top-Heavy Rules.
In 1982, Congress enacted the so-called top-heavy rules
because of perceived abuses among plans sponsored by small employers. The
top-heavy rules are qualification requirements and have no counterpart
under Title I, the Labor Law provisions of ERISA.
A plan is top-heavy if key employees have accumulated
60% or more of the contributions and benefits under the plan. In order to
determine whether or not a plan is top-heavy, plans are required to
maintain a detail analysis of who is receiving plan benefits. This complex
testing is in addition to equally complex testing to determine whether or
not the plan satisfies the non- discrimination rules of the tax code.
Although similar in purpose, the non-discrimination rules define highly
paid and rank and file employees differently and require different tests
to determine whether or not a plan satisfies its requirements
In any year in which a plan is determined to be
top-heavy, additional qualification requirements apply. First, the plan
must provide for more rapid vesting of benefits. Vesting standards were
first established by ERISA in 1974. In 1982, when Congress added special
rules for top-heavy plans, the more rapid top-heavy vesting schedules
significantly increased the likelihood that short tenured employees
received pension benefits. Top heavy rules prescribed a 2 to 6 year graded
vesting schedule as compared to a then 5 to 15 year graded vesting
schedule for non-top heavy plans. In the alternative, the top-heavy rules
prescribed a 3-year cliff-vesting schedule as compared to a then 10-year
cliff-vesting schedule for non-top heavy plans. Under the top-heavy graded
vesting schedule, a participant is 20% vested after 2 years of service and
his or her vesting percentage increases by 20% for each additional year.
Under top-heavy three-year cliff vesting, participants become fully vested
after three years of service.
The top heavy vesting schedules' impact have been
significantly diluted by subsequent changes in the vesting schedules,
which apply, to all plans. Specifically, the Tax Reform Act of 1986
amended ERISA to promote faster vesting for non-top heavy plans. The Tax
Reform Act of 1986 vesting schedules provides for 3 to 5 year-graded
vesting or 5-year cliff vesting. While there are still marginal
differences in top heavy and non-top-heavy vesting schedules, we believe
that the number of participants who would not have vested benefits if the
top-heavy rules were repealed currently is relatively small.
TEFRA also established minimum benefit and contribution
rules for all non-key employees in top-heavy plan, but not for other
plans. These rules were enacted because before TEFRA some qualified
retirement plans were able to provide rank and file plans’ participants
with little or no benefits by coordinating their plans with Social
Security benefits. For defined benefit plans, TEFRA required that each
non-key employee receive an accrued benefit equal to 2% of the
participant’s average compensation for each year of service up to a
maximum of 20% of compensation. In a defined contribution plan, non-key
employees must receive a contribution equal to 3% of compensation, or the
highest percentage contributed to a key employee, if less. For purposes of
determining the minimums, integration with social security benefits is
disregarded.The Tax Reform Act of 1986 eliminated methods of coordinating
with Social Security that resulted in some rank and file participants
receiving little or no benefits. The new so-called “permitted disparity
rules” which apply to all plans which coordinate with Social Security
modified the types of benefit formula that effectively denied rank and
file individuals private pension benefits and required that they provide
minimum benefits. In addition, regulations implemented by Treasury after
the Tax Reform Act of 1986 generally tightened the non-discrimination
requirements, which apply to all qualified retirement plans, assuring that
rank and file employees receive greater accrued benefits or contributions.
As a result of the changes in the non-discrimination rules, we believe
that most plan participants in top-heavy plans are already receiving
benefits above the top-heavy minimums.In 1974, ERISA imposed a combined
plan limit on the maximum amount of permitted benefits when an employer
maintains both defined benefit and defined contribution plans. In such a
case, the sum of a participant’s “defined benefit fraction” and a
participant’s “defined contribution fraction” cannot exceed 1.0.
Normally, when calculating these fractions, the dollar limits for a
defined benefit plan ($130,000 in 1998) and defined contribution plans
($30,000 in 1998) are multiplied by 1.25. Under TEFRA, the dollar limits
were multiplied by 1.0 rather than 1.25 for top- heavy plans, which had
the effect of reducing the maximum amount of benefits or contributions
which key employees in a top heavy plan could receive as compared to
highly compensated employees in a non-top-heavy plan. A top-heavy plan
could “buy” back the 1.25 fraction by providing addition minimum
benefits to non-key employees, unless the plan was “super-top-heavy”,
in which case the reduced 1.0 fraction could not be avoided.In 1996,
Congress repealed the combined plan effective in the year 2000 because of
its complexity, as part of the Small Business Jobs Protection Act.
Congress also repealed the corresponding provisions of the top-heavy
rules, which provided for reducing the combined plan limit, also effective
in the year 2000.
Although it is possible that plans of larger employers
can be top-heavy, as a practical matter, plans of small employers,
covering fewer employees, are more likely to be top-heavy. Even if a plan
passes the new non-discrimination tests implemented after the Tax Reform
Act of 1986, the plan must still be tested for top-heaviness. Calculating
whether a plan is top-heavy substantially adds to the burden and
complexity of maintaining a qualified retirement plan. Witnesses
testifying before the Advisory Council were unanimous in their view that
pension laws and regulations are too complex. In addition, a majority
thought that current pension law and regulations discourage small
employers from establishing qualified retirement plans. Among the
requirements most frequently cited as unnecessary and burdensome were the
top-heavy rules.
With the changes implemented by the Tax Reform Act of
1986 and the Small Business Job Protection Act of 1996, the top heavy
rules, originally enacted in 1982, do little more than add a significant
layer of administrative complexity. Whatever the merits of the rules when
first enacted in 1982, it is clear that the protections they afford to
participants in top-heavy plans have now been applied, by subsequent
changes in other pension rules, across the board to participants in all
qualified retirement plans.
The top-heavy rules under Internal Revenue Code Section
416 should be repealed. They no longer provide significant protections to
rank and file employees. Their effect is largely duplicated by other rules
enacted subsequently. Despite their limited utility, all employers must
test for top- heaviness. Since most small employers are not capable of
performing these tests on their own, they represent an additional and
largely unnecessary cost of maintaining a qualified retirement plan. They
also create a perception within the small business community that pension
laws target small businesses for potential abuses. This too discourages
small business from establishing qualified retirement plans for their
employees.
B. Eliminate User Fees.
The Internal Revenue Service has for many years had a
practice of issuing determination letters to employers opining that their
retirement plan conforms in form to the complex rules established under
the Internal Revenue Code for qualified retirement plans. Although
employers are not required to obtain determination letters, given the
adverse tax consequences of a subsequent determination that a plan is not
qualified, employers, as a practical matter, generally seek determination
letters.
For many years, the Internal Revenue Service reviewed
requests for determination letters without imposing a fee. As part of the
Revenue Act of 1987, Congress directed the Internal Revenue Service to
collect user fees for determination letters. Budget laws in 1990, 1995 and
1996 extended the IRS’s authority to collect user fees through September
30, 2003. The user fees were imposed at a time when there was significant
pressure to generate additional revenue to reduce the budget deficit.
Under Revenue Procedure 98-8, the Internal Revenue Service has established
a fee schedule taking into account the time and expense of reviewing
different types of plans. The fees for determination letters range from
$125 to $2,000 depending on the type of plan involved. These fees are in
addition to the costs of having plan documents and requests prepared in
order to receive a determination letter.The Internal Revenue Service has a
strong interest in encouraging employers to seek determination letters.
The IRS review of the plan is likely to reveal any serious drafting errors
or incorrect elections, in the case of a master or prototype plan. The
frequency with which Congress has changed required provisions for
qualified retirement plans increases the potential for inadvertent error.
The Internal Revenue Service would prefer that a plan be correctly drafted
at the outset rather than go through the complicated, expensive and
draconian process of disqualifying a plan.
The imposition of user fees adds another financial
obstacle to the adoption of qualified retirement plans by small business.
Although user fees apply to all employers—large and small— the cost of
establishing a plan is more acutely felt among small employers. User fees
do not vary by size of employer. While a $700 user fee for an individually
designed qualified plan is an insignificant cost for a Fortune 500
employer, it may well be an insurmountable obstacle for a small employer.
The small employers choice may be to not seek a determination letter, with
the attendant tax risks, or worse to not establish a qualified retirement
plan because the costs are too high.Now that the budget deficit has become
a budget surplus, the economic justification for user fees is much
diminished. User fees should be repealed.
C. Increasing the Limits on Benefits and Contributions.
Since ERISA was enacted in 1974, the Internal Revenue
Code has provided overall limits on the contributions and benefits under
qualified retirement plans. These limits apply to all Section 401(a)
qualified retirement plans, Section 403(b) tax deferred annuities and
Section 401(k) simplified employee pension plans. There are special rules,
which permit a higher defined benefit limit for certain
government-sponsored defined benefit plans.
The limits are expressed differently for defined
benefit and defined contribution plans. For defined benefit plans, the
limit on the annual benefit payable is the lesser of 100% of high
three-year average compensation or a dollar amount, which is indexed
($130,000 in 1998). There are special rules that require the benefit to be
actuarially reduced for benefits commencing prior to Social Security
retirement age (which ranges from age 65 to age 67). There is a minimum
benefit of $10,000, which is not indexed, and which can be paid without
regard to the normal limits, if the plan participant has at least 10 years
of participation and does not also participate in a defined contribution
plan.
For defined contribution plans, there is a limit on the
maximum annual addition to a defined contribution plan of the lesser of
25% of compensation or a dollar amount, which is indexed ($30,000 in
1998). An annual addition is the sum of employee contributions, employer
contributions and reallocated forfeitures.
Both the defined benefit limit and the defined
contribution limit apply in the aggregate to all plans of that type
sponsored by the same employer.
An additional limit applies if an employee participates
in both a defined benefit plan and a defined contribution plan sponsored
by the same employer. In such a case, the sum of the participant’s
“defined benefit plan fraction” and the participant’s “defined
contribution plan fraction” cannot exceed 1.0. Congress repealed this
complex rule as part of the Small Business Job Protection Act of 1996 for
years after 1999.The defined benefit and defined contribution plan dollar
limit were indexed by ERISA and were originally established in 1974 at
$75,000 and $25,000 respectively. From 1976 to 1982, the indexing feature
was allowed to operate as intended and the dollar amounts grew to $136,
425 and $45, 475. Under the Tax Equity and Fiscal Responsibility Act of
1982, the dollar limit on defined benefit plans was reduced to $90,000 and
the dollar limit on defined contribution plans was reduced to $30,000.
Furthermore, the dollar limit on defined contribution plans was frozen at
the $30,000 level until the defined benefit dollar limit rose to $120,000
so that the relationship between the dollar limits became 1: 4. For years
after 1994, the indexing was modified so that changes in the dollar
amounts would be in multiples of $5,000 adjusted downward to the next
lowest multiple.
These reductions in the dollar amounts are widely
believed to have been revenue driven. These reductions had the net effect
of adjusting downward the maximum amount of benefits and contributions
that highly-paid employees can receive in relationship to the
contributions and benefits of rank and file employees. Witnesses before
the Advisory Council testified that these changes have had the perverse
effect of “de-linking” retirement benefits of key employees from those
of other employees. Key employees looked to non-qualified deferred
compensation plans to satisfy their benefit needs rather than establish a
qualified retirement plan or enhance an existing qualified retirement plan
in which their benefits are significantly reduced.In order to give key
employees the incentive needed to establish qualified retirement plans and
expand coverage, we recommend that the $30,000 dollar limit on defined
contribution plans be increased to $50,000 which will help partially
restore the dollar amount to the level it would have grown to had the
indexing continued without alteration since the dollar limit was first
established in 1974.
Second, we recommend that the $90,000 dollar limit on
defined benefit plans be increased to $200,000 which will restore the
dollar amounts lost through alternations in the dollar amount since 1974,
while maintaining the 1:4 ratio established in 1982 as part of TEFRA.
Third, we recommend, that in the future, indexing occur
in $1,000, not $5,000, increments which has had the effect of retarding
recognition of the effect of inflation.
Fourth, we renew the recommendation of last year’s
ERISA Advisory Council that the minimum $10,000 dollar limit on defined
benefit plans be increased and indexed. The minimum benefit amount helps
increase the benefits of rank and file employees and its value has been
badly eroded since 1974. We recommend that the minimum defined benefit
dollar amount be increased to $30,000 and be indexed.Fifth, we recommend
that actuarial reductions of the defined benefit plan dollar limit should
be required only for benefits commencing prior to age 62. This was the
rule originally enacted in 1974 as part of ERISA. It was changed as part
of the Tax Reform Act of 1986 and has had the effect of significantly
reducing the maximum benefit of participants electing early retirement.
D. Increasing the Limits on Includable Compensation.
Under ERISA, there was no dollar limit on the amount of
annual compensation taken into account for purposes of determining plan
benefits and contributions. However, as part of the Tax Reform Act of
1986, a qualified retirement plan was required to limit the annual
compensation taken into account to $200,000, indexed. The $200,000 limit
was adjusted upward through indexing to $235, 843 for 1993. As part of the
Omnibus Budget Reconciliation Act of 1993, the limit on includable
compensation was further reduced down to $150,000 for years after 1994.
Although indexed, adjustments are now made in increments of $10,000,
adjusted downward. In 1998, the indexed amount is $160,000.
Witnesses before the Advisory Council testified that
these changes, like the reductions in the dollar limits on contributions
and benefits, have had the perverse effect of “de-linking” retirement
benefits of key employees from those of other employees. As a result, key
employees looked to non-qualified deferred compensation plans to satisfy
their benefit needs rather than establish a qualified retirement plan or
enhance an existing qualified retirement plan. We recommend that the limit
on includable compensation be restored to its 1988 level of $235,000 and
be indexed in $1,000 increments in the future.E. Develop a National
Retirement Policy
Utilize public service spots on television, radio and
in the printed media to educate the public and raise the awareness of the
need to prepare and save for retirement.
Utilize the Chambers of Commerce (U.S., state, and
local) and other community and business associations to promote the
importance of retirement savings.
Encourage state legislatures to develop mandatory core
curriculum courses at elementary and high schools on personal financial
management.
Create speakers' bureau on retirement planning and
savings for presentations at industry gatherings of small employers.
F. Coalitions
Promote the development of coalitions to offer pooling
vehicles for small employers. For multiemployer plans created by
collective bargaining an amendment to the Labor Management Relations Act
may be needed to allow small employers without a collective-bargaining
agreement, to continue to participate in these existing plans. This
recommendation deserves further study and consideration.
G. Tax Incentives
Offer tax incentives for employers without a qualified
plan to adopt in a plan. Tax credit could be offered to reimburse for the
administration of the plan as well as for retirement education costs
incurred for the employees.
H. Simplified Defined Benefit Plans
The Working Group restates its support of the
recommendation made by 1997 Working Group on Defined Contribution vs.
Defined Benefit Plans to create a simplified defined benefit plan.
III. Background and Findings
A. Impact of Demographics on Retirement Security
The combination of social, political and economic
factors over several decades contributed to creating a blueprint for
retirement security along with the recognition that a vehicle that would
provide a modicum of financial security for older Americans, once their
work life ended and their retirement began, would do much to thwart the
specter of poverty. Over the last four decades America has experienced a
demographic tidal wave of a growing and aging population commonly referred
to as the “age wave” that has in recent times reinforced and focused
national attention on the need to evaluate where we are today and
determine how to continue to provide a secure retirement system for older
people.B. Three-Legged Stool of Retirement
Traditionally, the three-legged stool of retirement,
Social Security, personal savings and a retirement plan, commonly referred
to as the “three cornerstones” of retirement income, has been promoted
as the most effective combination to provide a secure retirement.All three
-- Social Security, a pension plan, and personal savings -- can most
effectively support and strengthen the three-legged stool. Unfortunately,
each of these cornerstones is in various stages of serious threat of
erosion in one form or another and has been characterized as America’s
looming retirement security crisis. The need for education with regard to
savings, pensions and long-term retirement planning is of paramount
importance. Our failure to address this crisis portends for serious
long-term societal ills.C. Social Security
For the past two decades various pundits have
articulated that we face a crisis and some predict the potential
insolvency of the unreliable “pay-as-you-go” Social Security system.
They argue that a result of the alleged inadequate funding, and
unrealistic investment objectives as well as the impending retirement of
the baby boom generation, and the dramatically shifting top heavy
demographic landscape in our nation which will place the burden of
entitlements onto the younger generation, our Social Security system is
seriously threatened.D. Trends in Personal Savings
The personal savings practices of a large portion of
society are also in serious jeopardy. The Commerce Department’s latest
national income and product accounts data shows that Americans are saving
less than at almost any time since the department began collecting the
data in 1929. Its recently-adjusted figures report that Americans saved
only 2.1 percent of their disposable income in 1997; in June 1998 the
figure hit a staggering 0.2 percent annualized rate. Twenty-five years
ago, in 1973 and 1974, the savings rate reached a postwar high of 9.5
percent, and it hovered at about 7 to 8.5 percent well into the
1980’s.According to a study done last year by the non-profit research
organization Public Agenda and underwritten by Fidelity Investments, 46
percent of Americans said they have saved less than $10,000 for
retirement, including money saved in their retirement plans.
Consumers account for 62% of the Gross National Product
in the United States today. According to Juliet Schor in her book “The
Overspent American”, the majority of Americans are intent on
“Competitive Consumerism”. They try to acquire the trappings of the
rich by acquiring the most and latest toys. Schor flogs the American way
of life for its excesses, its materialism and its dangerously pervasive
messages that “you are what you own”.Americans want to keep up with
the Joneses, but cannot – too many of the Joneses have become
millionaires. The diabolical marketing by corporations of the capitalist
conspiracy keeps American consumers buying beyond their income. Life has
become a see -- want -- borrow -- and buy bummer. Americans spend more
than they realize, hold more debt than they admit, and ignore many of the
moral conflicts surrounding acquisitions. It seems a paradox: despite a
booming economy reflecting eight years of substantial growth, more than a
million Americans file for bankruptcy each year. Consumer bankruptcy
filings shot up 29% from 1995 to 1996. Last year, in 1997, they jumped
another 20% to a record high of 1.4 million. In 1985 only 350 thousand
individuals filed for bankruptcy.The flood of credit card offers in
mailboxes has helped propel consumer debt to record levels. Some experts
say the spike in bankruptcies has come from ease of filing for bankruptcy
and the loss of the stigma that bankruptcy once brought. One could easily
observe that we have created a system to consume and accrue debt when, in
reality, we should be asking the question “what are society’s goals”
with respect to savings and debt and offering an approach as to how to
address them.Recently, in Philadelphia, a couple earning a combined income
of $75,000, who were sending their children to private school at a
combined cost of $7,500 a year and renting a Mercedes, filed for
bankruptcy. The bankruptcy judge found that the couple did not abuse the
law, commenting that “The debtors are persons who became accustomed to
living with the amenities of the upper middle class and have been unable
to completely adjust themselves to a somewhat altered financial
depression.”Congress is currently grappling with this vexing problem.
The result may be the tightening of the bankruptcy code denying
individuals the benefits now enjoyed. The result could have a profound
effect on the quality of life.
History is a great teacher -- often repeating itself
– for many reasons. Why, might we ask? People have not changed much over
the course of modern civilization. History sets precedents and gives
people ideas. In this age of extremes and the new world order, the ability
to meet the needs of a modern, rapidly changing globalized economy rests
more and more on the shoulders of the individual. This means that for
consumers the future is in their hands.We have had the luxury of living in
an era, especially, over the last fifteen years of one of the most
scintillating periods in U.S. economic history. The complexity and speed
with which innovation has revolutionized the world of finance have reached
a proportion where it is difficult to comprehend all of the dynamics of
this fast-paced change from moment to moment. In the American economic
“miracle” everything should be up has gone up – GDP, capital
spending, incomes, the stock market, employment, exports, consumer and
business confidence. Everything that should be down is down –
unemployment, inflation, interest rates. This litany of America’s
economic success may sound tinny to those who feel their lives are
buffeted by forces over which they have virtually no control. People are
working harder than ever before. The gap between the well to do and the
poor has been growing. The options for unskilled workers keep shrinking,
as does the “safety net” that is supposed to protect them if they fall
out of the economy altogether. The natural American tendency to feed a
national optimism and sense of renewal that rides over the potholes of
politics and defies predictions of calamity must be held in check.When the
Clinton Administration introduced the notion of health care reform early
in the first term our national conscience was awakened to the fact that
over 35 million working Americans were without health care coverage and
that number has increased to 43 million in 1998. Today, with prescription
drug costs skyrocketing, it is shocking that 145 million Americans are not
covered by a prescription drug plan. As we face the most profound
demographic change in the history of our nation – the “age wave” –
many American consumers are ill-prepared for retirement.E. Lack of
Retirement Planning by Workers
We are in what Arthur Levitt, Chairman of the
Securities and Exchange Commission, recently characterized as a
“financial literacy crisis”. One out of two Americans has no pension
coverage. Three out of four Americans do not know how much they will need
to retire. Three out of four Americans do not know the difference between
a stock and a bond. One out of three workers who is offered a 401(k) plan
does not participate. One out of five has saved nothing for retirement. A
recent poll showed that people fell into these various categories:21% are
planners
15% are impulsive
19% are deniers (believing they won’t live long
enough)26% are strugglers (and need help)
With people living longer lives, the period of
retirement will be almost as long as the period of working. Institutions
shunting more responsibility onto the shoulders of the individual mandates
the necessity for individual knowledge and individual action. The
individual cannot go it alone. With mergers and acquisitions, downsizings,
restructuring and re-engineering, the world of workers is riddled with
tragedy and high anxiety.
F. Shift to Defined Contribution Plans
Much has happened to change the private pension plan
system as well as the methodology for delivering benefits. Since the
1970’s, qualified defined contribution plans, participants, and
contributions have grown as a percentage of the employment based
retirement system. According to the findings from the Form 5500 series
report filed with the Department of Labor for 1994 the count of private
pension plans filing was about 690, 350, a 2% decrease from 1993. The
number of defined benefit plans decreased by 11% to 74,400, while the
number of defined contribution plans has decreased by less than .5% to
615,900. The number of defined benefit plans has decreased each year since
1986. The 1994 count is only 43% of the peak total of 175,000 plans in
1983.The long-term patterns of decreases in the defined benefit plan
active participants and increases in defined contribution plan active
participants continued in 1994. Defined benefit plan active participants
decreased by 2% to 24.6 million. Defined contribution plan active
participants increased by 2% to 40.4 million.
We have witnessed during the last two decades some
serious trends that could best be characterized as the
“deinstitutionalization” of retirement benefit coverage as evidenced
by the statistics recited above. Many employers have shifted the
responsibility for providing for retirement income from their shoulders to
the shoulders of the worker as witnessed by the precipitous decline of
defined benefit plans and the increasing proliferation of defined
contribution plans where tomorrow’s retirees’ income security will
likely depend increasingly on his or her life-long money management skills
and decisions.What would normally have been considered an issue that most
people would readily rally around and support, namely, the creation of a
pension plan for employees, has become a debate about who is responsible
for the employee’s long-term retirement income goals. Perhaps the shift
of pension coverage or, more importantly, the lack thereof, has become
more noticeable and profound for employees of small employers.G. Obstacles
For Small Employers
A major portion of small employers do not offer
retirement benefit programs to their employees because of various
obstacles including the tax laws, regulatory issues, administrative costs,
fear and a misperception as to what employees want in a compensation
package. As a result, it was determined to undertake a much-needed
examination of the issues that confront small businesses and their
employees in the area of pension programs and retirement planning.
Who cares? Over two-thirds of small business employees
are not covered by a retirement plan largely because companies’ revenues
are uncertain or employees prefer high wages or other benefits. Therein
lies the charge to this Working Group as to how to enhance and encourage
the establishment of pension plans offered by the small employer
community.Retiring workers with a pension plan will be able to supplement
their Social Security benefits with their retirement income. Those workers
with low incomes who do not have the ability to save and are not covered
by a pension plan will be at risk at an extremely vulnerable period of
their lives. The burden of this responsibility cannot be placed with the
children of those retiring baby boomers who themselves are facing dramatic
changes in the world of work as we move through this modern industrial
transition known as the “new world global economic order” into the
21st century. This new era is not a forgiving one. It is dominated by
instant communications; the accelerated flow of capital, and global
interdependence and interconnectedness as evidenced by the economic shock
waves occurring in other countries that rocked the American financial
markets during the summer of 1998.H. Impact of Globalization
With the onset of accelerating and widespread
globalization over the past two decades, global competition among many
American employers has skyrocketed. Global capitalism is being unleashed
with an intensity and scale we have not witnessed before in economic
history, in a world where national governments are wrestling with the
reality that they are becoming progressively less able to protect
businesses, investors, and individuals from the evolving and sometimes
brutal free market forces. When you assimilate and crunch this down to the
ground where most of us function, these changes will drive household
decisions on jobs, savings, buying houses, education, and the ability to
provide a comfortable and financially secure retirement. This intensity
will continue. Many organizations will increasingly deal with uncertain
profit margins. Certainly the flexibility to quickly divest a business
venture or to terminate a business with the least obligation can be a
competitive advantage for an organization competing globally. Defined
contribution plans were perceived by some businesses to be more preferable
to defined benefits plans when they were unsure of their organizations’
stability, viability, and profits. During periods of stock market turmoil
small business’ financing strategy can stall and for some their
financing efforts can go into a tailspin. Small firms have fewer resources
and financing alternatives when the wealth of people who provide the seed
money is in jeopardy.I. Difference in Coverage Between Large and Small
Employers
The private voluntary retirement system has been
relatively successful for individuals employed by large companies. We have
been less successful in promoting and providing coverage among employees
of small companies. In the small employer community there are an array of
reasons why pension plans are not offered to their employees. In a world
were the predominant concern is “will today’s workers be able to
maintain their pre-retirement standard of living” and, it appears that
most of the retirement debate centers on whether to privatize Social
Security or at least invest some of its funds in the stock market, the
Working Group has struggled and wrestled with the challenge as to how to
promote the recognition of the need to create retirement programs for a
large segment of the working population, some 32 million as estimated by
the Department of Labor, that are without coverage.J. Summit on Retirement
Savings
In 1997 Congress passed and the President signed into
law the Savings Are Vital to Everyone’s Retirement Act (SAVER). The Act
called for an initial Summit on Retirement Savings to be held on June 4th
and 5th of 1998. The mission of the Summit was to determine how best to
raise awareness of the need for pension and individual savings so that
working Americans and their families may enjoy a comfortable and secure
retirement. This is an issue that must capture the attention of
government, employers, employees, the media, community organizations,
schools and families to work towards communicating the need to build
retirement security and in a more pervasive way, a national retirement
policy.Delegates to the Summit represented the leadership from political
parties, large corporations, small businesses, labor organizations, and
numerous trade groups dealing with employee benefits, personal finance and
retirement issues. Of large concern were the barriers that Americans face
when saving for retirement and the challenges and obstacles employers’
face when providing retirement plans. Clearly, the mantra for retirement
security is the need to educate all to its importance.This fact was
reinforced by three surveys that were released around the time of the
Summit. The surveys showed that Americans are worried about saving enough
for retirement. They also feel that they need more education to properly
plan for it and believe they will keep working part-time after they retire
in order to make ends meet.
Just one in four respondents to the 1998 Retirement
Confidence Survey of the Employee Benefit Research Institute (EBRI) said
they believe they would have enough money to live on after they retire.
The survey polled 1,500 individuals aged 25 and older. Their average age
was 43. The survey found confidence hadn’t budged in six years, despite
a booming stock market and sharp rise in mutual fund retirement
investing.K. How To Motivate Americans To Save
What can motivate American workers to save for their
retirement? The study found fear that was a factor for nearly half of
those respondents who were saving. Some 48% said watching retirees
struggle motivated them. Some 37% cited “time running out” as a
motivator.A second study by the same group, EBRI, showed employees of
small businesses need help from their employers to both motivate and
educate them on the value of retirement planning. A telephone survey of
601 small companies, those with 100 or fewer employees, found only about a
third of workers were covered by retirement plans. Few workers at these
companies even inquired about retirement planning, according to the
survey. When there were plans, the most popular was the 401(k) plan.
In those companies with plans, only about half offered
retirement education to workers and consequently, the study concluded,
only about one employee in five participated. In large companies, eight
out of ten employees participated, due largely to educational efforts.
Still another survey conducted and released by the
American Association of Retired Persons found baby boomers willing to work
well into their retirement years. Eight out of ten polled said they wanted
to work at least part-time jobs after they retire, mostly to maintain what
they admitted was an indulgent lifestyle. But a fourth said they believed
they would have to work from necessity. Today, just 12% of those over 65
now are working.
In March 1998 the Securities and Exchange Commission
initiated a campaign that aimed to motivate individuals to learn how to
save and invest wisely. The “Facts on Saving and Investing Campaign”
is a response to the need for heightened money management and investment
skills among Americans. Financial knowledge, skill and awareness are
particularly important given the increased individual responsibility
Americans face for funding their retirements.As recited above, Americans
need to save more and invest wisely because they can expect to live longer
and many do not expect Social Security and Medicare to provide benefits
comparable to those that beneficiaries receive today.
L. Contingent Workforce And Small Employers Plan
Sponsorship
The globalization of the economy has forced companies
to restructure, re-engineer, merge with and acquire other businesses in
order to heighten their competitiveness. The growing cost of running a
business, especially a smaller one, has increased the practice of leasing
or hiring contingent employees. For those small employers that do not
lease employees workers’ compensation rates have gone through the roof.
Despite an increasingly tight labor market, fewer small businesses are
offering health care and retirement benefits. This would seem to defy
conventional wisdom that employers are being forced to offer better perks
to attract employees as the unemployment rate has dropped to levels not
seen since the 1960’s.Small employers are hiring independent
contractors, temps, part-time and younger, less- experienced people who
may believe that they have less need for pension benefits but instead seek
higher salaries.
For those small employers who might give thought to
providing retirement benefits they are confronted by the apparent
complexities associated with creating pension plans. Part of the confusion
may also be attributed to the number of plans or options in existence.
The Department of Labor, through various offices, has
done a great deal in its outreach effort to promote the awareness for the
need to create retirement vehicles for employees of small employers. This
group became a target group in 1995 when the department recognized that it
had to be a catalyst to promote a national campaign to educate Americans
on the need to save for retirement. Other groups targeted were women and
minorities.
Brochures have been created and disseminated through
organizations, at public appearances of the Secretary and Assistant
Secretary and through partnerships developed with private sector groups
such as the National Association of Women Business Owners.
Work groups and task forces have been developed as well
as coalitions with business and community-based organizations like the
Chamber of Commerce, the Small Business Council of America, the Small
Business Association, the Hispanic Radio Network and African-American
publications. An interactive web site (///) has been established and the
department maintains an 800 number (800-998-7542) where inquiries can be
made and information can be obtained.
Small employers who have a plan find that their ability
to hire and retain good employees is enhanced. Also, a pension plan can
have an impact on employee attitude and performance and certainly
facilitate an employee’s ability to prepare more substantively for
retirement.Those small employers who do not have a pension plan who were
surveyed recited three main reasons why (1) they see their employees’
preferences for wages and other benefits; (2) the cost of set up and
administration as well as government regulations; and (3) their uncertain
revenue stream makes it difficult to commit to a plan.When asked what
changes would lead to serious consideration to establish a plan the
following responses were given: (1) an increase in profits; (2) providing
a business tax credit for starting a plan; (3) an increase in demand from
their employees; and (4) allowing key executives to save more in a plan
(i.e., eliminate the non-discrimination requirements).
The notion of employers having the ability to pool
resources and participate in a coalition or multiemployer-like vehicle
might enhance the willingness to establish plans. Multiemployer plans as a
retirement delivery system offer: (1) economies of scale; (2) no
regulatory compliance obligations; (3) the requirement to pay the
contribution; (4) a pooling of actuarial costs; (5) security from
investment risk and volatile fund fluctuations; (6) access to
professionals - attorneys, accountants, actuaries, investment managers and
investment consultants; and, (7) portability for employees.
M. Conclusion
We all have a role to play in the effort to create a
national retirement policy and improve working Americans’ retirement
goals. Improving the opportunity for a secure retirement for all will do
much to impact the economic well being of the United States.Government,
labor leaders, trustees, administrators, corporate leaders, investment
managers, consultants and other professionals, employers and employees
alike may play different roles in the retirement equation but we should
all be bound together for one sole purpose: to enable working women and
men to retire with a modicum of financial well-being and dignity.
IV. WORKING GROUP PROCEEDINGS AND
SUMMARY OF ORAL TESTIMONY
Meeting of May 4, 1998
Stephen Lee
Law Specialist
Office of Policy and Research
Pension and Welfare Benefits Administration
Mr. Lee participates in the National Economic Council's
working group on pensions and helped develop the SIMPLE plan and the
Administration’s SMART proposal as an alternative to the SAFE
proposal.Mr. Lee began his testimony by indicating that the NEC defined
small businesses as being “a hundred or fewer” and that the
legislation is targeted at businesses of this size. Additionally, the Form
5500 has a cut-off for certain filings of a hundred or fewer. He provided
an overview of the kinds of plans that are available to small businesses
and distributed a brochure on Simple Retirement Solutions. He discussed
the defined benefit plans which generally are not used by small businesses
except for professional organizations such as doctor and lawyers. He
indicated that it is the agency’s experience that “most small
businesses tend to sponsor defined contribution plans” because of the
inherent burdens of administration.Mr. Lee commented on the relatively new
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) and
indicated that the “nice thing about this plan is that the IRS has
issued a model form”. The form is completed and given to the employee
which satisfies all the disclosure requirements. Employees can defer up to
$6,000 of their salary and the employer can either match employee
contributions up to three percent or make a contribution of two percent
pay for all eligible employees.The next plan discussed was the Simplified
Employee Pension Plan (SEPP) which has been available since 1978. Mr. Lee
indicated that this type of plan has not been all that popular. The
employer contributions are limited to 15% of an employee’s annual salary
or $24,000. It is a very simplified kind of form and plan to adopt.Mr. Lee
commented on the 401(k) which are more expensive to operate. Another
problem with 401(k) plans are the non-discrimination rules relating to
highly compensated employees which reduce the amount these employees can
contribute. This makes for a more complicated plan although there are
other features which are attractive such as plan loans which the other
plans can’t offer. One other feature is that a prototype plan can be
used thus cutting down on the expense of having an attorney draft the
plan.Finally the last type of plan is the payroll deduction IRA. Mr. Lee
indicated that these “are not very popular because you can only put away
$2,000.” This is attractive to low-income workers as a way for them to
save. There is no model form for this but there are prototype programs
which are easy to adopt.Mr. Lee briefly commented on the money purchase
plan which is not in the brochure. This type of plan allows for the
employer to contribute a set percentage each year which can’t be
changed. This is different than a profit sharing plan or the SIMPLE plan
as the employer can lower the percentage or skip the contribution if the
company has a bad year. This is probably the reason that money purchase
plans are not as popular although there are significant tax advantages to
the employer to have both a money purchase plan and a 401(k) plan.Next Mr.
Lee went on to the legislative area. He indicated that there are two
proposals that the Council might want to focus on which are the American
Society of Pension Actuaries (ASPA) simplified benefit plan proposal
entitled Secure Assets for Employees (SAFE) and the Administration’s
proposal called Secure Money Annuity or Retirement Trust (SMART). Both of
these proposals are designed to get rid of a lot of the complicated
testing that exists with plans and to simplify the rules. The SMART plan
would limit compensation up to $160,000, where as the SAFE proposal is
really targeted to more middle-income workers where the limit would be
$100,000. The SMART plan would have PBGC insurance coverage while the SAFE
proposal would not. The benefits are richer under the SAFE proposal as you
are allowed to contribute 2% per year of participants’ compensation
while the SMART plan allows for only 1%. Additionally, the SAFE plan
allows for the employer to go back ten years to make contributions which
would allow for a lot more money being contributed to the plan. The SMART
plan does not allow for this.A question was raised by Council member Ms.
Uberti regarding providing the Council with a grid that includes the
options for small employers, the types of plans, contribution limits, when
contributions are required, deduction limits, etc. Apparently, there is
such a document that will be available soon and the Council was directed
to Ms. Watson of the Department.
The issue of too many choices was discussed with Mr.
Lee suggesting that it would be no surprise if SAFE or SMART went inactive
this year. He concluded by restating the following points: (1) The
Administration is going forward with a simplified DB plan proposal to
include defined medical plans. (2) The payroll deduction IRA proposal
which ought to operate more like 401(k) plans is very positive. (3) The
simple regulatory options per se don’t go far enough, and the focus is
needed beyond regulatory and structural issues as to what else can be done
to promote increased plan coverage among small employers. (4) EBRI’s
small business retirement survey results targeted a concrete data
collection on the underlying, critical issues impacting women, minorities,
and employers.Linda Jackson-King
Public Affairs Specialist
Pension and Welfare Benefits Administration
Ms. Jackson-King recited how the Department of Labor
was marketing pension plans to the small business community which included
a demonstration on the Small Business Retirement Saving Program--Employer
Advisor.
Ms. Jackson-King gave a brief history of why the
Department has focused on the small business owner and how the small
business owner became one of the target groups of the Retirement Savings
Education Campaign and the American Savings Education Council (ASEC). The
Retirement Savings Education was launched by the DOL in July of 1995 with
65 public and private sector organizations to educate Americans of all
ages, all backgrounds, all workers; that it is very important to take
individual responsibility for saving for your retirement; but that it is
crucial to recognize the inability to maintain a particular standard of
living in retirement without preparation.
One of the charges of the ASEC is providing or making
it very clear where individuals can get information they need to become
more educated about their retirement. ASEC wants everyone to have the
ability to know the choices available to them and the sources that are
available to them to learn about these choices. Ms. Jackson-King wanted
the Council to know that her organization is very pleased that we are
studying this issue.
According to Ms. Jackson-King the ASEC is currently
targeting three very specific groups: women, minorities and small
businesses. Women and minorities typically have lower wages which causes
pension participation rates to be disproportionately lower. ASEC has
prepared several brochures, one of which is Top Ten Ways to Beat the Clock
and Prepare for Retirement. This publication has proven to be quite
effective and is ASEC’s signature piece. All of the publications or
packets are distributed during public appearances of the Secretary or
Assistant Secretary in addition to out reach programs of the Department.
The National Association of Women Business Owners has also been a good
source for distributing these materials.The Department has an 800 number
for individuals to call to get information and referrals. The 800 number
in included on each of the pamphlets that are being distributed. The
number is 1-800- 998-7542.
Ms Jackson-King discussed current media campaigns which
included a supplement in The Washington Post regarding a profile story of
a small business owner and a 401(k) plan. An interactive web site is being
developed for small businesses. The web site asks a series of questions of
a small business owner and it leads them to a chart to see what their
options are based on the answers to the questions. The Council was invited
to view the web site. Another project is a small business video which is
being done with the Chamber of Commerce and the Small Business
Administration.
It was clear from the presentation that the Department
and ASEC are endeavoring to reach out to as many people as possible to
help them understand the necessity to save for retirement.
Meeting of June 8, 1998
Carol Gold, Director
Employee Plans Division
Internal Revenue Service
Ms. Gold began her testimony by stating that she would
be addressing specifically the tax advantages that are available to
enhance and encourage the establishment of pension plans. She approached
the topic by giving a detailed history of the tax treatment of
employer-provided retirement plans.
An example was provided of two workers earning the same
compensation and saving for retirement over the same period--one saving
through a savings account and the other through a tax-qualified retirement
plan. The difference, almost triple, in the accumulation available for
retirement through the tax-qualified plan illustrates the powerful
incentive of deferred taxation.
Ms. Gold pointed out that with a tax incentive some
individuals will take advantage of the incentive without effectively
fulfilling the social policy--accumulation of retirement savings- -that
led to the tax treatment itself. To avoid this, the nondiscrimination
rules were enacted in 1942. She pointed out that there are two
perspectives that have led to the current law: increasing worker security
and preventing tax abuse. ERISA blends the two perspectives by clearly
providing worker protection and the prevention of tax abuse.
Ms. Gold stated that the tax expenditure for qualified
retirement plans is estimated at about $75 billion a year that is not
collected in current income taxes because people have money saved for them
in tax-exempt trusts to be taxed when distributed at retirement. She
indicated that a tax expenditure is like a subsidy, and therefore it is
effectively taking social policy to its logical extreme to assure that
this subsidy is benefitting society as a whole. To do this, there are a
number of rules that are administered by the Department of Labor and the
Internal Revenue Service, i.e. the nondiscrimination rules, the benefit
and contribution limits and the distribution rules.
Ms. Gold stated that the Internal Revenue Service has
made efforts to combat the fear of the cost and complexity of maintaining
a plan through its model or prototype program which enables a small
employer to buy an approved plan for a low fee. Also, the Service's
voluntary compliance programs alleviate the small employer's fear of the
loss of tax benefits by allowing the employer to audit its own plan and
correct the mistakes without consequences on audit by the Service.
Dr. Paul Yakoboski
Employee Benefit Research Institute
Dr. Yakoboski discussed the results of the Employee
Benefit Research Institute’s (EBRI) very first small employer retirement
survey, which was released just before the National Summit on Retirement
Savings. According to Dr. Yakoboski, the number one area where retirement
plan coverage is lacking in the workplace is among small employers. Of the
35 million Americans who work for employers with under 100 employees, 25
million of them are not covered by a retirement plan.The survey identified
three main reasons for small employers not offering a retirement plan: (1)
Small employers view wages and/or other benefits as more important to
their employees (cited by 22%). This is consistent with previous research
which has demonstrated that retirement benefits come in a distant second
as a desired benefit by employees, (2) Excessive administrative costs and
government regulations (cited by 35%, respectively), and (3) Uncertain
revenue making it difficult to commit to a plan (cited by 16%). In
addition, many small employers have a misunderstanding about costs. For
example, one-third of those without a plan did not know that a plan can be
set up for less than $2,000, and many believe that they are legally
required to match 401(k) contributions.
Conversely, employers that do offer plans see real
benefits, particularly the major impact on employee attitudes and
performance (35%), on their ability to hire and retain good employees
(35%), and not surprisingly, on an employee’s ability to prepare for
retirement (54%).When small employers without a plan were asked what would
make them consider offering a plan, their response in order of
importance-- increase in business profits and a business tax credit
(>60%), reduce administrative requirements (50%), and increase demand
from employees and/or allowing key executives to save more (50%).
Dr. Yakoboski further suggested that the findings
indicated that, in order to make significant progress in increasing plan
sponsorship among small employers, small employers’ concerns about
offering plans must be clearly addressed. Also, effective policy must make
retirement planning and saving a priority for employees of these
firms.David S. Blitzstein, Director
Office of Negotiated Benefits
United Food & Commercial Workers
David Blitzstein's responsibilities include advising
the over one thousand UFCW local unions nationwide on issues related to
pensions and health insurance bargaining. He also serves as a trustee of
the UFCW Industry Pension Fund, a $3 billion multiemployer fund that
covers 150,000 workers and retirees.
He pointed out that a unique feature of the UFCW is its
sponsorship of multiemployer Taft- Hartley funds that deliver negotiated
pension and health insurance benefits to one million UFCW members, and
another 350,000 retirees. In total, 8 million Americans are covered by
multiemployer plans. The legal framework of multiemployer funds was
mandated by the Taft-Hartley Act of 1947. These funds are established
under collective bargaining and administered by a board of trustees
equally represented by labor and management. Multiemployer plans are
governed by ERISA, and therefore, plan trustees live under the fiduciary
codes of ERISA. Taft-Hartley funds exemplify the concepts of industrial
democracy inherent in our collective bargaining system, giving workers a
voice in the administration of their negotiated benefit programs. The UFCW
sponsors over 150 multiemployer funds including local, regional and
national plans. Half of these funds are pension plans.
One of the weakest coverage gaps, Blitzstein asserted,
in the private pension system consists of workers employed by small
business. He referred the Working Group to the recent study by the
Employee Benefit Research Institute which verifies this fact. Only 36% of
workers at employers with 25-99 workers, and 15% of those employers with
fewer than 25 workers actually participated in employer-based retirement
plans. In comparison, two thirds of workers at employers with 100 or more
employees participated in retirement plans. Small employers with 25-99
workers had a sponsorship rate of less than 50%, and 20% among employers
with fewer than 25 employees. In contrast, the sponsorship rate for
employers with 100 or more workers is 85%. These facts suggest that small
employers require special attention by policy makers if the nation is
going to be successful in closing the private pension plan coverage gap.
Mr. Blitzstein recited that 50% of the American
workforce, some 53 million workers, do not participate in a retirement
plan, and 35% have no opportunity to participate because their employer
does not sponsor a plan. Lower than average participation and sponsorship
rates disproportionately affect low-wage workers, part-time workers, women
and minorities. Moreover, participation and sponsorship trends have been
essentially static for the last 20 years. The employer-based pension
system has to expand if the nation expects to fulfill the retirement needs
of future generations of Americans.
He believes that one of the barriers to improved
pension coverage in the U.S. is the decline of organized labor
representation and collective bargaining as a proportion of the workforce.
There is a direct correlation between union membership and pension
coverage- nearly 80% of union members have pension coverage, compared to
less than 40% for non-union workers. Pension coverage in the private
workforce accelerated from 10% to nearly 40% in the post-World War II
decade primarily through the demands of organized labor. Unions have
traditionally promoted pensions in collective bargaining and have educated
their members about the necessity of planning and financing retirement.
The decline of unions has weakened the demand for pension sponsorship and
silenced a major intermediary in retirement education. The pension
coverage trends attest to this. The resurgence and growth of organized
labor is definitely consistent with the Council's and the Department of
Labor's goals of increasing pension coverage on a national scale.
Small businesses face special challenges in sponsoring
pension plans. The EBRI survey of small employers suggests a number of
reasons why small businesses don't offer retirement plans. These reasons
include: employees have other compensation-related preferences; set-up and
administrative costs are too high; the complexity of government
regulations; the expense of required company contributions; lack of
knowledge on how to start a plan; the sense that pensions don't reward
performance; and, the concern that owners can't benefit from pension
coverage.
The UFCW has found contrary evidence to the contention
that employees prefer wages and other benefits to pensions. The UFCW does
extensive opinion polling of its members and has found consistently across
all age groups that their members prioritize pensions just behind wages
and equally with health insurance. Also, research by Douglas Krause of
Rutgers University suggests a strong correlation between pension coverage
and superior productivity performance. Krause found that companies that
established profit-sharing plans experienced first-year productivity
increases by 3.5%-5% higher than companies that didn't, and that these
productivity increases were sustained over time.
Small employers face a serious management information
void when it comes to pension planning. They simply don't have the
in-house expertise to establish and administer a plan without outside
help. Just starting the pension planning process is costly and
time-consuming. Retention of legal counsel and a benefit consultant is
probably beyond the budgets of most small employers. The fact is, start-up
costs can be a legitimate barrier to pension sponsorship.
Blitzstein asserted that these institutional
constraints are real and must be addressed. This raises the question as to
what other options do small businesses have if they want to establish a
pension plan for their employees? He stated that UFCW believes that small
businesses should consider multiemployer pension plans as a retirement
delivery system option.
Multiemployer plans offer significant advantages to
small employers that they could never attain on their own. Some of these
advantages include economies of scale. Multiemployer plans covering
thousands of participants can offer a small employer a host of
efficiencies equal to that experienced by a Fortune 500 company. These
efficiencies allow a small employer to allow benefits beyond their budgets
if they were to purchase the same benefit independently. Most importantly,
a multiemployer plan could be a small employer's best opportunity to
provide a defined benefit pension plan to their employees.
For example, employers contributing to a multiemployer
plan have virtually no regulatory compliance obligation other than to pay
contributions when due, accompanied by whatever documentation is required
for the plan to apply payments correctly. In addition, multiemployer plans
have certain regulatory advantages over single employer plans because they
fall into certain collective bargaining exemptions which allow for relaxed
IRS design controls. These circumstances allow a small employer to
concentrate management resources on their business instead of being
distracted by administering a pension plan. This approach happens to
converge with a popular management trend of "outsourcing"
employee benefit plan administration, which has received much attention
among large corporations.
Blitzstein pointed out that large multiemployer plans
like the UFCW Industry Pension Fund can offer small employers tremendous
administrative cost efficiencies. A study prepared by Edwin C. Hustead of
the Hay Group for a Pension Council conference in May 1996 found that a
small employer with 15 workers would have an annual administrative expense
of $619 per employee to operate a stand-alone defined pension plan. The
same report estimated the annual administrative expense of $345 for an
employer of 75 workers. The annual administrative expense for an employee
group of 15 to operate a defined contribution plan was $287. In
comparison, the annual administrative expense per participant for the UFCW
Industry Pension Fund is $86 which included investment expenses. If you
apply the difference in these administrative costs to benefits in the UFCW
Fund, an employer could buy a $29.00 per month per year future service
benefit for his employees in a 15-employee unit, and $14.25 for a
75-employee unit. This arrangement allows the small employer to spend his
dollars on benefits instead of administrative overhead, something that
most employers should find very attractive.
The pooling of actuarial and investment risk in a
multiemployer plan provides another attractive feature to small employers.
By participating in a larger plan a small business gains security from
investment risk and volatile funding fluctuations. Employers get absolute
predictability of cost during the course of a collective bargaining
agreement, unless they have negotiated otherwise. In addition, because
plan funding is pooled over a number of employee groups, small employees
gain uniformity of pension costs regardless of the demographic
characteristics of their particular employees. At the same time, by
participating in a larger investment pool, a small employer gains access
to professional money managers and investment consultants which in the
experience of the UFCW National Pension Fund translates into higher
investment rate of return of 12% annually for the past 10 years with an
average investment expense of 26 basis points. These investment results
are totally out of reach for any small employer pension plan. In the case
of the UFCW National Pension Fund, these higher than expected investment
returns have resulted in benefit improvements for employees without any
necessary increases in employer contributions. Thus, hundreds of small
businesses have been able to increase pension benefits for their employees
without increasing their costs -- a "win-win" for labor and
management.
Multiemployer funds can also provide coverage to
non-collectively bargained groups, including shareholder employees and
owners of incorporated companies, subject to law, regulation, and the plan
rules. Thus, in many cases, the owner can participate in the same plan
with his employees, alleviating the need to create a separate retirement
vehicle for himself and his salaried employees. This design flexibility
should be exceedingly attractive to small employers.
Blitzstein cautioned that a barrier to multiemployer
plan utilization by employers is that benefit professionals have counseled
them to avoid participation in multiemployer plans because of the
potential for withdrawal liability, the legal obligation companies have
under ERISA for their share of a plan's unfunded vested benefit liability
if they should leave the fund. However, this advice seems self-defeating
and socially irresponsible. The withdrawal liability amendments to ERISA
were legislated to protect multiemployer plans from financial insolvency.
The fact is these laws have been tremendously successful. Multiemployer
pension plans are exceedingly well funded according to the Pension Benefit
Guaranty Corporation. The PBGC multiemployer insurance pool has run
surpluses for the past dozen years in stark contrast to the single
employer plan insurance pool which experienced its first surplus last
year. Most multiemployer plans are so well funded today that withdrawal
liability does not currently exist. The concept of withdrawal liability is
good public policy. Any small employer considering participation in a
multiemployer plan should see withdrawal liability as a positive
protection against irresponsible employers, who, without the obligation of
withdrawal liability would be able to dump their financial costs on other
employers.
Another important feature of multiemployer funds is
benefit portability. One of the most serious problems in the
employer-based pension system is the ability to continue the benefit
accrual when the employee changes jobs. Job change creates substantial
leakage in the employer-based pension system, weakening future retirement
income. The multiemployer pension system is unique in its provision for
pension portability. Multiemployer plans provide full benefit portability
for workers that move from job to job within the sponsoring union's
jurisdiction. This includes complete credit for service with all past and
current contributors on the same basis as those who stay with one
employer. This internal plan portability is enhanced by reciprocal
arrangements through which plans co-sponsored by affiliates of the same
International Union recognize service under any of the other plans that
have joined the agreement, this providing more complete portability for
work under union contract anywhere in the country. Most of the UFCW's
multiemployer plans are linked by reciprocity agreements.
Blitzstein concluded that multiemployer plans offer
some outstanding advantages and incentives to small employers. This
little-know pension delivery system should be given serious consideration
by small businesses who want to provide their employees with superior
retirement benefits. If the policy makers really want to address the
pension coverage gap in the employer- based retirement system, they should
find ways to promote and encourage the multiemployer plan model.
David Kemps
Manager of Employee Benefits Policy
U.S. Chamber of Commerce
Mr. Kemps began by sharing some ideas from the U. S.
Chamber of Commerce which the Chamber believes work, as well as some of
the barriers faced by small employers starting a pension plan. Mr. Kemps
commented that the misconception that owners of small businesses will sell
their business when they reach retirement age and live off the proceeds is
not true. They need a pension plan for themselves and want one just like
the rest of us. They also want a plan in order to attract and keep quality
employees. Mr. Kemps further noted that the Chamber sees examples all the
time, especially among high- tech firms, where a pension plan and other
benefits make a real competitive difference.
According to the U.S. Chamber of Commerce, the simple
IRA has proven successful. However, one major concern—the major reason
why many employers don’t have it—is the mandatory employer
contribution feature. The Chamber findings indicated that for very small
employers, ten employees or less, the matching contribution feature is not
a deterrent. Nonetheless, the matching contribution feature of the simple
IRA does become onerous for firms with 25, 50, or more employees. The
Chamber has established an arrangement with Fidelity for their members and
themselves. For employers with 25 employees or more, Mr. Kemps emphasized
that the 401(k) plan is the plan of choice, and it has been very
successful. Even though the costs can be fairly high, firms of this size
have found it affordable. Moreover, there are no required contributions
from the employer.Mr. Kemps stated that the idea of a payroll deductible
IRA, included in the Portman- Cardin bill, will be very attractive the
small employer. The payroll deductible IRA eliminates the matching
contribution feature; thus, opening the opportunity to offer plans to
small employers that have the desire but cannot afford the match.
According to Mr. Kemps, the Chamber has been working hard with the
appropriate branches of government to make a payroll deductible IRA a
reality. One drawback is the possibility of small deduction amounts. He
suggested one conduit worth exploring is to encourage payroll service
bureaus to market payroll deductible IRA programs to their small employer
clients. Mr. Kemps emphatically emphasized that pension plans have to be
marketed!—small employers don’t wake up one morning and say, “I
would like to have pension plan for myself and my employees.”The Chamber
diligently seeks to reach small employers through various levels of the
Chamber. For example, if a person is a member of U.S. Chamber, the Chamber
has made arrangements with Fidelity Investments whereby the person can
have access to Fidelity’s range of plans. A similar concept, with other
entities, can be explored with State and Local level Chambers, and through
various business groups and associations.Mr. Kemps further commented that
the barriers for small employers are costs, both contribution and
administrative, and the many rules and regulations. A survey of the
Chamber’s membership revealed that a major deterrent is the top-heavy
rule. It not only keeps small employers from having plans, but also keeps
the providers from marketing a plan effectively to them. Kemps concluded
that lastly, apathy is a barrier, i.e. employees, especially younger
employees, can always find other priorities for the money than retirement
savings. Kemps suggested the creation of a computer program that shows the
effect on take-home of putting away various percentages into a retirement
plan. Employees would be surprised that it will not be that much of a
burden on their take-home pay.Meeting of July 7, l998
R. Theodore “Ted” Benna
President, 401 (k) AssociationMr. Benna began his
testimony by explaining what the 401 (k) Association does--set up and
administer 401 (k) and 401 (k) SIMPLE plans for small employers. He stated
that studies indicate that 50% of the workforce does not have any form of
private retirement coverage. The most significant gap in coverage is with
the employees of small employers.
Mr. Benna proceeded to discuss the barriers to small
employers in setting up and maintaining a plan. These barriers are
twofold: 1) administrative cost and 2) complex tax laws and regulations.
In addressing the cost barrier, Mr. Benna stated that it is possible to
provide a high quality/low cost 401 (k) plan for the small employer
market. The 401 (k) Association program is priced at $700 a year for full
service, compared with the $3,000 to $4,000 a year charged by other
providers.
In discussing the complex legal barrier, Mr. Benna
cited the top heavy rules as a major deterrent. The plans of small
start-up companies invariably will be top heavy and the problem will be
there for at least five years. This will cause the employer to have to
make the three percent minimum contribution which is difficult for many
employers. the top heavy rules coupled with the discrimination testing
relative to the contributions of highly compensated and non-highly
compensated employees are very challenging concepts for the small employer
to understand.
Mr. Benna made the following recommendations that would
make it easier for small employers to establish retirement plans: (1)
Eliminate the top heavy rules, or, (2) Simplify the rules by:(a) Changing
the key employee definition to include only 5percent owners without
applying the attribution of stock ownership to family members, (b)
Eliminating the 5-year rule both for determining key employees and for
determining whether a plan is top heavy, (c) Reducing the 3 percent
minimum contribution to a 2 percent automatic contribution or a dollar for
dollar match up to 3 percent of compensation, and (3) Allow a $1,000 tax
credit towards the cost of establishing a plan.
Mr. Benna pointed out that while the complex top heavy
rules applicable to regular 401 (k) plans do not apply to the SIMPLE 401
(k), it is not always the answer. The SIMPLE 401 (k) is great where it
fits, but is simply not an alternative for many small businesses. The
level of required employer contribution is much more than most small
employers can afford. Starting with this contribution level also creates a
longer term problem for companies that are expected to grow. On the other
side, some employers would like to be able to make higher contributions
than the SIMPLE 401 (k) allows.
The following recommendations for law changes were made
in order to make the SIMPLE 401 (K) a better option for small businesses:
(1) Eliminate or make optional the contribution requirement for 5% owners,
(2) Permit employee deferrals only with a lower maximum contribution limit
for 5% owners, (3) Permit transfers from an IRA SIMPLE to a 401 (k) (4)
Permit a discretionary profit sharing contribution.
Mr. Benna opined that realistically the biggest barrier
of all to the establishment of retirement plans by the small employer is
economic resources. A lot of small businesses will not be reached in terms
of retirement plans, but there is a subgroup with 5 to 10 employees that
are addressable by continuing to listen to what the barriers are that
prevent the establishment of plans.
Alan Kanter
President, Alan Kanter & Associates, Inc.
The small business market, which Mr. Kanter served for
over 26 years, is an employer with 100 or less employees. Of the 600 plus
plans administered, 80 percent have less than 25 participants and about 50
percent less than 10. The service provided is personalized, hands-on,
without any products to sell, and is usually to a founder-owner without
the internal staffing to stay abreast of the complex and constantly
changing rules and regulations.
Based on Kanter’s experience, he found that small
employers only adopt retirement plans if there is a tax incentive for them
to do so. Thus, if his firm can show an employer that 60% or more of the
monies contributed accrue to the benefit of themselves and family members,
they are ready to listen. He has also found that employees of small
employers are more concerned with salary rather than fringe benefits.
However, once an employee has been with an employer with a plan, it is
contagious because it becomes an important consideration with a new
employer if they change jobs.According to Kanter, the savings rate in the
United States is very low. With respect to retirement plans, the
percentage of small businesses that have them is very low, something in
the order of 17%. Thus, increasing participation on the part of small
business, Kanter believes, can help to improve the savings rate in our
country plus accomplish several other good things for the small employer.
Once a plan is established, it does help to attract and retain a better
employee. Besides benefiting the employer tax wise, there is a “trickle
down” effect that benefits all employees. Many employees that have been
with an employer for a long time have account balances approaching six
figures or more, all of which is employer contributions.Kanter commented
that one trend among small employers that he has found disturbing is the
proliferation of 401(k) plans as a substitute for the pension plan. Thus,
the burden for saving is shifted from the employer to the employee. He
believes the 401(k) plan is a wonderful supplemental plan, but the
employer should provide a basic benefit.
Kanter observed a major stumbling block making the
small employer reluctant to adopt a plan is the complex rules and
regulations. In addition, the laws are constantly changing. Admittedly,
the changes have been more positive over the last few years to simplify
things compared with what occurred through the 1989 act when we went
through TEFRA, DEFRA and RIA.
Those were very challenging laws to small businesses.
The number of retirement plans that Kanter’s firm administers dropped
from over 1200 to 600 over a period of two years. Of the 600 plans
currently administered, only about 35 are defined benefit plans compared
with 250 before. Of the 35 defined benefit plans currently, about 30 of
them cover the owner of the business and spouse. Kanter recommended
terminating many of the defined benefit plans where there was no longer a
tax benefit associated with many of them, and the small plan audits in the
1989-90 time frame made them difficult to justify. With the change in the
law in 2000, many employers will be encouraged to establish defined
benefit plans. Kanter further deemed that the incentives offered under the
Portman-Cardin bill are encouraging.What can be done to encourage small
employers to establish plans? - (1) Educate the public on the need to
save. Think of savings as a three-prong approach, Social Security,
personal savings, and retirement savings, (2) Eliminate IRS user fees, (3)
Simplify regulations.
Beverly A. Holmes, Vice President
Massachusetts Mutual Life Insurance Company
And
Julie R. Weeks, Director of Research
National Foundation for Women Business Owners
Beverly Holmes, Vice President of Retirement Services
at Massachusetts Mutual Life Insurance Company, and. Julie Weeks, the
Director of Research for the National Foundation for Women Business Owners
(National Foundation) focused their testimony on women-owned small
businesses based on a recent study conducted by the National Foundation.
MassMutual commissioned this study and it is the first to focus
specifically on women business owners and retirement planning. As of 1996,
there were nearly 8 million women-owned businesses in the United States,
generating nearly $2.3 trillion in revenues.
The National Foundation conducted telephone interviews
with a nationally representative random sample of business owners with 10
or more employees—399 women business owners and 211 men business owners.
The survey asked business owners: 1) whether they offered retirement
plans; 2) what the characteristics of those plans were; 3) what they
considered important when designing and maintaining those plans and; 4)
what factors were important to them when making decisions about retirement
matters.Small business owners are becoming more concerned about the issue
of retirement. However, retirement is still not rated as one of the most
critical issues facing women and men business owners with ten or more
employees. Those issues ranking the highest were maintaining business
profitability, finding and keeping qualified employees, managing cash
flow, and managing and maintaining business growth. Nevertheless, more
than half of the business owners surveyed indicated that they are more
concerned than they were a year before about retirement issues, both for
themselves and their employees. The level of concern is higher among
business owners who are over the age of 35 and among those who do not yet
have a retirement plan in place.
Among the employee benefits offered by the business
owners surveyed, the most common are paid vacation (93%), health insurance
(86%), life insurance (64%), and parental leave (60%). About half of the
businesses surveyed currently have a retirement plan in place for
qualified employees. The share of businesses with retirement plans rises
with business size: 86% of the firms with 100 or more employees offer
retirement benefits compared to 42% of those firms with only 10 to 19
employees. Women business owners are somewhat less likely to have a
retirement plan: 49% of women-owned businesses, compared to 54% of
men-owned businesses, currently offer a retirement plan. Interestingly,
the survey shows this gender difference occurs predominantly among firms
with 20 to 99 employees. Women business firms with 10 to 19 employees are
just as likely as the male-owned business firms of the same size to offer
a retirement plan.
In the businesses that offer retirement plans, about
three-quarters of the eligible employees participate. Women business
owners have typically had their retirement plans in place for a shorter
period of time than male business owners. Both men and women business
owners recognize that offering retirement benefits aids in the recruitment
and retention of valuable employees. Fully three-quarters of the men and
women business owners offering retirement plans indicate that having a
plan has helped them recruit new employees, and 85% state that the
retirement plan has helped retain their current employees.
Male and female small business owners identified some
of the same key factors as affecting their satisfaction with a retirement
plan. The factors they identified are: 1) regular statements that employer
and employees can use to track plan performance; 2) an unwillingness to
expose their own or their employees’ investments to risk; and, 3) the
cost to set up and manage the plan 60% of the business owners would like
to see a higher rate of return on investments, 42% would like to see more
employees participate in the plan, and 37% would like to see less time and
paperwork for their staff.Half of the business owners surveyed who do not
offer a retirement plan for their qualified employees. Many indicated that
they are gathering information and discussing the issue of retirement.
Although many of the business owners who do not yet offer retirement plans
acknowledge their merit in attracting and retaining valuable employees,
both the men and women in this group identify cost as a key deterrent. For
33% of the business owners, the expense of setting up and maintaining a
retirement plan is a problem. While some of the business owners reported
that their employees do not want or need a retirement plan (19%), others
indicated that their company is too small (11%) or not profitable enough
(13%) for a retirement plan. However, about 40% of these employers intend
to offer a retirement plan in the future year.
According to Ms. Holmes, what is clear from the
National Foundation survey is that the level of coverage is directly
related to the size of the employer. There are significant gaps in
retirement plan coverage between large employers, which usually sponsor
retirement plans, and small employers, which sometimes sponsor retirement
plans, and between the small employers and very small employers, which
frequently do not sponsor any retirement plans. The National Foundation
survey found that 86% of firms with 100 or more employees offers
retirement plans compared to 42% of firms with only 10 to 19 employees.
The National Foundation survey also found that women owned firms with 10
or more employees were somewhat less likely to have a plan in place, and
those with a plan in place have had it for a shorter period of time than
their male counterparts. The gap in coverage by plan size means that more
than twenty-five million employees who work for employers with less than
100 employees face an uncertain retirement, unless the retirement system
can overcome the major deterrents to establishing a retirement plan among
small employers.
The first step in closing the coverage gap is to
understand better the needs of small employers. Among those challenges is
the cost of establishing and administering a small employer retirement
plan. Here Ms. Homes pointed to some positive developments. The
competition for the retirement business of small firms has become fierce,
as retirement plan providers focus on the small employer sector as the
last big opportunity for growth in retirement plans. There is much more
communication via the media and from providers with small employers about
retirement benefits today. Establishing a plan is much less expensive
today than many small business owners realize. Finally, retirement plan
providers are offering small employers state of the art plan features and
services formerly available only to large employer plans.
The National Foundation survey found that for 33% of
small business owners without retirement plans, the expense of setting up
and maintaining a retirement plan is a key deterrent to establishing a
retirement plan. MassMutual believes that a start up tax credit for small
business retirement plans would encourage new plan formation.
A second often cited obstacle to small employer plan
formation is administrative complexity. Further simplification of the
pension laws is both possible and desirable. Among the reforms, which
MassMutual believes would be helpful to small businesses, are the repeal
of the “top-heavy” rules, which impose expensive and complex
regulations on businesses where 60% or more of accrued benefits are held
by “key employees.” As a practical matter, this extra layer of
regulation was targeted to small employers. Subsequent changes in the law
have largely made the top-heavy requirements redundant.A third desirable
change is the creation of a new simple defined benefit plan for small
employers. Fourth, higher contribution and benefit limits as well as
higher limits on includible compensation are also desirable.
Finally, retirement plans are not viewed as the most
important benefit needed to attract and retain employees. The National
Foundation Survey found that retirement benefits ranked 5th in importance
among employee benefits after paid vacation, health insurance, life
insurance, maternity or paternity leave and disability insurance. It is
not enough simply to target small business owners. It is also important to
target employees of small employers with information on the need to plan
and save for retirement. According to Ms. Holmes, this will build demand
among small employers considering which forms of compensation are most
important to their employees. More resources need to be dedicated by both
the private and public sectors to educate those employees.
Robert M. Landau, Esq.
Feder & Associates
Representing the National Coordinating Committee of
Multiemployer Plans
Mr. Landau defined a multiemployer plan as a joint
labor-management effort to provide benefits to employees on a non-profit
basis. These plans are specifically intended to provide economic, cost
efficient, guaranteed benefits for employees of small businesses. He
recited as major differences and advantages of the multiemployer plan over
401 (k) plans the following: (1) guaranteed income replacement and (2)
ability to provide past service benefits.
The following recommendations were made as a way to
foster retirement plans among small businesses and particularly provide
multiemployer plans as a viable option:
Eliminate the Code Section 415 benefit limits tied to
compensation and the benefit limits that artificially suppress early
retirement benefit limits
Repeal Code Section 412 funding limits for
multiemployer plans
Provide tax credit for initial tax year to employers
who participate in multiemployer plans
Facilitate merger of single employer plans into
multiemployer plans
Disseminate through the DOL more information on
multiemployer plans.
Meeting of August 11, 1998
Lana Keelty, Legislative Counsel
National Rural Electric Cooperative Association
The National Rural Electric Cooperative Association (NRECA)
represents approximately one thousand rural electric cooperatives whose
average size is about 35 employees. The NRECA offers both defined benefit
and defined contribution plans. In addition to those plans, NRECA started
a mutual fund in late 1990. The combined assets of these funds approached
$5.6 billion in 1997.
The Defined Contribution Plan
At the end of 1997, more than 900 rural electric
systems participated in the association's 401(k) savings option, covering
more than 50,000 participants. Assets held by the plan exceed $2 billion.
Participants may invest in five (5) diversified funds that invest in a
range of securities including domestic equities, international equities,
short and long term bond funds and money market funds. Assets are managed
by in-house portfolio managers. The plan includes a loan option. Plan
participants pay no account fees and are not charged make fund changes,
plan distributions or plan amendments. Operational expenses are deducted
from plan assets.
The Defined Benefit Pension Plan
The defined benefit plan provides employers with
flexibility in plan design, professional asset management and plan
administration support and services This plan essentially provides 100%
coverage, a uniform benefit formula and is not integrated with Social
Security. The plan has assets in excess of $3 billion and covers more than
850 rural electric systems with 50,000 plan participants. The plan pays
benefits, either as a lump sum or as a monthly annuity to participants at
retirement (or early termination of employment) and to beneficiaries upon
a participant's death. The plan is organized as a multiple employer plan..
These services range from assistance in plan implementation, enrollment
and record keeping to employee communication material, seminars and
conferences.
June Robinson
Special Assistant to the Deputy Secretary
U.S. Department of Labor
June Robinson reviewed the following commitments of
Secretary Herman and former Undersecretary Berg to the small business
community: (1) the critical need for American workers to be educated as to
the importance of retirement saving and planning, (2) the department’s
strategic goal of providing protection of worker benefits and the
recognition that a secure work force provides economic security for
workers and their families and increases compliance with worker protection
laws and encourages the provision of worker retraining.Ms. Robinson then
went on to tell the Working Group that in the furtherance of these goals
the DOL administers 140 federal statutes covering 10 million employers and
100 million employees. The Pension and Benefits Welfare Administration (PBWA)
of the DOL protects pensions, health plans and employee benefits relevant
to small businesses. It has regional offices and broad outreach programs.
Within the DOL and under the Small Business Regulatory
Enforcement Act (SBREA), Special Assistant Robinson’s group provides
small businesses with compliance assistance regarding DOL enforcement
programs. The Small Business Administration Programs and the Regional
Fairness Boards set up under that Act actively involve small business
owners. Each of the ten (Federal) regions has a board of five small
business owners that constitutes a “sounding board” for small
businesses in those regions.As part of their outreach to small businesses
the DOL prepared a special presentation for the Annual Conference of the
National Black Chamber of Commerce. The presentation highlights Special
Assistant Robinson shared were as follows:
Americans save four pennies of every dollar.
One of 2 Americans has no pension coverage at work.
One of 3 workers offered 401(k) plans does not
participate.
Only one out of 4 Americans knows he or she will need
to save for retirement and how much that retirement will cost.
One of 5 has saved nothing for retirement.
Small businesses employ 40 million workers, yet only 8
million of them are covered by pension plans.
Women earn less than men and female employment is high
in service and retail positions -- industries with low pension
participation rates.
Women switch jobs more often than men and move in and
out of the work force to care for children or aging relatives reducing
their ability to participate in long-term pension plans.
Within the private sector 46 % of white employees
participate in pension plans compared to 26 % participation of Hispanic
American and 38 % participation of African American employees.
Robinson concluded her remarks by discussing methods of
communication with small business. Although the trend may be toward
electronic information dissemination, many small businesses either cannot
afford or do not rely on the Internet. The PBWA ?s education efforts
should continue by utilizing pamphlet mailings and by personal contact at
conferences.
Finally, in reply to questions from Council Members
Mackell and Blackwell concerning the Department’s experience with
changing levels of interest by small businesses in this subject, Ms.
Robinson responded that interest among small employers in providing
pensions to their employees is a relatively new phenomenon. Historically,
small businesses have raised issues about fair labor standards and minimum
wages more frequently than about pensions or retirements.Today, the DOL
outreach efforts involves the National Association of Women Business
Owners and a very wide variety of other associations. An example of this
effort included the recent establishment by the National Black Chamber of
Commerce of junior chambers of commerce on 10 college campuses to help
collegiate entrepreneurs learn the responsibilities of business ownership
and the retirement savings concept.
Russ Sullivan
Legislative Director and Tax Counsel
for Senator Bob Graham (Florida)
Mr. Sullivan reiterated that more women are working,
and they are a higher percentage of the work force. There is increased
mobility of workers, both in older and younger workers making portability
of pension coverage important. The workforce in general includes fewer
unionized workers – and therefore, generous or “high” retirement
coverage plans are not available to a large percentage of workers. There
continue to be low numbers of defined benefit plans.The legislative
changes mandated by SB 2339 include a 6 year “phase in” of the PBGC
premium for new plans rather than 100% applied at the beginning. In
addition, this act reduces the look-back rule from 5 years to 1, so top
heavy employers only have to look back one year to see if the employer’s
contribution levels met the nondiscrimination requirements.Liz Liess
Counsel to the Senate
Special Committee on Aging
Liz Liess is Counsel to the Senate Special Committee on
Aging that oversees income security, Social Security, and pension issues.
Ms. Liess’ comments focused on the fact that retirement income is based
on a three-legged stool of Social Security, employer-sponsored retirement
plans and personal savings.Small business employers believe that employees
prefer other kinds of benefits, such as health insurance to pension
benefits.
Employers dislike administrative costs of pension plans
Small businesses with uncertain revenues don’t want
to commit to a plan.Small business owners do multiple jobs themselves and
don’t hire pension experts to assist in pension plan administration and
set up.Under current law a family member is treated as a key employee
regardless of his compensation.
Ms. Leiss alerted the Working Group to potential new
legislation similar to SB2339, the Portman-Cardin bill, which is pending
in the House of Representatives. If enacted this law would modify the
family aggregation rule so a family member is not automatically treated as
a key employee. Furthermore this legislation would redefine “key
employee” to conform more closely to a highly compensated employee. For
example, a key employee would be a 5% owner or an officer with
compensation exceeding $80,000.Furthermore, the legislation exempts
employers from top-heavy rules if they adopt the 401(k) safe harbor. It
exempts them from having to make a very costly 7% contribution for each
employee and prevents “top-heavy” rules from being triggered by
employee contributions. Matching contributions would count toward the
employer’s contribution requirement and shortens the look-back rule from
5 years to 1. In addition, the confusing requirement that “non-top
heavy” plans must include top-heavy plan language in their plan
documents is repealed.The program would offer a tax credit of $500 in each
of the first 3 years of the plan's operation. Another tax credit for
employers with 50 or fewer employees who offer matching contributions to
employees would be created. The credit would be available in each of the
plan’s first 5 years to match 50 % of contributions up to 3% of
compensation but only for non-highly compensated employees. The credit
would be refundable against payroll taxes, so employers with no federal
income tax liability would be refunded against payroll taxes paid. The
costs for businesses would be reduced by a repeal of fees ($100-$1,000)
currently imposed on employers who seek IRS letters saying their plans are
qualified. Finally, it would equalize the less restrictive cap on IRA
contributions with the more restrictive cap on simple 401(k)'s.Council
Member Cohen observed that the three witnesses favored creation of some
kind of a tax credit, that “top heavy” rules were enacted in 1982
under a false perception that small employer plans were frequently
abusive.Council Member Cohen reminded those present that: SB 2339
incorporates the following recommendations from the ERISA Advisory Council
of 1997 to:
Create a simplified defined benefit plan.
Repeal the full funding limit, not just gradually
increase it from 150 % to 170 %
Require that employers automatically send to defined
contribution plan participants individual account benefit statements.
Require employers who sponsor defined benefit plans to
send statements.
Meeting of September 8, 1998
Marla Kreindler, Esq.
Partner, Katten, Muchin & Zavis
And
Perry Shwachman, Esq,
Partner, Katten, Muchin & Zavis
Marla Kreindler noted that the various alternatives for
a small business that wants to set up a defined contribution plan include
the 401 (k), the Simple 401 (k), the Simple IRA, and the SEP. Each has its
own advantages and disadvantages. She also compared these plans to a 403
(b) plans (for which most small employers are not eligible). Generally,
the 403 (b) has the most liberal rules and would be most attractive to
small businesses. Currently, 403 (b) plans are available only to certain
government and not-for-profit organizations.
She reviewed the minimum coverage rules, minimum
vesting rules, contribution limits, non- discriminatin rules, distribution
restrictions and other rules (including top heavy rules, reporting and
disclosure and fiduciary rules) which apply to these plans. Ms. Kreindler
recommended that IRC Section 403 (b) be changed to cover small businesses
(perhaps with some minor modifications).
Perry Shwachman pointed out that small business owners
do not have time to deal with several vendors that may be involved with a
retirement plan. They would prefer to have a bundled package that covered
all their needs.
Mr. Shwachman noted that current Federal Securities
Laws present some obstacles to insurance companies, banks and other
financial services organizations in providing these bundles packages on a
profitable cost effective basis. One problem is that the 403 (b) and
IRA’s do not qualify for certain exemptions relating to registration and
commingling of investment funds, that other qualified plans do.Mr.
Shwachman recommends that the Federal Securities Laws (Section 3 (a)(2) of
the Securities Act of 1933 and Section 3(c)(11) of the Investment Company
Act of 1940) be amended to allow insurance companies and banks to utilize
separate accounts and commingled funds for all retirement plans (e.g.
SIMPLE IRA’s) without special registration.Marysue Wechsler
Managing Director, International Foundation for
Retirement Education representing
The Certified Financial Planner (CFP) Board of
Standards, Inc.
The CFP board has certified over 32,000 financial
planners based on certain education, examination, experience and ethics
requirements.
Ms. Wechsler noted that “the cost, complexity and
liability are too great for most small business owners to consider defined
benefit plans.” Defined contribution plans put more responsibility on
the employee to decide how much to save and how to invest the savings.
“Most workers do not have a clue how to project their potential
retirement needs, or if they are saving enough to meet their future
retirement needs, or if they are saving enough to meet their future
retirement goals, or how to help themselves save more and at the same time
meet other necessary life goals.” She also noted that they do not
understand risk or know how to make investment decisions.Ms. Wechsler
noted that education was the best way to motivate workers to take the
necessary steps to assure a financially worry-free retirement.
To encourage employers to provide this financial
education and to encourage employees to seek out this advice, she made the
following RECOMMENDATIONS:
Allowing financial planning services to receive the
same favorable tax treatment accorded to qualified group legal services
under IRC Section 120.
Exempt financial planning services from the two percent
floor on miscellaneous itemized deductions (IRC Section 67).
Provide tax credits for small businesses that provide
financial education for their employees. Those providing this education
should meet ceratin minimum standards, including certain ethical standards
(to avoid a biased sales pitch)
V. Exhibits and Written Materials Received
A. 1998 Index for Small Business Working Group
May 4, 1998 Meeting
Agenda
Official Transcript
Executive Summary of Transcript
“Simple Retirement Solutions for Small Business,” a
brochure currently being distributed by the U.S. Department of Labor.June
8, 1998
1) Agenda
2) Official Transcript
3) Executive Summary of Transcript
4) “Barriers That Keep Small Employers from
Sponsoring Retirement Plans” by David W. Kemps, manager, employee
benefits policy, U.S. Chamber of Commerce plus 1. a Chamber statement made
on March 17, 1998 by John Kimpel re S. 957, the Pension Prosave Act before
the Senate Committee on Labor and Human Resources; 2. a Chamber statement
made May 5, 1998 by Lynn Franzoi on Pension Reform and H.R. 3788, the
Retirement Security For the 21st Century Act, before the subcommittee on
Oversight of the House Committee on Ways and Means; and 3. Nation’s
Business: “Retirement Plans: Options, benefits and risks for small
firms,” dated July 1997.Written testimony by David S. Blitzstein,
director of the office of negotiated benefits for the United Food &
Commercial Workers International Union (UFCW), entitled “The Role of
Unions and the Multiemployer Plan Alternative.”News Release from the
Employee Benefit Research Institute, the American Savings Council and
Mathew Greenwald & Associates, Inc., on “Small Employers: Retirement
Planning’s Overlooked Giant?” Including a Small Employer Retirement
Survey (SERS) on “No Thank You: Small Employers Without Retirement
Plans”.A Choice for Small Business Owners: SEP or SIMPLE from the
Vanguard Internet Website. 7/22/97.
July 7, 1998 Meeting
1) Agenda
2) Official Transcript
3) Executive Summary of Transcript
4) Outline provided by Theodore R. “Ted” Benna for
his appearance before the W.G. on July 7, 1998, including a brochure for
his 401(k) Association entitled the “401(k) Starter Plan” designed for
small business.
5) Written Testimony by Robert M. Landau, Feder &
Associates, July 7, 1998, representing the National Coordinating Committee
for Multiemployer Plans and two of NCCMP’s pamphlets: A Basic Guide to
Multiemployer Plans and Annual Review, Fall 1997
6) A packet prepared by MassMutual including written
testimony by Beverly A. Holmes, Vice President, MassMutual Life Insurance
Company, and Julie R. Weeks, Director of Research, National Foundation for
Women Business Owners; a pamphlet “Finally, a retirement program that
goes the extra mile for small businesses”; a news report “Women
business owners more likely to add retirement plans than men in the next
five years” discussing the results of a survey conducted by NFWBO in
1997 on the topic; as well as the study, “Retirement Trends in the Small
Business Market: A Survey of Women and Men-Owned Businesses” and a
“Key Facts About Women-Owned Business” pocket brochure.
7) “Fewer Small Businesses Are. Offering Health Care
and Retirement Benefits” by Rodney Ho, for the Wall Street Journal,
dated June 24, 1998“Study: Many employees today cannot afford healthcare
plans,” article from the Journal of Commerce, June 24, 1998“Online
401(k) Advisers Brace for Fidelity: Giant Plan Provider Uses Education to
Skirt Legal Issues”, by Paul Katzeff, Investor’s Business Daily, June
24, 1998“Employer Firms See Burgeoning Market: Small Businesses Seek
More Help in Personnel Matters” by Melanie Trottman, Dow Jones
Newswires, June 24,1998.(Also provided in July to all Council members):
“401(k) Pension Plans — Many Take Advantage of
Opportunity to Ensure Adequate Retirement Income,” a General Accounting
Office report to the Chairman, Subcommittee on Social Security, Committee
on Ways and Means, House of Representative dated August 1996.Private
Pensions — Plan Features Provided by Employers That Sponsor Only Defined
Contribution Plans,” a General Accounting Office report to the Chairman,
Subcommittee on Government Reform and Oversight, House of Representatives,
dated December 1997.“A Look at 401(k) Plan Fees,” prepared by the U.S.
DOL and issued in June 1998.Final Report - a Study on 401(k) Plan Fees and
Expenses, prepared for the Department of Labor by Economic Systems, Inc.
and The HayGroup, April 13, 1998.
August 11, 1998 Meeting
1) Agenda
2) Official Transcript
3) Executive Summary of Transcript
4) Memo from Chair Mackell to committee members to
focus discussion at the August meeting.
Senator Bob Graham’s (D-Fla.) Pension Reform Bill
(S.2339) and a PWBA backgrounder on the Pension Coverage and Portability
Act of 1998.Written Testimony of the National Rural Electric Cooperative
Association presented by Lana Keelty, including an extensive marketing
package the NRECA uses with its members (also, Ms. Keelty, legislative
counsel, sent a letter August 13 answering two questions posed by members
Cohen and Greenwood-Harris.
September 8, 1998 Meeting
1) Agenda
2) Official Transcript
3) Executive Summary of Transcript
4) “Simple Section 401(k) Plans Lag Behind Other
Simplified Defined Contribution Plans” article from the August 17, 1998,
issue of BNA Pension and Benefits Reporter by Colleen T.Congel.
5) Copy of H.R. 1891, the Representatives Portman and
Cardin Bill entitled the “Staffing Firm Worker Benefits Act of 1997.”
6) “Employers Don’t Want to Be Pension Saviors”
article from the Journal of Commerce, August 14, 1998.
7) Written Testimony by Marla J. Kreindler and Perry J.
Shwachman, Katten Muchin & Zavis of Chicago, Ill. September 8, 1998.
8) Testimony of the Certified Financial Planner Board
of Standards, Inc., presented by Marysue J. Wechsler, CFP, Managing
Director of the International Foundation for Retirement Education. (Packet
included “Questions to Ask When Choosing a Financial Planner”; “What
You Should Know About Financial Planning; Mark of Quality”, a news
release on “Americans Depending Most on Employers to Fund Retirement,
Say Financial Planners in New Survey” and the CFP 1997 Annual Report.
9) Survey Findings on the number of Roth IRAs,
Education IRAs and SIMPLE IRAs established in the 1st Quarter, 1998,
prepared by the Investment Company Institute and provided by Senior
Counsel Russell G. Galer via a Letter to Meredith Miller, dated August 28,
1998.October 5, 1998 Meeting
1) Agenda
2) Official Transcript
3) Executive Summary of Transcript
4). Draft Report of Working Group
November 12, 1998
1) Agenda
2) Official Transcript
3) Executive Summary of Transcript
4) Letter to Meredith Miller from Karen Ferguson from
the Pension Rights Center dated October 31, 1998, on the topic of
repealing top-heavy rules.
5) Top-Heavy and The New 401(k) Safe Harbor Rules as
prepared by Kenneth S. Cohen, ERISA Advisory Council Vice Chair, November
12, 1998.
6) Second draft of the Working Group’s reportVI. 1998
SMALL BUSINESS WORKING GROUP MEMBERS
Dr. Thomas J. Mackell, Jr., Chairman (11/96-99)
Simms Capital Management, Inc.
Eddie C. Brown, Vice Chairman (11/97-00)
Brown Capital Management
Marilee P. Lau, (11/95-98)
KPMG Peat Marwick, LLP
J. Kenneth Blackwell, (11/96-99)
Treasurer, State of Ohio
Janie Greenwood Harris (11/97-98)
Mercantile Bancorporation Inc.
Kenneth S. Cohen (11/95-98)
Massachusetts Mutual Life Insurance
Barbara Ann Uberti (11/96-99)
Wilmington Trust Company
Richard (Dick) Tani (11/97-00)
Retired, William Mercer Co.
Judith Ann Calder (11/97-00)
Abacus Financial Group, Inc.
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