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November 13, 2001
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The Working Group on Increasing Pension Coverage,
Participation and Benefits is pleased to present this report and
recommendations to the full Advisory Council. The Working Group urges that
the report be adopted by the Advisory Council and submitted to Secretary
of Labor Elaine L. Chao pursuant to Section 512(b) of the Employee
Retirement Income Security Act. |
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Decades ago, the Federal Government declared a national
public policy to encourage the creation and maintenance of
employer-sponsored pension plans for all workers. Despite various efforts
to promote plan sponsorship and participation through income tax
incentives, education and other means, roughly 50% of private sector
workers lack pension benefits on the job and this coverage rate has not
budged more than a few percentage points in the past 20 years or more. |
Significant reasons why more employers do not sponsor
pension plans for any or some of their employees include: concerns over
the business realities of revenues and profit; the nature of the
employer's workforce; employee preferences for cash and health insurance;
the decline in unionization; the cost of setting-up and administering a
plan; concerns about government regulation and liability; and a lack of
information or knowledge among employers and employees. |
Significant reasons why more employees do not
participate in pension plans sponsored by their employers include: the
growing predominance of elective plans over traditional defined benefit
plans that provide automatic coverage; employees give cash wages a higher
priority than pension coverage; employees give health insurance a higher
priority than pension coverage; a lack of personalized information or
knowledge; inertia and fear; employment patterns; a sense that pension
coverage is unnecessary or futile; the lack of the incentive of an
employer matching contribution; and the lack of tax incentives for lower
income workers. |
The Working Group recommends that the Federal
Government take the following actions to further encourage the voluntary
sponsorship of pension plans by employers and participation in those plans
by employees: (1) promote more, individualized education for employers and
employees; (2) encourage the sponsorship of defined benefit pension plans
by modernizing the regulatory scheme for these plans; (3) encourage the
creation and maintenance of multiemployer pension plans; (4) promote the
use of automatic enrollment / negative election plans in conjunction with
advance commitment programs like the "Save More Tomorrow" so as
to increase both plan participation and retirement savings; (5) simplify
the regulation of plans generally; (6) take a constructive approach to
enforcement; (7) promote plan sponsorship as the obligation of a
responsible employer by use of the government's roles as consumer and
regulator; (8) target additional tax incentives to encourage particular
behavior (e.g. employer matching contributions, coverage of part-time
employees); (9) be mindful of the importance of maintaining tax advantages
of qualified plans relative to IRAs and other tax-sheltered financing
arrangements; and (10) ensure that plan participation does not disqualify
low income workers from benefits under government programs; (11) create a
supplemental Social Security program to which an employer could
voluntarily contribute for its employees so that they can receive an
enhanced defined benefit; and (12) convene an interagency task force to
develop a coordinated, comprehensive program for expanding plan coverage,
participation and adequacy. |
Recognizing that many of these actions lie outside of
the Labor Department's jurisdiction, we recommend that the Secretary of
Labor use her influence as a member of the President's Cabinet and the
principal administrator of ERISA to persuade the Administration and
Congress to take these actions. |
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Sound retirement income from employment-based pension
plans and retirement savings programs for all employees has been an
important national public policy objective for several decades. Yet, only
about 50% of private sector workers ages 25-64 are covered by or
participate in pension plans of any kind on the job.(1)
And, that percentage has not increased over the past two decades despite
an economic boom, an expansion of the workforce, the authorization of new
types of tax-favored retirement plans, and government-sponsored
educational efforts. Fifty-five million private sector still workers lack
employment-based pension coverage.(2)
Why? What can be done about it.? |
Retirement income security has been said to depend on a
"three legged stool:" Social Security, employment based pension
plans, and personal savings. Social Security, while essential, was never
intended to be the sole source of retirement income. Maintenance of a
decent standard of living-indeed, avoidance of poverty-among older
Americans requires substantial retirement income from sources other than
Social Security. Yet, a very high percentage of the elderly continue to
depend on Social Security for most, if not all, of their income. |
Federal law does not require employers to establish and
maintain pension plans for their employees. Plan sponsorship is voluntary.
Plan participation is voluntary for employees under a large and growing
number of retirement savings plans, such as 401(k) plans. To promote
sponsorship of and participation in employment-based pension plans, the
federal government has been relying on "tax carrots" and
"regulatory sticks": favorable tax treatment conditioned on
compliance with non-discrimination rules and other requirements. These tax
incentives have been adjusted repeatedly over the years, and various new
types of tax-favored employee pension plans have been authorized. |
Despite these tax-focused governmental efforts, private
sector pension coverage and participation has stagnated. Millions of
workers do enjoy employment-based pension coverage, thanks largely to
various tax incentives. But, as many workers lack such coverage in spite
of these same incentives. A disproportionate share of these unbenefitted
workers are employed in small businesses (under 100 employees), are
low-earning, and/or are young. |
This situation is all the more alarming because of
other developments. First, the Social Security system's future is being
questioned. Second, Americans are retiring earlier and living longer,
requiring more retirement income. The large "baby boom"
generation is approaching retirement age. Third, personal savings are at a
record low, and personal debt is at a record high. Fourth, for workers who
have pension coverage, the traditional defined benefit plan is being
eclipsed by the Section 401(k) plan under which participation is
voluntary, the investment risk is borne by the participant, and the
typical form of benefit is a lump-sum distribution of whatever amount is
in the participant's plan account.(3)
And, fifth, health insurance and health care costs are absorbing an
increasing share of workers' and retirees' financial resources. |
The road to a pension at retirement contains many
entrances, exits, detours and toll booths, and navigation of that road
requires the cooperation of the employer and the employee. The employer
must sponsor an employee pension plan. The employee must be in the group
of employees covered by the plan or for whom participation is available.
If not automatically covered by the plan, the employee must elect to
participate in the plan. If the plan requires employee contributions (in
the form of salary deferral or otherwise), the employee must make
contributions. If the plan provides for self-direction of how the
employee's account is invested, the employee must invest wisely. Upon
changes in employment, withdrawn from the employee's plan must be rolled
over into another retirement savings program. Once reaching retirement,
the employee must take benefits in a form that provides a lifetime income. |
The Working Group's focus was on a subset of these
issues: why more employers are not sponsoring plans for their employees
(coverage) and why more employees are not participating in plans sponsored
by their employers (participation). |
Clearly, coverage by and participation in an employer's
pension plan is essential for an adequate retirement income. Moreover, the
type of pension plan in which an employee participates can have a very
significant impact on the amount of the employee's benefits and the form
in which they are paid (e.g. as a lump sum or as a lifetime annuity). But,
the extent to which the benefits actually paid by employment-based pension
plans replace pre-retirement earnings and meet the retirement income needs
of pensioners are important matters that the Working Group was unable to
study. We note that the Report of the Council's Working Group on
Retirement Planning does address issues relating to the post-retirement
income needs of pensioners and to the accumulation and distribution of
retirement savings to meet those needs. We encourage readers of this
Report to also read the Report of the Working Group on Retirement
Planning. |
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The Working Group conducted seven public meetings at
the Labor Department. At those meetings, the Working Group received
written and oral testimony from a variety of individuals and organizations
having knowledge of and experience with the issues being studied by the
Working Group. In addition, the Working Group received written submissions
from other individuals and organizations interested in pension coverage
and participation issues. The Working Group also considered articles
published in journals and the public press. And, perhaps most importantly,
the members of the Working Group brought to the proceedings their own,
considerable knowledge and experience. |
At its first meeting on April 9, 2001, the Working
Group discussed the issues to be studied and developed an outline to guide
its proceedings. The meeting also featured a presentation by Richard Hinz,
Director, Office of Policy & Research, U.S. Department of Labor and
members of the Data Team from that office. The presentation provided the
Working Group with a statistical overview of the current state of
employment-based pension coverage and participation in the United States. |
On May 3, 2001, the Working Group's second meeting
featured presentations by Cindy Hounsell, Executive Director of the
Women's Institute for a Secure Retirement, Ed Ferrigno, Vice President for
Washington Affairs, Profit Sharing/401(k) Council, and Brian Graff,
Executive Director, American Society of Pension Actuaries. |
At the Working Group's third meeting, on June 11, 2001,
one of its members, Professor Shlomo Benartzi of the Anderson School at
UCLA, made a presentation on the Save More Tomorrow approach of using
behavioral economics to increase employee participation and savings in
employer sponsored plans. In addition, Michael A. Calabrese, Director of
the Public Assets Program of the New America Foundation discussed a
proposal for individual accounts to supplement Social Security encouraged
through refundable tax credits. Teresa Turyn of the Employee Benefits
Research Institute (EBRI) and Ruth Greenwald & Associates reported on
the findings of their organizations' 2001 Small Employer Retirement
Survey. |
On July 17, 2001, the Working Group held a joint public
meeting with the Working Group on Retirement Planning, reflecting the
close relationship between the topics being studied by these Working
Groups and the interest of the witnesses at the hearing in both topics.
Presentations were made by the following individuals: Sylvester Schieber,
Ph.D, Vice President, Watson Wyatt Worldwide; David Blitzstein, Director
of Negotiated Benefits, United Food & Commercial Workers; Alicia
Munnell, Peter F. Drucker Professor of Management Sciences, Boston College
Carroll School of Management; Anna Rappaport, Principal, William M.
Mercer, Inc.; Ron Gebhardtsbauer, Senior Pension Fellow, American Academy
of Actuaries; Teresa Ghilarducci, Associate Professor of Economics and
Director of the Higgans Labor Research Center, University of Notre Dame;
Diane Oakley and Richard Hiller of TIAA-CREF; and Patrick J. Purcell of
the Domestic Social Policy Division of the Congressional Research Service. |
The Working Group's next meeting, on September 11,
2001, was cut short by the extraordinary and tragic events that struck our
Nation on that date. Saddened, but in accordance with President Bush's
directive to continue governmental operations, the Working Group continued
the meeting on September 12, 2001 to discuss the presentations and other
information that it had received at the prior sessions and to develop
collective views on the issues. |
At its October 15, 2001 public meeting, the Working
Group continued its discussion and the development of collective views. |
At its final meeting on November 13, 2001, the Working
Group reviewed a draft report and approved this final report. |
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Based on the testimony and written submissions of
witnesses, on additional information collected, and on the knowledge and
experience of the Working Group's members, we find that the following
matters appear to be significant factors affecting the decision by
employers not to sponsor pension plans for all or some of their employees
and decisions by employees not to participate in their employers' plans.
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We note that the information on which these findings
are based necessarily relies on the statements of employers, employees and
others, and those statements may or may not accurately reflect true
motivations.
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We also note that, according to the information
received, the lack of plan sponsorship is predominantly a small business
problem. According to Labor Department data based on the March 2000
Current Population Survey there is a high correlation between employer
size and plan sponsorship; the smaller the employer, the less likely that
the employer sponsors a pension plan for its employees.(4)
Accordingly, our findings place substantial weight on the 2001 Small
Employer Retirement Survey (SERS) conducted by EBRI and Matthew Greenwald
& Associates, a copy of which was submitted to the Working Group and
about which we received testimony (as summarized in part VI of this
Report).
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Why Do More Employers Not Establish And Maintain
Pension Plans For Their Employees?
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Business Realities -
Business uncertainties are a major reason for not sponsoring an
employee pension plan, according to the 2001 SERS.(5)
71% of the surveyed employers without plans reported that revenue or
profits were too uncertain to commit to a plan; for 48% this was a major
reason, and for 18% this was the most important reason. 66% of these
employers gave as a reason that required company contributions are too
expensive; for 46% this was a major reason, and for 10% this was the most
important reason. An increase in company profits was cited by 44% of the
surveyed employers as a development that would make serious consideration
of a plan much more likely.
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New businesses tend to be focused on survival rather
than on retirement savings. The termination rate for new small businesses
is high. As many as 80% close within the first four years of operation.
32% of employers in the 2001 SERS gave "business is too new" as
a reason for not sponsoring a plan; for 20% this was a major reason, and
for 6% this was the most important reason. |
Nature of Workforce -
Employees who are not full-time are less likely to be employed by an
employer that sponsors a pension plan or that offers plan coverage to
them.(6) Employers are reluctant
to provide pension plan coverage for part-time, part-year, seasonal, and
temporary employees. To the extent that the employer maintains a plan for
some employees, these types of employees may well be excluded from
coverage by design. |
Such workforces are common in small businesses.
According to the 2001 SERS, a reason given by 63% of employers for not
sponsoring plans was that their employees were largely part-time or
seasonal or had a high turnover rate. For 32% this was a major reason, and
for 15% this was the most important reason. |
Some large and medium sized firms deliberately rely on
part-time employment as a workforce structuring and management strategy,
and exclude such employees from plan participation by design.
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Employee Preferences -
The lack of employee demand for a pension plan was given as a reason
for not sponsoring a plan by 63% of employers in the 2001 SERS; for 43%
this was a major reason, and for 19% this was the most important reason.
Cash wages and health insurance coverage may be a higher priority for many
employees.
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Where an employer is offering only one benefit program,
employees tend to prefer health insurance coverage over retirement
savings. Health insurance has an immediate effect on the financial
security of a worker and the worker's family, whereas retirement may seem
a distant aspiration. As health insurance coverage becomes more expensive
for the employer and the employee, there is less money to devote to
retirement savings.
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Statistical data seems to confirm that insufficient
employee demand is a significant factor in employer decisions not to
sponsor plans or to include certain employee groups in plan coverage.(7)
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Decline in Unionization -
Organized labor has been a major force in promoting employment-based
pension coverage and participation over the past several decades.
Employees who are represented by a labor union and covered by a collective
bargaining agreement with their employer are the most likely of any group
of employees to have pension plan coverage.(8)
They are also likely to have traditional defined benefit plan coverage
that provides benefits in the form of a lifetime annuity. Unionization has
also benefitted unorganized workers whose employers maintain pension plans
to compete for labor against unionized employers or to make union
representation less attractive for their workers. |
Unionization has played a particularly significant role
in providing defined benefit pension coverage through multiemployer plans
to workers in industries characterized by small employers and transient
employment patterns such as building and construction, trucking, maritime,
clothing, services, and entertainment. Through a multiemployer plan, an
employer can provide pension coverage for all of its employees by simply
submitting contributions, fixed by the collective bargaining agreement, to
the plan. The employer need not become involved in the administration of
the plan or concern itself with government regulation of the plan.(9) |
However, the percentage of the private sector workforce
that is unionized has declined significantly, and this has had a
significant, negative impact on plan coverage.(10) |
Cost of Set-Up and Administration -
56% of employers in the 2001 SERS cited the cost of setting-up and
administering a pension plan as a reason for not sponsoring a plan; for
34% this was a major reason, and for 12% this was the most important
reason. Surveyed employers would be more likely to sponsor a plan if
administrative costs were low, according to the SERS. Other witnesses and
sources cited administrative costs, particularly for defined benefit
plans, as a major impediment to plan sponsorship. |
Cost of plan administration and compliance is a concern
of employers of all sizes, although the impact may be the greatest on
small employers. There are certain costs that are more or less fixed
regardless of the size of the plan (e.g. preparation of plan documents,
tax filings, creating a recordkeeping system). |
Statistical data confirms that the cost of creating and
administering a plan discourage plan sponsorship, particularly sponsorship
of defined benefit plans. There was a steady pattern of growth in annual
per capita pension administrative costs over the period 1981-1996
according to one study.(11)
Costs rose more for defined benefit pension plans than for defined
contribution plans, and the costs were greater for smaller employers.
According to another study, the differential cost of operating a defined
benefit plan (including actuarial and participant communication costs) as
compared to a 401(k) plan increased for all sizes of plans during 1981-96,
with the largest increases falling on smaller plans.(12)
The PBGC's Working Group noted that the differential in costs discourages
sponsorship of defined benefit plans.(13) |
Acknowledging this cost issue, Congress provided in the
Economic Growth and Tax Relief Reconciliation Act of 2001 a $500 tax
credit for a small employer's costs of establishing a new employee pension
plan. It remains to be seen whether this modest incentive will have any
effect on the rate of plan sponsorship. |
Government Regulation / Liability -
The perception that pension plan sponsorship involves "too many
government regulations" is a common concern among employers of all
sizes. With respect to smaller employers, this was a reason given by 47%
of those employers in the 2001 SERS for not sponsoring a pension plan for
their employees. For 22% this was a major reason, and for 4% this was the
most important reason. |
Some employers have a discouraging sense that the laws
and regulations governing plan design and operations are complex and
constantly changing, and that extensive professional assistance is
required for compliance. Indeed, misunderstanding of the rules among
professionals is not uncommon. A perception that government enforcement
might be intrusive or excessive can also discourage employers from
bothering with a pension plan. |
Financial disclosure of pension related costs under
Financial Accounting Standards Board rules has also been cited as
discouraging plan sponsorship as well as benefit enhancements such as cost
of living increases. This effect has to be balanced against the value of
FASB disclosure rules. |
A related concern is that a sponsoring employer may be
held liable for money beyond contributions. The SERS revealed that fear of
liability for employees' investment decisions was a factor in the
non-sponsorship decision of 33% of the surveyed employers. It was a major
reason for 12% of employers, although less than 0.5% of the employers
listed it as the most important reason. |
Tax Incentives -
In the 2001 SERS, only 1% of employers cited insufficient benefits for
owners as the most important reason for not sponsoring a plan. For 42% of
the employers this was a reason for non-sponsorship, and for 16% it was a
major reason. On the other hand, business tax credits for starting a plan
would make serious consideration of plan sponsorship much more likely for
surveyed employers. |
There is concern that sponsorship of tax qualified
plans will be jeopardized by enhancements in the tax treatment of
Individual Retirement Accounts (IRAs) and other tax-sheltered financing
arrangements that are not subject to the nondiscrimination and other
qualification requirements of the Internal Revenue Code that compel
coverage of non-highly compensated employees. To the extent that owners
and highly compensated employee see the tax incentives of qualified plans
as too restrictive, they may not identify with qualified plans and lose
interest in supporting improvements in such plans for other employees.(14)
Witnesses observed that increases in the IRA contribution limits may cause
small employers to use that tax-favored vehicle for their own retirement
savings and forego a qualified plan for their employees. There was also a
concern that other tax-sheltered financing vehicles may be viewed by
owners and highly compensated employees as being preferable to qualified
plan coverage.(15) |
Lack of Information or Knowledge -
For 26% of employers in the 2001 SERS, lack of information about
starting a plan was a reason for non-sponsorship. For 9% this was a major
reason, and for 1% it was the most important reason.(16) |
It is said about the small business market that pension
plans are sold, not bought. But, plan marketers see little opportunity for
profit in the small market. The costs of marketing and plan administration
are high relative to the available financing. |
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Why Do More Employees Not Participate In Pension
Plans Sponsored By Their Employers? |
Change To Elective Participation Plans -
Traditional defined benefit plans automatically cover the
employer-sponsors' employees. Employees do not have to elect to be
covered. However, such traditional plans have become less common; the
number of such plans has declined dramatically.(17)
Most new plans established over the past decade have been 401(k) type
plans for which an employee must elect to participate and contribute. Many
employees do not elect to participate for various reasons. |
Perceived Cash Needs Have Higher Priority -
Many employees have perceived needs to which they give a higher
priority than retirement savings. These needs may include feeding a
family, buying a home, educating children, or maintaining a certain
lifestyle; needs that are perceived as more immediate than income for an
uncertain, distant retirement. |
These perceived needs are greatly influenced by
omnipresent marketing of consumer goods and services through all forms of
media. Recently, even government policies seem to have encouraged consumer
spending over savings as a means of stimulating a recessionary national
economy (e.g. Administration urged that the special income tax rebates
paid in 2001 be spent by taxpayers). |
Notably, personal debt is at record high levels, and
the personal savings rate is near the record low.(18) |
Immediate cash needs have a greater significance for
low wage workers. There is a high correlation between low earnings and low
retirement savings.(19) |
Health Insurance Has Higher Priority -
Health insurance coverage is more important to workers than retirement
savings. The need for medical care by an employee or family member is a
daily risk. Moreover, as health insurance coverage has become more costly
for employees (premiums, deductibles, co-payments), less of the employee's
total compensation is available for pension plan contributions.(20) |
Lack of Information / Knowledge -
We may be drowning in information, and starving for knowledge about
the whys, whats, and hows of pension plans and retirement savings in
general among employees. There is no lack of general information on
pension plans and retirement savings through the Labor Department's
publications and web site, the retirement savings campaign of the American
Savings Education Council and EBRI, and countless publications and web
sites of nonprofit organizations and product marketers. However, the
volume and complexity of the information can be overwhelming and
frustrating. Language and cultural barriers also impede the conversion of
information into understanding and knowledge.(21) |
A consistent theme among the testimony and other
submissions received was that employees want and need more individualized
information and advice. Individuals want advice on what is best for them
in their particular circumstances, not general information that might or
might not be relevant to them.(22)
In traditional defined benefit plans most of the work was done for the
participants by plan professionals. Under salary deferral and
self-directed investment plans, responsibility has been shifted to the
individuals. They are laymen who often feel ill-equipped to make such
financial decisions. |
Inertia and Fear -
Some employees simply do not get around to joining the plan if they
are not automatically covered.(23)
Joining requires learning about the plan and making choices, such as
investment choices, about which individuals may feel uncomfortable. Some
employees fear that their contributions would be lost to bad investments
or misconduct, or that they will not have access to the money in their
plans in the event of a personal financial emergency. Recent declines in
the stock markets have discouraged participation; the flip-side of the
exuberance for participation and contributions experienced when the stock
markets were soaring. |
Work Patterns -
Employees who work only part-time for an employer, or who are seasonal
or temporary employees may not be eligible to participate in the
employer's pension plan. To the extent that they are eligible, they may
choose not to participate because they have no sense of connection or
long-term commitment to the employer. They may not expect to vest in
employer-funded benefits and may not want to leave their money in a plan
of a temporary employer. |
Pension Coverage is Unnecessary or Futile -
Some employees erroneously believe that a pension plan and retirement
savings are unnecessary because Social Security or some other governmental
program will provide retirement income, health care and long-term care.
Some employees believe that they will be working until death and will
never enjoy any retirement savings. Some employees have the sense that
they could never save enough to provide much retirement income. |
No Employer Match Incentive -
Employees who participate in 401(k) plans to which no employer
contributions are made for them may see no benefit in putting only their
own money into the plan.(24) The
lack of an employer contribution may signal a lack of employer commitment
to the plan and to the employees. |
No Tax Incentive -
Many employees do not pay significant federal income tax and would not
realize much of an immediate tax benefit from contributing to a 401(k)
plan.(25) For low wage workers,
401(k) plan contributions are discouraged by the treatment of salary
deferrals as income for purposes of government programs (e.g. the Earned
Income Tax Credit income limits before the 2001 tax law). |
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What More Can The Federal Government Do To Expand
Employment-Based Pension Coverage And Participation? |
More, Individualized Education -
Education of employees and workers about pension plans and other
retirement savings vehicles remains a key in this struggle to expand
coverage and participation. Generalized educational materials are helpful.
However, individualized education and advice for employers and employees
is the most effective means for encouraging plan sponsorship and
participation. Employers want to know how a pension plan generally and
particular types of plans will affect their specific business and their
workforce. Employees want to know how participation would affect their
circumstances; they want advice on how much they should defer and how they
should invest their accounts in 401(k) type plans. Employees need to be
encouraged to look for employment that offers pension plan coverage, to
demand that their employers offer retirement savings plans, and to let
employers know that they do value pension plans as a benefit of
employment. |
Encourage the Sponsorship of Defined Benefit Plans -
Traditional defined benefit plans feature automatic coverage and
participation for employees; employees do not have to affirmatively elect
to participate. Moreover, such plans do not require investment direction
by the participants, and employees do not directly bear the investment
risk. Such plans typically pay benefits in the form of an annuity that
cannot be outlived, and in the form of a joint and survivor annuity for
married pensioners. |
Defined benefit plans have fallen out of favor with
employers for a variety of reasons, including funding standards that
produce unpredictable fluctuations in contribution requirements, the
complexity and cost of administration, and restrictions that prevent
employers from designing plans to fit the needs of their workforce. To
reverse this downward trend, the regulatory scheme for defined benefit
plans should be re-examined and modified to make these types of plans more
attractive to employers while preserving requirements that are truly
needed to protect the interests of participants and beneficiaries. For
example, allowing pre-tax employee contributions / salary deferrals to a
defined benefit plan for supplemental benefits under the plan would make
these plans more attractive to employees and employers. |
Encourage Multiemployer Plans -
In the 1980 amendments to ERISA, Congress declared that national
retirement policy should promote the maintenance and expansion of
labor-management multiemployer pension plans. Such plans typically provide
automatic, portable pension coverage for all workers employed in a
bargaining unit. They are particularly valuable in industries
characterized by mobile employment patterns and small employers where
single-employer plans are virtually non-existent. They require of
employers little more than payment of periodic, collectively bargained
contributions. Employees, through their union, make a collective decision
to devote a portion of their compensation to retirement savings. |
Many features of current law accommodate the special
character of multiemployer plans. Policymakers should continue to be
mindful of the beneficial role and special character of these plans in the
development and implementation of policy. |
Multiple employer pension plans (as legally distinct
from joint labor-management multiemployer plans) may provide opportunities
for increased coverage and participation in settings where the employees
are not union-represented but have mobile employment patterns or where
multiple employers want the economies of scale offered by a pooled
arrangement. However, particular care may be required to protect multiple
employer plans from entrepreneurial misconduct of the kind associated with
some notorious "multiple employer welfare arrangements" under
ERISA. Sponsorship by established professional or trade associations or
other affinity groups may provide this protection. |
Promote Automatic Enrollment / Negative Election
Plans In Conjunction With Advance Commitment Programs Such As SMarT -
401(k) type plans typically require an employee to make an affirmative
election in order to participate. A number of such plans are automatically
enrolling new employees and requiring an employee who does not wish to
participate to elect out of participation. Preliminary studies suggest
that such an automatic enrollment-negative election approach increases
participation by employees in their employers' 401(k) plans. However,
there is insufficient evidence from early studies that such an approach
increases aggregate retirement savings, and there is evidence that it can
adversely impact aggregate savings by producing lower average deferral
rates. Negative elections typically provide for a default investment that
has the lowest risk/return characteristics. Employees tend not to transfer
their account balances from these default investments to other investments
that will produce a higher return over time. Further study will be
required to assess the effect of the automatic enrollment/negative
election approach by itself. |
The Internal Revenue Service has acted to clarify the
lawfulness of automatic enrollment/negative election provisions in 401(k)
type plans. However, the legality of these provisions under State laws
regulating deductions from wages remains an issue for some employers.
Resolution of this issue at the Federal or State level would further
encourage the inclusion of automatic enrollment/negative election
provisions in plan designs. |
There is evidence that the use of an automatic
enrollment/negative election approach in combination with an advance
commitment program, such as the "Save More Tomorrow" (SMarT)
program studied and advocated by Professor Shlomo Benartzi and Richard
Thaler, does increase both plan participation and retirement savings
rates. The SMarT program, based on behavioral economics principles,
features a pre-commitment by employees to contribute more to their
employer's pension plan in the future when they receive salary increases.
Employees tend not to miss the contribution when it serves only to reduce
a salary increase and not current earnings. |
The use of automatic enrollment/negative election and
SMART techniques could be encouraged through the granting of tax
incentives for the affected plan or for another plan sponsored by the
employer. |
Simplify the Regulation of Plans -
The Internal Revenue Code's regulatory scheme for pension and other
retirement savings plans, although well-intended, is discouragingly
complex. Even employee benefits professionals have a difficult time
comprehending some statutory and administrative rules, and have a more
difficult time keeping up with the continuous changes in the law,
regulations and rulings. Unnecessary distinctions among various types of
plans need to be eliminated. A proliferation of new types of tax-favored
retirement plans could add to, not reduce, the confusion. Continuous
changes in law and regulations perpetuate complexity. |
The Treasury/IRS has made significant progress towards
simplification of substantive and procedural regulations. But, further
simplification of the law as well as agency regulations could reduce the
costs of plan establishment and administration, and make it easier for
plan promoters to market plans to small employers. |
Simplification should not mean abandoning the policy of
requiring nondiscriminatory pension coverage, participation and benefits
that is necessary to ensure pension adequacy. It means only finding
simpler ways to provide that protection for employees. |
Take a Constructive Approach to Enforcement -
Truly effective enforcement of statutory and regulatory rules in the
context of a voluntary system requires prudent, balanced judgment so as to
protect the rights of plan participants without unnecessarily discouraging
plan sponsorship. An enforcement approach that promotes and aids voluntary
compliance can encourage plan sponsorship. A perception that enforcement
is unnecessarily intrusive or excessive may deter plan sponsorship. |
The IRS has taken important steps to simplify and
refocus its enforcement programs on encouraging voluntary compliance,. The
Labor Department, too, has made significant efforts in this direction.
Notably, Assistant Secretary Ann Combs announced to the Advisory Council
that the Administration intends to concentrate on promoting voluntary
compliance as an enforcement strategy in recognition that the vast
majority of plan sponsors want to comply with the law. |
Promote Employer Responsibility As A Consumer &
Regulator -
The Federal Government could influence employers to establish and
maintain plans by promoting the concept that employers have a social
responsibility to provide pension coverage for their employees. Moreover,
to the extent that an employer sponsors a 401(k) type plan, this social
responsibility includes offering matching contributions. Evidence
indicates that the availability of matching contributions results in
greater participation and savings. |
The Federal Government could leverage its roles as a
consumer of goods and services and as a regulator to promote plan
sponsorship, participation and benefit adequacy. Employers that sponsor
employee pension plans, sponsor defined benefit plans, offer matching
contributions, cover part-time employees, or take other beneficial actions
could be given credit for purposes of Federal Government programs: for
example, given a preference for government contracts; granted credit
toward government approval (e.g. business merger, license); or given
waiver from some regulatory requirement. The use of such programmatic
incentives should be studied as soon as possible. |
Target Tax Incentives -
The current extent of plan sponsorship and participation is largely
attributable to tax incentives. Additional tax incentives should be
targeted to encourage specific conduct, rather than to simply enhance the
tax benefits of current plan participants: for example, higher deferral
limits for highly compensated employees of employers that make matching
contributions to 401(k) type plans; tax credits for employers that extend
plan coverage to part-time employees. |
The Economic Growth and Tax Relief Reconciliation Act
of 2001 attempts to promote plan participation by providing for low-income
individuals a non-refundable tax credit of up to $2,000 for contributions
to an IRA or 401(k) plan. There are questions about the extent to which
this tax credit will actually provide an effective incentive for low
income savers given the fact that the credit is not refundable and that it
is available only if the employee makes a cash contribution. The effect
remains to be seen. |
Avoid Undermining Qualified Plans -
Policymakers must be mindful of the tax treatment of IRAs and
non-qualified deferred compensation arrangements relative to the tax
treatment of qualified plans. A core theory of plan qualification is that
employers will offer plan coverage to non-highly compensated employees in
order to gain tax benefits for highly compensated employees. This
"trickle down" theory will be undermined if employers,
particularly small employers, can obtain comparable tax benefits for
themselves without covering their employees through use of IRAs and
tax-sheltered financing vehicles. There is concern that the increase in
the IRA limit enacted as part of the Economic Growth and Tax Relief
Reconciliation Act of 2001 may be approaching the point where an employer
could find an IRA more attractive than a qualified plan on this basis
alone. |
Plan Coverage Should Not Adversely Affect Government
Benefits -
Salary deferrals under a 401(k) type plan should not be counted as
income for purposes of income-based government benefits or subsidies.
Counting salary deferrals as income for such purposes discourages plan
participation and retirement savings. We note that the Economic Growth and
Tax Relief Reconciliation Act of 2001 corrects this problem with respect
to the Earned Income Tax Credit income rules. Salary deferrals should
remain in the FICA tax base so as not to undermine an employee's Social
Security benefit. |
Supplemental Social Security Program -
(a) Voluntary Program: Pension coverage and participation for the
uncovered 50% of the workforce could be provided by creating a
supplemental Social Security program to which an employer could contribute
for its employees, including part-time, seasonal and temporary employees.
The additional contributions would be used to enhance the employee's
Social Security benefits (including disability and survivors benefits).
Social Security's indexed defined benefits will remain a critical
component of most Americans' retirement income. Those benefits would be
increased to reflect any supplemental contributions made for an
individual. |
This approach offers many advantages. First, the
program would be relatively simple and involve de minimis regulation.
Employers and employees are already familiar with the Social Security
system. Employers and employees already contribute in the form of payroll
taxes to the system for the basic benefits. There would be relatively
little need for marketing. Second, the Social Security Administration
would be responsible for all administration, relieving employers of the
cost of administration and regulatory compliance. In essence, the only
cost to the employer would be the contributions. Third, coverage and
participation would be automatic, so no employee would have to
affirmatively elect to participate. Fourth, benefits would be immediately
vested and fully portable. Fifth, benefits would be payable as a life
annuity that could not be outlived. Sixth, generally there would be no
risk of loss of benefits due to plan or employer termination, to
investment experience, or to administrative and management fees. |
The attractiveness of this program could be enhanced by
additional incentives such as tax credits for contributions, matching
contributions by the Federal Government, or tax-free distributions. |
We recognize that such a program could increase the
cost of administering Social Security. But, we expect that this cost
increase would be only incremental. |
(b) Play-or-Pay Approach: While the voluntary program
outlined above would cause an expansion of pension coverage and
participation, the policy objective of near universal coverage and
participation will not be accomplished without a mandate for employers.
Under a "play-or-pay" approach, a private sector employer would
be required to contribute for each employee an amount equal to at least 5%
of the employee's compensation to either an employer-sponsored pension
plan (defined benefit or defined contribution) or to the supplemental
Social Security program. The choice would be the employer's, subject to
any collective bargaining obligations or legal constraints on the
employer. We believe that this approach deserves serious study. |
(c) Details: Needless to say, the creation of a
supplemental Social Security program would require consideration of an
array of political and practical issues that are beyond the jurisdiction
and competence of the Working Group. Such issues would include whether the
Social Security Administration has the resources and capability to
administer a supplemental program, how to prevent discrimination in
employer contributions, how to enforce the employer's contribution
obligations, and how to protect the supplemental contributions from being
used to fund basic benefits, as well as how to design any additional tax
incentives. Most importantly, the program should be designed so as not
undermine employer-sponsored, qualified plans. |
Interagency Task Force -
The Working Group is mindful that most of the actions that we believe
would significantly expand plan sponsorship and participation lie within
the jurisdictions of agencies other than the Department of Labor, such as
the Treasury Department/IRS and the Social Security Administration. We
recommend that the Secretary of Labor use her influence as a member of the
President's Cabinet and as the principal administrator of ERISA to
encourage and persuade the Administration and Congress to take these
actions as soon as possible. We further recommend that the Secretary urge
the Administration to convene an interagency task force to develop a
coordinated, comprehensive program for expanding plan sponsorship and
participation, including implementation of a supplemental Social Security
program. |
|
|
Testimony of Richard Hinz on April 9, 2001
|
Mr. Hinz provided a statistical overview of the
current state of private sector, employment-based pension coverage
and participation in the United States based on the Contingent Work
Supplement to the February 1999 Current Population Survey and other
sources. He also discussed how various employer and worker
attributes correlate with pension coverage, and proposed an approach
to evaluating various factors. He also described the complexity of
supply and demand interactions in pension coverage. He made the
following specific points: |
The path to a secure retirement has many steps; the
employer must sponsor a pension plan, the employee must be eligible
for participation, the employee must participate, the employee must
make any required contributions, the employee must invest wisely in
a self-directed plan, the employee must rollover his account upon a
change in job, and the employee must convert his pension to
retirement income upon retirement. |
About 58% of private sector workers in current jobs
work at firms that sponsor a pension plan of some kind. About 30%
work at firms that do not sponsor a plan, and 12% do not know
whether the firm has a plan. |
Of workers at firms that sponsor a plan, 44% are
enrolled in the plan, 4% choose not to participate, and 9% report
that they are ineligible. |
In firms that sponsor 401(k) plans, about
two-thirds of employees who are offered participation choose to
participate. |
Interpreting coverage and participation data is
tricky because of the range of individual circumstances of workers,
including coverage under multiple types of plans, pensioners who
return to work and lack coverage at the new job, and some workers do
not understand a 401(k) plan to be a pension plan. |
100% coverage and participation is unlikely.
|
About 43 million of workers have pension coverage,
and 55 million are not covered. This represents a "fairly formidable
coverage issue." |
From 1979 to 1999, the percentage of the workforce
employed by firms with pension plans has remained within a couple of
percentage points. In 1979, 54% of workers were employed by a firm
with a plan (of which 11% did not participate in the plan), and in
1999, 58% were employed by a firm with a plan (of which 14% did not
participate in the plan). |
"We get pension simplification, pension
complication, tax reform, high marginal rates, low marginal rates,
and one thing stays constant, and that is probably the vexing
problem. All of the interventions that have been tried and all of
the external forces that have influenced us over the last 20 years,
it hasn't budged the pension coverage rate more than a percentage or
two." |
Coverage might be better than the data show because
some workers when asked if their employer has a pension plan answer
no because they do not understand a 401(k) plan to be a pension
plan. |
During 1984-97, the total number of private sector
plans remained steady at about 700,000. But, the composition of this
universe of plans has changed. The number of defined benefit plans
decreased dramatically, the number of 401(k) plans increased, and
the number of non-401(k) defined contribution plans remained roughly
the same. |
The number of active plan participants
substantially increased during 1984-97, but this increase has been
in proportion to the growth in the workforce, leaving the coverage
rate unchanged. This growth has been in DC plans. |
During 1984-97, the number of workers covered by DC
plans only increased substantially, the number covered by DB plans
only declined, and the number covered by both DC and DB plans
remained stable. |
Based on the 1999 survey, 64% of full-time workers
were employed at firms with pension plans, and of those 37% were
participants. 51% of part-time workers were employed at firms with
plans, and only 14% of those were participants. Part-time workers
are less likely to be employed at firms sponsoring plans and were
less likely to become participants in their employers' plans.
However, full-time and part-time workers with similar earnings have
similar pension coverage rates. |
Regarding gender, 60% of men and 57% of women were
employed at firms that sponsor plans. Of those, 47% of men and 40%
of women were participants in the plans. Male pension coverage has
been declining as a share of the workforce, and female coverage has
been increasing. Young males as a group tend not to participate.
Traditionally male industries that were the core of pension coverage
in past decades have been in decline. The higher the earnings level,
the lower the coverage and participation rate differences by gender.
|
Regarding ethnicity, 40% of Hispanic workers are
employed by firms with pension plans 9of which 27% participate). 58%
of Black, Non-Hispanic workers are employed at firms with pension
plans (of which 41% participate). 63% of White, Non-Hispanic workers
are employed at firms with pension plans (of which 47% participate).
Even at higher earnings levels, there were significant differences
in coverage and participation rates among various ethnic groups
which could indicate cultural differences. |
Regarding union representation, "the most powerful
explanatory variable is collective bargaining status." 81% of
workers covered by a union contract were employed by firms with a
pension plan (of which 70% participated in the plans). 56% of
workers not covered by a union contract were employed by firms with
a pension plan (of which 41% participated). Even at various earning
levels, workers covered by a union contract have higher pension
coverage rates than workers who were not covered by a union
contract. |
Regarding employer size, the March 2000 Current
Population Survey shows the following rates of plan sponsorship and
participation by number of employees: under 10 (20% coverage, 15%
participation), 10-24 (32% coverage, 24% participation), 25-99 (48%
coverage, 36% participation), 100-499 (61% coverage, 46%
participation), 500-999 (68% coverage, 54% participation), 1,000 or
more (74% coverage, 57% participation). There is a significant
association between size of firm and coverage. Participation rates
tend to be about the same. |
The size of the firm is a significant factor
independent of earnings levels of the workers. The larger the firm,
the more likely pension coverage and participation at all earnings
levels. |
There are significant differences in coverage rates
among industries, although there are cross-cutting factors such as
union representation, prevalence of traditional defined benefit
plans in which coverage and participation are not elective, size and
earnings. In commercial, utilities, manufacturing, finance, and
mining, coverage rates are relatively high. In agriculture,
construction, and retail, the coverage and participation rates are
relatively low. |
Regarding age, coverage and participation are
relatively low at younger ages (40% coverage, 14% participation at
under age 25), peak in middle life (55% coverage, 39% participation
at ages 25-29; 66% coverage, 56% participation at ages 45-49), and
fall off at older ages (59% coverage, 50% participation at ages
60-64). |
There is a high correlation between education level
and plan coverage and participation. 31% of workers with less than
high school education were employed at firms with a pension plan,
and of those 16% participated. Of college graduates, 74% were
employed at firms with a pension plan and 62% participated.
|
There is a high correlation between earnings and
pension coverage and participation. At the lowest end of the
earnings range, 30% of workers were employed at firms with a pension
plan, and of those only 6% participated in the plan. At the highest
end of the earnings range, 82% of workers were employed at firms
with a pension plan, and of those 76% participated. |
Conventional levers for pension coverage
interventions include raising benefit limits, relaxing
nondiscrimination rules, subsidizing employer administrative costs,
tax credits for lower income workers, limiting eligibility
exclusions, broadening the range of tax qualified plans, and
increasing education and outreach. |
The central question is whether the lack of pension
coverage and participation is a demand problem or a supply problem:
is it that workers do not demand plans, or that employers do want to
sponsor plans? This is a difficult question, and the law is littered
with failed attempts to increase coverage and participation based on
oversimplified assumptions about the cause of the problem.
|
Workers who decline an opportunity to participate
in their employer's plan have similar characteristics to workers in
firms that do not sponsor plans. This is simple evidence of a
worker demand problem. |
PWBA has prepared a regression model to estimate
what would happen to participation (take up rates) if all employers
who do not sponsor a plan were to sponsor a 401(k) plan and offer
the plan to their employees. Preliminary estimates are that the best
case would be that 47.4% of the currently non-covered workers would
elect to participate in their employer's plan. In contrast, 74.1% of
workers whose employer offers them pension coverage now do
participate. This suggests that even if employers sponsor plans,
worker behavior must be changed to increase participation rates.
|
|
Testimony of Cindy Hounsell on May 3, 2001
|
Ms. Hounsell made the following points in her
testimony concerning the pension coverage and participation issues
affecting women: |
One-size-fits-all information about retirement
savings will not be as effective as personalized counseling or
information; information that is tailored to the person's particular
circumstances; small meetings and one-on-one sessions. Many women
simply do not have time to read all of the information that is out
there. And, much of the information is complex. |
Women need to be convinced to take a long-term view
of their finances. Once this attitude shift has occurred, women need
to know that they have to do something to plan for retirement, or
else they're going to have to work until they drop. From this
perspective, women can more easily realize that how much one is able
to save for retirement is directly related to how much one works and
how much one earns. And women tend to lose out on both those fronts.
|
Increasing pension coverage for women is more than
just persuading them to save more. It's a matter of educating women
that a pension, or some other retirement vehicle, is a critical
component of their total compensation from work. So when comparing
compensation packages, women need to evaluate the whole compensation
package and not just the monthly paycheck. |
The education needed is not merely that of
explanation or explication. The need for pension coverage must be
shown to women in a relevant and gripping manner. It is not enough
that women have access to pension and retirement information via the
internet or at work. The basics of how best to gear up for
retirement have to be driven home until women are actually signing
up for retirement savings vehicles. |
The fact that women remain so unaware of the need
to save and how to better prepare themselves for retirement is all
the more critical given the shift from defined benefit to defined
contribution plans. DC plans shift much of the responsibility of
retirement from the employer to the employee. |
Women cannot wait to happen upon a financial
planner; by then, it is too late to effectively deal with the issue
of a decent retirement. Employers and government must reach out to
women; commercial promoters ignore them because they tend to be
low-income. |
|
Testimony of Ed Ferrigno on May 3, 2001
|
Mr. Ferrigno made the following points in his
verbal and written presentations about expanding pension coverage
and participation from the perspective of promoters of DC plans:
|
The private employer-provided retirement system has
overwhelmingly succeeded in providing benefits to its target
population--full-time workers age 21 and older, who have completed a
minimum eligibility period of up to one year. Pension coverage for
the target group who work for medium-to-large firms is approaching
100%. |
Retirement plans, once established, tend to benefit
all workers: 92% of workers earning less than $60,000, 85% of
workers earning less than $40,000, and 68% of workers earning less
than $20,000 participated in plans when offered by their employers.
Based on a Fidelity study of 1999 data, the average participation
rate for 401(k) plans in existence for at least two years was 75%.
The participation rate for 401(k) plans below 50 employees was 84%.
|
Small business is the last major area where pension
coverage is lacking, particularly employers of fewer than 50
employees. According to the CRS reports, participation in small
firms increased from 1994 to 1996, and that tend has likely
continued. But, more needs to be done. A major reason for small
businesses not establishing qualified retirement plans for their
employees is their belief that they are unfairly targeted by
regulation. |
Small business could be encouraged to sponsor plans
by government action that would: (1) provide tax credits for small
businesses establishing new retirement plans; (2) provide a safe
harbor under the nondiscrimination rules for automatic enrollment
plans that meet certain criteria; (3) maintain IRA/401(k)
proportionality so that it is not more economically efficient to use
an IRA instead of a qualified plan; (4) maintain 404(c) protection
even when the plan allows the employee to delegate the asset
allocation decision to the plan sponsor; (5) amend the Earned Income
Tax Credit to exclude elective deferrals from the income limits; (6)
repeal the imposition of the FICA tax on elective deferrals that was
imposed in 1983; (7) repeal top heavy rules; (8) eliminate user
fees; (9) increase limits on benefits and contributions; and (10)
increase the limit on includible compensation. Some of these
concerns may be addressed by the pending tax legislation. |
Lower income workers are unlikely to save for
retirement except in employer plans. Tax credits for lower income
workers would encourage participation. |
Automatic enrollment programs have been shown to
increase participation rates for lower income workers. They should
be encouraged through nondiscrimination rule relief. |
|
Testimony of Brian Graff on May 3, 2001
|
Mr. Graff made the following points in his
testimony: |
Nonqualified retirement plans are on the rise and
this bodes ill for the retirement system. There is a trend of
executives to utilizing Nonqualified plans, which makes them less
interested in qualified plans with adverse effects on the retirement
plans for the rank-and-file workers. Consultants are promoting this
conversion as a way for small businesses to avoid costly government
regulation of qualified plans. A further reduction in the capital
gains rates would make nonqualified plans even more attractive.
|
There is not a sufficient connection between tax
policy and retirement policy. For example, annuity vehicles should
be promoted through favorable tax treatment that is only available
through the qualified plan system. |
The trend of employers shifting from DB plans to
401(k) plans is not helpful, particularly when the employer does not
contribute. |
|
Testimony of Shlomo Benartzi, Ph.D. on June 11,
2001 |
Dr. Benartzi made a presentation about the Save
More Tomorrow (SMarT) plan developed by him and Richard Thaler of
the University of Chicago to promote employee retirement savings
through use of behavioral economics. He made the following points in
his verbal and written presentations: |
There are three problems with 401(k) plans: (1) not
enough people participate; (2) participants do not save enough; and
(3) participants do not invest wisely. |
There is evidence that automatic enrollment plans
do increase participation in 401(k) plans. But, automatic enrollment
reduces aggregate savings. Employees generally do not elect out of a
plan into which they have been automatically enrolled, and they tend
not to elect out of the default savings rate set by the automatic
enrollment program and not to elect out of the conservative, default
investment. |
Providers are concerned that automatic enrollment
programs produce lots of small accounts that are costly to
administer. |
The psychology of the SMarT Plan is that: people
want to save more but lack self-control; self-control restrictions
are easier to accept if they take effect in the future; people are
very sensitive to perceived losses in their welfare and reductions
in their paychecks; and people are adverse to taking action
(inertia). |
The features of the SMarT plan are: (1) employees
are automatically enrolled into the plan (negative election); (2)
employees pre-commit to higher contribution rates in the future; and
(3) employee contribution rates are increased when the employee's
salary is being increased. Through automatic enrollment
participation rates are increased and through automatic contribution
rate increases synchronized with salary increases the retirement
savings are increased. |
Implementation of the SMarT Plan (without automatic
enrollment) at one company increased participation in the firm's
401(k) plan from 64% to 81% and significantly increased savings
rates. |
Employees may decline to participate in a plan
because they do not speak English and cannot read the material about
the plan. Peer opinion leaders on the job can also influence whether
employees elect to participate. |
|
Testimony of Michael A. Calabrese on June 11,
2001 |
Mr. Calabrese made the following points in his
verbal and written presentations concerning his proposal for using
voluntary, citizen-based retirement savings accounts to increase
pension coverage: |
During the best of times, a majority (over 70
million) of working adults do not have an employment-based pension
plan. |
Federal retirement policy should be recast to be
citizen-based rather than employer-based, and to use matching,
refundable tax credits rather than tax deductions. |
Five important policy goals would be advanced by
citizen-based matching accounts: (1) improving individual retirement
security; (2) increasing national savings and investment; (3)
achieving complete career account portability; (4) transferring the
social benefit burden from employers to society, particularly for
low-income workers; and (5) reducing inequality in both benefit
levels and in saving incentives. |
Among Americans 65 and older, 60% rely on Social
Security for a majority of their income. Forty percent rely on it
for 90% of their income. Even the middle quintile relies on it for
80% of their income. "Baby Boomers" will be as dependent on Social
Security as their parents. According to a "MINT" study commissioned
by the GSA, projections of pension income over the next 30 years
indicate that it will remain essentially the same as today based on
today's coverage rates and growth in the economy. |
Pension coverage in the private sector peaked in
the 1970s and has been declining ever since. Private sector pension
coverage is 2-5% below 1979 levels. From 48% in 1979, coverage fell
to 40% in 1995 (March 1995 CPS) and rebounded to 43% in 1998. The
drop-off has been more severe for men than women. In short, 57% of
all private sector workers lack pension coverage. According to a GAO
study in 2000, 49% of full-time workers lack pension coverage.
|
IRAs are not compensating for this lack of
employer-plan coverage. Only 4% of Americans made an IRA
contribution in 1996. |
According to a GAO study, 85% of working adults who
lacked coverage have one or more of the following four
characteristics: low income, young, part-time employment, or
employment by a small firm (under 100). |
Decline in "old economy" industries has caused some
of the decline in coverage. Coverage, as well as employment, shares
have fallen in every goods producing industry as well as in
transportation, communications, and utilities. Coverage rates, and
employment share, have increased in service producing industries.
Changes in relative size of employer is a major factor. |
The entire decline in pension coverage since 1979
has occurred among blue collar and service occupations. Coverage for
managerial, professional and technical occupations has increased.
|
Among workers under 30, coverage has fallen
dramatically: 43% in 1979, to 30%. Coverage for workers between 30
and 44 has fallen from 56% to 51%. |
A factor in the decline of coverage is the shift
from DB plans to DC plans. Workers have to elect to join a 401(k)
plan. A PWBA study opined that a 10% decline in average
participation rates was attributable to the shift to DC plans.
|
Personal savings rates are at historic lows, and
debt is at an historic high. |
Portability and immediate vesting of pensions are a
better fit with new economy labor trends. Labor mobility is up.
Average job tenure is down. Nearly one-third of the workforce is in
"non-standard" jobs: part-time, temporary, contract worker, or
self-employed. This "free agency" workforce makes traditional
pension coverage less adequate, especially for working mothers.
|
The current system for encouraging employees to
sponsor plans is a public-private welfare system. About $85 billion
in tax expenditures and subsidies flow from the federal government
to big firms that sponsor plans, but lower income workers and small
employers are unable to obtain these incentives. Majority of small
employers (under 500 employees) do not want the burden of sponsoring
plans. |
Employer contributions to plans fell by 3% a year
during the 1990s. Thus the shift from DB plans to DC plans in part.
|
There is a widening inequality in benefit levels
and savings incentives between higher and lower income workers. The
ratio of the value of pension contributions between the highest and
lowest paid one third of jobs had risen to 6 to 1 as of 1999. More
benefit compensation is flowing to the top 20% of jobs. In the
lowest paid jobs, only 9% DB plans as compared to 20% in 1979.
|
Two-thirds of the tax expenditures for pensions
flow to households with more than $100,000 in income. Tax deductions
for pensions favor those in the highest tax brackets and provide
little or no benefit for the bottom third of workers who don't pay
income taxes. The employers can pass little in the form of tax
benefits on to low income workers. |
System should be restructured to provide voluntary
citizen-based retirement savings accounts on top of Social Security.
Accounts would be available to all workers. Deductions would be
replaced by refundable tax credits. Contributions would not be
taxable upon withdrawal. Matching tax credits would apply to
contributions from any source: employer or employee. |
Employers would have an incentive to provide
pension contributions for low income workers. There would be no need
for the anti-discrimination requirements. There would be complete
career portability. If an employer does not sponsor a plan, an
employee could set up his own account and have the employer deduct
contributions from payroll and send them along with FICA payments.
The SSA or the Federal Thrift Savings Plan could manage small
accounts. |
More conventional, incremental reforms to the
current system that would increase pension participation include:
encourage payroll deduction IRAs by requiring employers to forward
deductions at employees' requests; eliminate distinctions among
different kinds of DC plans; require automatic plan enrollment; and,
shorten vesting periods to one year. |
|
Testimony of Teresa Turyn and Ruth Helman on
June 11, 2001 |
Ms. Turyn and Ms. Helman made a joint presentation
on the 2001 Small Employer Retirement Survey conducted by EBRI and
Matthew Greenwald & Associates. They made the following points
in their verbal and written presentations: |
The survey is based on interviews with 601
employers of between 5 and 100 employees; 302 of which sponsor
pension plans, and 299 of which do not. |
90% of plans sponsored by surveyed employers were
DC plans; 5% had only a DB plan; and 5% had both. |
A majority of the DC plans were 401(k) plans (58%);
22% offered SIMPLE plans; 22% offered profit sharing plans; 13%
offered SEP plans. |
Major and minor reasons for offering plans to
employees included the following: positive effect on employee
attitude and performance (61%/25%); competitive advantage in
recruitment/retention (47%/33%); employer obligation to provide
retirement plan (35%/32%); tax advantages for employees (34%/38%);
tax deferred retirement savings for owner (34%/24%); employee demand
or expectations (24%/39%); and availability of employer tax
deduction (22%/35%). |
The most important reason for offering a plan was
the following for surveyed employers: competitive advantage in
recruitment/retention (25%); positive effect on employee attitude
and performance (19%); employers obligated to provide plan (16%);
tax advantages for employees (9%); tax-deferred retirement savings
for owner (7%); tax advantages for key executives (6%); employee
demand/expectation (4%); and availability of employer tax deduction
(4%). |
42% of surveyed employers offered retirement
savings education on an ongoing basis; down from 54% in 2000. The
forms of education included: employee benefit statements (89%);
brochures (79%); individual access to financial planner (71%);
enrollment meetings (67%); newsletters (64%); and on-line services
(54%). |
Major and minor reasons given by surveyed employers
for not sponsoring a plan included: revenue too uncertain to commit
(48%/23%); required company contributions too expensive (46%/20%);
employees prefer wages and/or other benefits (43%/20%); costs too
much to set up and administer a plan (34%/22%); large portion of
workers are seasonal, part-time or high turnover (32%/19%); too many
government regulations (22%/25%); business is too new (20%/12%);
benefits for owner too small (16%/26%); being held liable for
investment decisions of employees (12%/21%); don't know where to go
for information about starting a plan (9%/17%). |
The most important reasons for not sponsoring a
plan were: employees prefer wages/other benefits (19%); revenue is
too uncertain (18%); large portion of workers are seasonal,
part-time, or high turnover (15%); costs too much to set-up and
administer a plan (12%); required company contributions are too
expensive (10%); business is too new (6%); too many government
regulations (4%); don't know where to go for information (1%);
benefits for owner too small (1%); and being held liable for
employee investment decisions (less than 0.5%). |
Despite the DOL's web site and other information
that is publicly available, there is still a substantial lack of
familiarity among employers about SIMPLE plans, SEPs, DB plans, and
other types of plans. |
Based on answers to true-or-false questions about
legal rules governing various types of plans, there is substantial
misunderstanding among plan sponsors and non-plan sponsors alike.
|
Employers not sponsoring plans tended to employ few
workers. Employers with higher gross revenues tended to sponsor
plans. |
Employers sponsoring plans were slightly more
likely to be in business longer, to be in professional services, and
to be non-family owned. |
Workers of non-sponsors are more likely to be
younger, shorter-tenured, lower paid, and less educated. |
Among plan sponsors, the plan had a major or minor
impact on their ability to hire and retain good employees for 53%
and 38% respectively. Among non-sponsors, only 8% considered a plan
as having a major impact on whether the firm could hire and retain
good employees. Among plan sponsors, 34% felt that the plan had a
major impact on employee attitude and performance. Only 6% of
non-sponsors felt that a plan would have a major impact on employee
attitude and performance. |
The following factors would make it much more
likely that a non-sponsor would sponsor a plan: increase in profits
(44%); plan with low administration costs and no employer
contributions required (34%); business tax credits for starting plan
(23%); plan tailored to unique needs of business (22%); plan with
reduced administrative requirements (18%); easy to understand
information (16%); and demand from employees (15%). For 10% of
non-sponsors, nothing would make sponsorship likely. |
69% of employers who do not sponsor a retirement
plan do offer a medical plan. 94% of employers who have a retirement
plan also offer medical insurance. |
|
Testimony of Sylvester Schieber, Ph.D. on July
17, 2001 |
Mr. Schieber made the following points in his
verbal and written presentations: |
Health care costs will be a major retirement cost.
Employer-provided retiree health coverage is going away. The
Medicare benefit is a 1960's benefit at best and is unlikely to be
updated for lack of revenues. Social Security's future is uncertain.
The retirement model that we have been relying on is breaking down.
|
There has been a steady pattern of growth in the
cost of administering pension plans. The cost burden has been
somewhat higher for smaller plans. For smaller DB plans, the
administrative costs outweigh benefit accruals well into a worker's
career. |
Since 1980s, both the number of DB plans and number
of participants in DB plans has decreased. DC plans and
participation continued to grow through the 1990s. |
From the early 1980s to the latter 1990s, when
legislative activity was the most significant, there was a steady
decline in workers covered by plans at lower income levels. There
has been a stabilization in legislative activity and coverage rates
since the late 1990s. |
There is a much higher rate of pension coverage in
the union sector than non-union sector. The long-term decline in the
percentage of the workforce represented by unions has played some
role in the decline in pension coverage. |
The increase in labor force participation by women
and their tendency towards part-time employment is also a factor in
the decline in coverage rates. |
As earnings rise, participation rises. As age
rises, participation rises. |
Employee contribution rates to 401(k) plans average
about 7% of compensation. |
Statistics show that even at lower earnings levels,
people do save and will save if given the opportunity. |
In 401(k) plans with a 100% match, participation
rates are 80% or higher. A match is important to encourage
participation. So, also, is communication with workers about saving.
|
In considering how to increase coverage and
participation, we must focus on the type of plan to which our
culture has driven us - 401(k) plans - and quit beating our heads
against a wall trying to bring back the "good old days" of the DB
plan. |
The fundamental problem with our Nation's
retirement system, including the Social Security system, is that
there is not enough money being put in it. The 401(k) plan system
has been effective in getting money into the system, especially
where there is an employer match. But, only about 50% of employers
sponsor plans. |
Additional voluntary retirement savings could be
generated by allowing individuals to establish Social Security
supplemental accounts, providing a dollar-for-dollar matching
contribution, and providing tax credits for low income workers.
|
Social Security has to be restructured; it needs
more revenue, and benefits have to be raised at the low income
level. |
The annual per capita increase in administrative
costs for DB plans between 1981 and 1996 as 8.03% for DB plans with
15 participants, 6.25% for DB plans with 75 employees, 6.46% for DB
plans with 500 employees, and 7.43% for DB plans with 10,000
participants. Administrative costs for DC plans increased between
1981 and 1996 at an annual rate of 5.05% for DC plans with 15
employees, and 4.42% for DC plans with 10,000 participants. The per
capita administrative cost in 1996 for a DB plan with 15
participants was $619.93; for a DB plan with 75 participants was
$345.68; for a DB plan with 500 participants was $173.62; and, for
10,000 participants was $68.33. The per capita administrative cost
for a DC plan with 15 participants in 1996 was $287.20; $49.19 for a
DC plan with 10,000 participants. |
There is a need to educate people about the value
of an annuity, a stream of income for life. People are afraid of
dying before receiving value for their money. This should be
addressed by product design. |
|
Testimony of David Blitzstein on July 17,
2001 |
Mr. Blitzstein made the following points in his
verbal testimony concerning the important role of multiemployer
plans in pension coverage and participation: |
The UFCW believes that all workers, including
part-timers, should be covered by a pension plan. Pension coverage
is a top bargaining priority, for members as well as the leadership.
|
The UFCW is a strong advocate of DB plans. They are
measurable, secure, and provide lifetime annuities so that
pensioners do not outlive their retirement income. |
DC plans should be supplements to DB plans.
|
Multiemployer plans, which cover 5 million actives
and 3 million retirees, are an untapped resource for policymakers to
address pension coverage and participation problems. They offer
several advantages. A multiemployer plan provides a central, pooled
fund for workers in mobile, decentralized industries in which single
employers would not have the money or interest to establish their
own plans. These plans have internal portability; a worker who
changes jobs. |
Employers' ability to exclude union employees from
401(k) plan coverage should be restricted. |
Direct transfers from DC plans to DB plans should
be permitted to allow a participant to convert his DC plan account
into an annuity from the DB plan. There is a PBGC priority issue
that needs to be resolved. |
Pre-tax employee contributions to a DB plan should
be allowed. A 401(k)-type structure within a DB plan should be
permitted. |
Employers should be granted tax credits for
contributions to multiemployer DB plans. |
The positive effect on worker productivity of
pension coverage deserves further study. |
There should be more education about DB plans. This
could be advanced by requiring DB plans to issue annual benefit
statements that include estimates of benefits at early and normal
retirement. |
|
Testimony of Alicia Munnell on July 17, 2001
|
Ms. Munnell, formerly a member of the President's
Council of Economic Advisors, an Assistant Secretary of the Treasury
for Economic Policy, and former Senior Vice President and Director
of Research at the Federal Reserve Bank in Boston, made the
following points in her verbal and written presentations: |
She addressed four issues: (1) many low and
moderate earners do not have pension coverage even though they need
more than Social Security income for retirement; (2) expansion of
the employment-based pension system is unlikely and may not be in
the best interest of low income workers; (3) the dramatic expansion
of DC plans has created problems not associated with DB plans (i.e.,
voluntary participation, lump sum pay-outs, and over-investment in
company stock; and (4) protection against inflation is an important
issue for DB and DC plans. |
In 1999, only 40% of the private sector workforce
(ages 25-64) was covered by a pension plan. This coverage has
remained virtually unchanged since 1979 despite the economic boom.
|
Pension coverage is sharply related to earnings for
males and females; coverage drops off as earnings decline.
|
The question is how to provide pension protection
beyond Social Security for low income workers. |
The tax treatment of pensions is more favorable
than that for any other type of savings. |
The strategy of using favorable tax treatment to
encourage qualified plan coverage for low income workers has failed.
The current system provides very little to the bottom 40% of the
income distribution. |
Higher employer provided pensions would result in
lower wages. |
The system should be reformed by taking lower
income workers out of the employment-based system and putting them
into a USA-type account like those proposed by President Clinton.
This would involve two components: (1) tax credits for
contributions, and (2) a matching contribution for low income
individuals. |
A problem with 401(k) plans is the shift of the
burden for providing for retirement to the employee: whether to
participate, how much to contribute; and how to invest. About 25% of
employees offered a 401(k) of employees offered a 40(k)plan choose
not to participate. Lower income, younger, less educated, less
tenured workers tend not to participate. People with short planning
horizons may choose not to participate. |
Plan structure also affects the decision whether to
participate: whether there is an employer match, and whether plan
loans are available. |
Education is helpful in getting workers to
participate. |
Human inertia is also a factor affecting
participation. The negative election movement may help increase
participation. |
The payment of lump sum distributions by DC plans
is a problem. These create problems of under consumption in
retirement as well as of outliving retirement income. Only 27% of
401(k) plan participants have an annuity form of benefit available.
|
Participants who receive a lump sum tend not to buy
annuities from insurance companies, perhaps out of concern about
loss of liquidity and the cost of annuities. Also, people are afraid
of dying before getting value from the annuity. |
The issue of post-retirement inflation protection
has not received enough attention. Annuities tend to be fixed
amounts. Inflation indexed annuities would make a good default form
of benefit for DC and DB plans. |
|
Testimony of Ron Gebhardtsbauer on July 17,
2001 |
Mr. Gebhardtsbauer made the following points in his
verbal and written presentations: |
The rate of private pension participation has been
declining. Factors include the increase in contingent workers, the
increase in DC plans, and the decrease in DB plans. 401(k) plan
participation rates are not as good as DB plan rates and even money
purchase DC plan rates. |
Coverage rates have increased among small firms,
perhaps because of recent legislation. But, the legislation has not
helped DB plans and large employees. |
Cost of plans, particularly DB plans, discourages
sponsorship. 401(k) plans can use employee pre-tax money. The
volatility of contribution requirements also discourages DB plan
sponsorship. |
Complex restrictive and conflicting laws and
regulations discourage plan sponsorship. DB plans cannot be adopted
to workforce needs. |
Other factors discouraging plan sponsorship are the
cost of plan administration and compliance, unpredictable revenue
flows (especially for new and small employers), the part-time and
seasonal nature of employment, the lack of valuing of DB benefits
and tax advantages, the lack of sense of need, employees' belief
that they don't need any more than Social Security, and employers'
lack of knowledge about simple alternatives. |
A Hay Huggins study showed that administrative
costs have increased a lot, and these costs may wipe out the tax
advantages. This is a concern for large employers as well as small
employers. |
DB plans have higher participation rates, involve
less risk for employees, and provide annuities. |
The EGTRRA added a tax credit match for DC plans
but not for DB plans. This is another example of legislation
favoring DC plans over DB plans. There are other problems with the
tax credit provision (e.g. not refundable, so lowest paid get no
match, worker won't know match until end of the year, creates cliffs
when the match rate changes). |
The EGTRRA tax credit for administrative costs is
limited to small employers. The credit should be increased or given
to all employers. |
The regulatory rules are confusing to employers and
employees, and these rules can interfere with beneficial plan
design. The rules need to be simplified. |
There should be one pension regulatory agency to
ensure consistent rules. Joint rule-making could be the first step.
|
Incentives are better than mandates. For example,
tax credits or lower tax rates could be given to annuities.
Employers could be incented with higher maximum or less regulation
to have negative elections (at hire date and pay increase dates),
coverage of all workers (part-time, temps, contractors). |
Action that the government could take to increase
coverage of low income workers include making the tax credit
refundable. |
Preparing for retirement was easier 25 years ago:
there were fewer employers; more DB plan coverage; people saved
more; workers tended to retire at age 65; retirement planning was a
matter of adding DB plan monthly benefits to Social Security.
|
Since then: job tenures have declined steeply;
particularly for men ages 45-54; retirement age is down to 62 or
below; people live two years longer; employees tend to be covered by
DC plans that do not provide annuities; people save less and are
indebted more; and DB benefits plus Social Security are not adequate
to cover basic expenses. It is a lot more difficult to decide when
to retire today. |
Workers may think that $100,000 is a lot to retire
on. In fact, $100,000 will buy an annuity of only $10,000 per year
for a male at age 65, $9,000 for a female at that age. Indexed
annuities and annuities at a younger age will produce even lower
annual amounts. |
An alternative to an annuity is spending the right
amount out of the nest egg each year. But to know how much to spend
requires knowing when you are going to die. If they guess wrong,
they could run out of money and be unable to return to work at an
advanced age. The government would end up with the liabilities.
|
The remedy is education regarding the need to save,
about the value of DB plans, and about the "de-accumulation" or
pay-out of pension benefits. |
Education is needed on when to retire; that normal
retirement age should be 70, not 55 or 62. We are living longer,
health status now at 70 is about what it used to be at 65, there are
fewer DB plans with subsidized early retirement, and Social Security
is moving to age 67. Pension plans should be allowed to increase
normal retirement age to 70 and move the mandatory distribution age
to 75 or 80. Perhaps participants should be allowed to transfer
money between their DC and DB plans, and buy annuities from their DB
plan. |
The DOL web site and the SSA statements are
helpful. But, effective education needs to be personalized because
of variations in the amounts that workers have and how much lifetime
income they would produce. For example, DC plan or 401(k) account
statements the amount of lifetime income that the balance would
provide (perhaps only for people over 50), although that would be a
complex task. |
Personalized education is needed also because
income replacement needs vary. While some expenses may decline in
retirement (e.g., work-related expenses, taxes), Medigap policy and
long-term care costs need to be considered. |
Personalized education is needed also on the issue
of whether to take your pension in a lump sum. |
Retirement income needed for 100% replacement of
spendable income at age 65 (for a single person) ranges from 120% of
wages for a person with $10,000 in income just before retirement to
about 80% of pre-retirement income for a person earning $100,000
just before retirement. |
The Pensions Assistance List of the American
Academy of Actuaries is a listing of actuaries who are available to
help people with retirement planning questions. |
Annuities can provide better benefits than a "do it
yourself" approach. Insurers can pay higher benefits because of
mortality experience and their ability to lock-in bond yields.
Annuities have additional advantages: payable for life at a fixed
rate (no longevity or investment risk); inflation risk can be
eliminated with indexed annuities; and annuities have tax
advantages. |
Public and tax policy should encourage lifetime
pensions, long-term care, and Medigap policies. |
|
Testimony of Anna Rappaport on July 17, 2001
|
Ms. Rappaport made the following points in her
verbal and written presentations on the challenges of the
post-retirement period which she illustrated through the "Story of
Joan": |
As people age, there are significant changes in
their family status, in their health, in their ability to get
around, in their ability to care for themselves and their property.
They may require increasing levels of paid assistance. Even if they
have long-term care policies, they may need costly assistance even
before the policies are triggered. The average family could not
afford the costs. |
Average periods of widowhood are long. |
More people are working during retirement.
Retirement is not well-defined these days. |
Key factors in the post-retirement environment
include an individual's health and functional status, the fact that
more benefits are paid as lump sums, there are longer periods of
widowhood, single women are less well-off, work during retirement is
increasing, and pensions and individual savings drive resources.
|
The Society of Actuaries has been sponsoring a
Retirement Needs Framework Project to: understand the needs of the
elderly, post-retirement events, and sources of security; to explore
modeling of events and data; to identify mismatches or gaps in the
security systems (financial products vs. income needs, public policy
vs. retirement needs); and to support building better retirement
systems. |
Post-retirement events or risks include inflation,
death of family members, changes in functional status, unanticipated
needs by family members; unanticipated medical needs, changes in
housing needs, and special interests. All of these events have an
economic impact, vary in their predictability, may or may not be
coverable by existing financial vehicles, and available vehicles may
or may not be adequate. |
Retirement assets are needed for basic retirement
income, to pay for acute medical services, to pay for (or insure)
long-term care, to help other family members, and for travel,
hobbies, and retirement dreams. |
The risk of out-living assets is not getting enough
attention. Other mismatches include: retirement patterns and public
policy; cost of special help and LTC; inadequate medical coverage;
income changes vs. need changes (death of spouse); functional status
change - need for help; inadequate inflation protection; family
members need help; annuity products to fit needs; inability to
manage large sums of cash; and tax management challenges. |
These mismatches represent problems as well as
identify areas for development of insurance, financial products, and
benefits and identify public policy issues (Social Security,
employee benefits and tax policy, and insurance policy). |
One study estimated future health care costs
(present value) per person at age 65 as follows: acute care -
$93,500 to $114,600; LTC - $57,000 to $67,000; total cost - $150,000
to $182,000. Medicare pays about 50-55%. |
LTC insurance pays under 10% of LTC needs today.
Families provide most care. |
Sources of security include Social Security,
pensions, personal savings and assets, housing, LTC insurance, and
life insurance. These should be thought of as an investment
portfolio. |
For 40-50% of population, Social Security is the
main source of security. That is unlikely to change. |
Family structure is a very important source of
security. |
Issues affecting women include differences in life
span, many elderly women are alone, families are better off than
individuals, declines in economic status at widowhood, work history
effects old age security, less likely to have family care giver, and
Social Security issues. |
Issues around annuitization include: the risk of
out-living assets; level annuities without indexation don't do a
good job; and concerns about privatization of Social Security
without mandatory annuities. |
The benefits of lump sum payments include:
flexibility in planning; control over assets; assets are available
for heirs in the event of early death; and they allow a home
purchase or savings for future frailty. Threats of lump sums
include: money will be spent for non-retirement purposes; out-living
assets; and under-spending. |
From an employer's perspective, lump sums: may
conflict with goal of providing retirement income. But employees may
want them and they reduce administrative costs. Employees may want a
lump sum because it gives them control over their money and many
have little idea of their long-term needs. Many advisors have been
recommending lump sums. |
Survey shows that 64% of retirees who continue to
work do so because they enjoy work or want to stay involved. 37%
work to make ends meet. 37% work for health insurance or other
benefits. 36% work for extra spending money. Post-retirement
employment is typically not at the career company, and is
self-employment or part-time. |
Employers see a decline in early retirement
subsidies and DB plans with the shift to DC plans. There is more
flexibility for individual work schedules, few formal phased
retirement programs, and quite a lot of rehired retirees. |
Causes of changing retirement patterns include
structural changes: Social Security is more age neutral; mandatory
retirement has been ended; DC plans are more age-neutral; fewer jobs
are physically demanding; family structures have changed (e.g.
working spouses); and employees tend to have more employers and
careers. Cyclical causes include: economic cycles; shortage of
skilled workers; and very low unemployment. |
There has been a large improvement in the economic
status of the elderly. But, there is still too much poverty. 50% of
people rely heavily on Social Security. Government systems are in
decline. Savings are inadequate. LTC financing is inadequate. More
people are working after retirement. The population will age
dramatically. These developments present challenges to society, to
employers, and to individuals to focus more on post-retirement needs
and how to meet them. |
There are many issues of particular concern to
women, including Social Security privatization, and consents to
waivers of spousal benefits. |
|
Testimony of Teresa Ghilarducci on July 17,
2001 |
Professor Ghilarducci made the following points in
her presentation about multiemployer and multiple employer plans:
|
Multiemployer plans have a surprisingly large
effect on pension coverage. 30% of the 64 million workers covered by
pension plans are covered by multiemployer plans (of which 46% are
collectively bargained plans). |
Multiemployer plans tend to cover small employers.
|
Tax incentives for sponsoring a pension plan
decline when tax rates fall; for every 1% drop in personal tax
rates, coverage falls by .4%. |
Employers do not sponsor pension plans if their
employees do not want them, according to traditional economic
models. |
The trend has been towards more cash, even though
the workforce is aging. The trend is also towards the individual
responsibility model of employee benefits: pension coverage is
falling in most industries and occupations; job insecurity and
turnover is increasing; and pension plan structures are shifting to
401(k) plans and to plans that reduce rewards for long-service with
one employer. |
Industry norms, as well as tax treatment and worker
demand, influence plan sponsorship. The largest industries have a
declining employment share and are making a smaller contribution to
employee benefits relative to total compensation. |
The economic consequences of the drive towards cash
and lower job tenure include productivity losses, inadequate
retirement income, and more elderly labor force participation.
|
Institutional barriers to expanding pension
coverage, even where firms and workers want it, include: collective
action problems and industry norms; the economies of scale - small
firms cannot afford plan coverage alone; poor management that is
short-sighted; and workers' failure to reveal preferences due to
lack of an effective voice. |
Multiemployer plans reduce these barriers to plan
coverage. Workers are induced to stay within their industry and
occupation. Stability is provided despite employer change. Economies
of scale are provided by the common plan. The plan can be tailored
to the particular needs of specific groups Many low income
industries depend on multiemployer plans to provide DB plan
coverage. Some high skill industries also depend on multiemployer
plans to deliver DB plan coverage. This is often because the workers
are unionized. |
The governance structure of a multiemployer plan
favors participants and allows plans to offer more generous
benefits. |
Multiemployer plan coverage should be encouraged
for low and middle income workers by: facilitating the sponsorship
of plans by affinity groups; investigating why the pension
consultants are not pushing DB plans; provide tax credits for
contributions to DC plans with DB features; and encourage employers
to form multiemployer plans. |
|
Testimony of Diane Oakley and Richard Hiller on
July 17, 2001 |
Ms. Oakley and Mr. Hiller made the following points
in their verbal presentation on the retirement planning process for
pre-retirees: |
Part of TIAA-CREF's charter mission is education
about retirement. It sponsors retirement seminars and seminars on
investing for women. Information is provided also through booklets,
one-on-one counseling, software, and web sites. Internal service
quality is monitored. Research on retirement issues is conducted.
|
Decision-making about how to take pension benefits
has become more complex over the past 20 years. The need for
education is more critical, particularly with regard to annuities,
investment performance, inflation, the need for a lifetime income,
and how even small changes in circumstances can significantly impact
on resources. |
There are significant implications for choosing a
systematic withdrawal of assets versus a life annuity as a source of
retirement income. Under a systematic withdrawal approach, a slight
change in the amount of each withdrawal can make a big difference
later on; assets could be exhausted. The investment mix and
performance of the assets can make a big difference in how long the
assets will provide retirement income. Inflation can greatly affect
the adequacy of assets to provide a lifelong retirement income. A
life annuity can address these risks. Annuity benefits factor in
mortality of the pool as well as investment performance. |
Pension coverage is extensive in the higher
education community. This is largely attributable to the fact that
employees and employers came together and agreed on standards for an
adequate pension plan. One principle sees an adequate pension as
that which would replace 60% of pay with inflation in conjunction
with Social Security. |
An important factor in expanding pension coverage
is keeping the plan simple and easy to administer. |
Another important factor is mandatory participation
pension plans, as is the typical situation in the higher education
community. |
Employer matching contributions is another
important factor in plan participation. |
Pension portability is a growing issue in the
education community due to increased mobility. Portable pensions are
a recruitment tool in times of teacher shortages. There is a need to
find more cost efficient ways to administer plans serving small
employers perhaps by the Internet. |
The most effective tool for helping people to make
good retirement decisions is one-on-one counseling about how to
structure their overall financial picture in relation to their
TIAA-CREF plan. The counseling session is more valuable if the
person has already attended a basics seminar. |
|
Testimony of Patrick Purcell on July 17,
2001 |
Mr. Purcell made the following points in his
testimony concerning pension coverage and participation in addition
to submitting several papers on the subject authored by him for the
CRS: |
Few small employers sponsor DB plans; only 660,000
people were in DB plans of 100 or fewer participants in 1997. Yet,
there were 47 million employees who worked for firms of 100 or fewer
employees; 26 million full-time workers ages 25-64. In contrast, 9.2
million workers of such employers were in DC plans. This is a DC
plan world now. |
Only 17% of workers between ages 21-64 without
employer plan coverage had an IRA in 1999. |
The average personal savings rate is very low. In
2000, the rate was actually negative for the first time since 1933.
|
In 1998 about 66 million workers ages 25-64 didn't
have a retirement account of any kind. 59% of full-time workers
lacked a retirement savings plan. |
Average account balances are low: in 1998, the mean
value of all IRA and 401(k) accounts was $35,000, and the median
value was only $14,000. For ages 55-64, the average account balance
was about $57,000. A $57,000 account for a 65 year old in May 2001
would purchase a single life annuity of only $450 per month.
|
Another form of savings is home ownership. We have
a high rate of home ownership. But, homes are not liquid assets.
|
In October 2001, the average Social Security
benefit for a retiree was $815 per month. Social Security reform
will likely result in lower benefits. |
The 66 million workers without coverage are
disproportionately younger. But, many are close to retirement and
face a reduced standard of living. |
A retiree will likely need 80% of pre-retirement
income to maintain his standard of living. But, retirement assets of
the average household will not support that replacement rate.
|
Direct government subsidies for retirement accounts
is unlikely. |
One of the most important roles for government is
retirement planning education. Retirement income is increasingly an
individual responsibility in this DC plan world. People need more
information, including employers. Government may not be devoting
sufficient resources to education. Public-private cooperation is
needed. |
DB plans provide valuable protection against
above-average longevity, against investment risk, and against career
ending compensation increases. Insurance company annuities do not
provide all of these protections, including pre-retirement
investment risk shifting and sudden compensation increases late in
your career. |
|
Additional
Information Sources |
Actual Transcripts/Executive Summaries for the
Council's full meetings and working group sessions are available at
a cost through the Department of Labor's contracted court reporting
service, which is Neal R. Gross and Co., Inc. 1323 Rhode Island
Avenue, NW, Washington, DC 20005-3701 at 202.234.4433 or
www.nealgross.com. |
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April 9, 2001: Working Group on Increasing
Coverage, Participation and Savings
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Agenda
-
Official Transcript
-
Strawman outline for group's study
for the year
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Written Statement by Dallas L.
Salisbury, President and CEO, Employee Benefit Research Institute
on Increasing Pension Coverage.
-
Series of Slides used in Oral
Presentation by Richard Hinz, Director of Policy and Research,
Pension and Welfare Benefits Administration, April 9, 2001.
-
EBRI Womens Retirement Confidence
Survey - 2000, February 2001 Notes Article
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EBRI Retirement Plan Participation
from the January 2001 Notes article on Retirement Plan
Participation: Full-time, Full-year Workers Ages 18-64.
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Small Employer Retirement Survey (SERS), sponsored by
EBRI, the American Savings Council and
Matthew Greenwald & Associates, Inc.
-
SMALL Plans New Penchant for
Pensions by Jinny St. Goar, February 2001 issue of Plan Sponsor
Magazine.
-
Written Statement of Stuart Sirkin,
Pension Benefit Guaranty Corporation - Summary of Comments by the
PBGC Defined Benefit Plan Working Group on July 14, 1998.
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May 3, 2001: Working Group on Increasing
Coverage, Participation and Savings
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Agenda
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Official Transcript
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Revised Project/Request for Input
for Working Groups Course of Study and listing of potential
additional sources of information for discussion.
-
CitiStreet Launches Internet-Based
401(k)Service, April 24, 2001, excite.com
-
Written Testimony of Edward Ferrigno, vice president of Washington affairs, the Profit Sharing
Council of America as well as a release on the PSCA's Auto
Enrollment 2001 Study.
-
Packet of promotional materials from
witness Cindy Hounsell, executive director of WISER, the Womens
Institute for a Secure Retirement.
-
Participation in Retirement Plans: A
Comparison of the Self-Employed and Wage and Salary Workers by
Sharon A. Devaney and Yi-Wen Chien in the Winter 2000 issue of
Compensation and Working Conditions, Bureau of Labor Statistics,
U.S. Department of Labor.
-
Series from about.com on retirement
issues, authored by Greg Hanna, March 28, 2001 and another article
by Hanna entitled Are You Planning?.
-
Executive Summary - Baby Boomers
Envision Their Retirement: An AARP Segmentation Analysis.
-
March 2001 Forum from Aon Consulting
regarding the Aon Consulting/Georgia State Replacement Ratio Study
entitled Benchmarking Retirement Income Needs.
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Characteristics of Persons in the
Labor Force Without Pension Coverage by the General Accounting
Office, GAO/HEHS-00-131, dated August 2000. and Top-Heavy rules
for Owner-Dominated Plans, GAO/HEHS-00-141, dated August
2000.
-
SIPP 1996 Wave 7 Topical Module CAPI
Specifications - Retirement Expectations and Pension Plan Coverage
Topical Module from the U.S. Census Bureau (showing the kinds of
questions posed to American workers).
-
Institute Releases Ad Hoc Survey on
Simple IRAs as of December 31, 2000, Mutual Fund Connection,
Investment Company Institute.
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Boom Time for Gen X? Older than you
think, and smarter, too, they are making, savings and figuring out
money by Dan Zevin, U.S. News online, July 10, 2000.
-
Meeting the Investing Needs of All
Plan Participants by Marianne Leedy, DFP, CRC, Vice President, the
Scarborough Group.
-
GenX preps for retirement: young
investors upbeat on finances, but realize bull market won't last
by staff writer, Jennifer Karchmer, February 29, 2000, CNNfin, the
financial network.
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June 11, 2001: Working Group on Increasing
Coverage, Participation and Savings
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Agenda
-
Official Transcript
-
Summaries of witnesses appearing in
May
-
Save More Tomorrow: Using Behavioral
Economics to Increase Employee Saving by Richard H. Thaler and
Shlomo Benartzi, April, 2001. Also provided overheads
-
EBRI Finds Retirement Confidence,
Preparation Vary Among Ethnic Groups from Plan Sponsor, May 9,
2001, plus EBRI's President on the Evolution of the Sponsor's
Role. May 10, 2001
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Fewer Americans Are Saving for
Retirement as Falling Market Takes Toll on Attitudes, Glenn
Ruffenach, Wall Street Journal, January, 1999.
-
Packet from the Employee Benefit
Research Institute focusing on the Small Employer Retirement
Survey and overheads used during the presentation by Teresa Turyn,
EBRI, and Ruth Helman from Mathew Greenwald Research
Associates.
-
Testimony of Michael A. Calabrese,
Director of the Public Assets Program, New America Foundation and
copies of his overhead slides.
-
Bridging the Cultural Divide: Part
One: Speaking Your Employee's Language, May 31, 2001, and Part
Two: Know Your Employees, June 1, 2001, Plan Sponsor
Magazine.
-
Retirement Saving - We're Still
Behind the Curve, by Scott Burns, June 5, 2001, Dallas Morning
News
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July 17, 2001: Combined Meeting of Working
Groups on Increasing Pension Coverage and Preparing for
Retirement
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Agenda
-
Official Transcript
-
Considerations for a Voluntary PSA
Plan in Reforming Social Security, August 2000, and Background
Materials for the Joint Session by Sylvester J. Schieber, PhD,
Vice President, Watson Wyatt Worldwide. (Also provided Watson
Wyatt Suggests Whipsaw Fix from the Watson Wyatt Insider.
-
Written Statement of Ron Gebhardtsbauer, Senior Pension Fellow, American Academy of
Actuaries, including Criteria for Retirement Plan Legislation and
Regulation.
-
Written Statement of Alicia H. Munnell, Peter F. Drucker Professor of Management Sciences, Boston
College Carroll School of Management.
-
Packet of Materials from Anna Rappaport, William M. Mercer, Inc., including Focusing on
Retirement Needs: The Period After Retirement, Journal of
Financial Service Professionals, July 2000; The Story of Joan;
Characteristics of Post-Retirement Events; Making Your Money Last
for a Lifetime, a pamphlet from WISER; Retirement Implication of
Demographic and Family Change Symposium, November 29 - 30,
2001.
-
De-linking Benefits from a Single
Employer: Alternative Multiemployer Models, by Teresa Ghilarducci,
University of Notre Dame, with assistance from David Blitzstein,
United Food and Commercial Workers International Union, prepared
for a 2001 Pension Research Council Symposium April 30-May 1,
2001, and her slides Multiemployer Plans for Casual Labor Markets
for the meeting.
-
Copies of slides used in the
testimony of Richard A. Hiller and Diane Oakley, TIAA-CREF, as
well as the organization's AYour Retirement Income Planning Kit,
and Saving for Retirement: The Importance of Planning by Professor
Annamaria Lusardi of Dartmouth College for TIAA-CREF's Research
Dialogue.
-
Retirement Savings and Household
Wealth in 1998: Analysis of Census Bureau Data (May 8, 2001),
Pension Coverage and Participation: Summary of Recent Trends
(November 6, 2000), and Older Workers: Trends in Employment and
Retirement (July 26, 2000), all by Patrick J. Purcell, Special in
Social Legislation, Domestic Social Policy Division, Congressional
Research Service.
-
Automatic 401(k) Enrollment Can Be a
Costly Benefit - Many workers fail to upgrade from
low-contribution, low-risk default options, to portfolios'
detriment by Josh Friedman, Los Angeles Times, July 11,
2001.
-
Automatic enrollment survey and
reader verbatims, Plan Sponsor.com, July 11, 2001.
-
Time May Not Be on Automatically
Enrolled Employees' Side: Hewitt Study Shows Automatic Enrollment
in 401k Plans Works Against Some Employees, Helps Others, Business
Wire, July 10, 2001.
|
September 11, 2001: Working Group on Increasing
Coverage, Participation and Savings
-
Agenda
-
Official Transcript
-
Outline of Draft Report
|
October 15, 2001: Working Group on Increasing
Coverage, Participation and Savings
-
Agenda
-
Official Transcript
-
Outline of Approaches to Expanding
Coverage, Participation & Benefits by James Ray as well as a
bullet point piece by Patrick McTeague on a new approach to
expanding coverage.
-
Abstract dated October 5, 2001 on
Pension Sponsorship and Participation: Summary of Recent Trends
from the Congressional Research Service.
-
Cash Flow: Help for Those of Modest
Means, Low Income Tax Credit Is a Winner, but It's Complicated@
story from the Sunday, Oct. 14, 2001 Washington Post by Albert B.
Crenshaw.
|
|
Advisory Council
Members |
-
James S. Ray, Chair
-
Judith F. Mazo, Vice Chair
-
Evelyn F. Adams
-
Shlomo Benartzi
-
Janie Greenwood Harris
-
Catherine L. Heron
-
Timothy J. Mahota
-
Patrick N. McTeague
-
Robert P. Patrician
-
Norman Stein
-
Ronnie Susan Thierman
-
Michael J. Stapley, Chair of Advisory
Council
-
Rebecca Miller, Vice Chair of Advisory
Council |
|
Footnotes |
-
See testimonies of Richard Hinz,
Michael Calabrese, Sylvester Scheiber, Alicia Munnell, Ron
Gebhardtsbauer, and Patrick Purcell summarized in part VI of this
Report. .
-
Id.
-
See the Report of the Working Group
On The Merits Of Defined Contribution Vs. Defined Benefit Plans of
the 1997 ERISA Advisory Council (available on the DOL-PWBA web
site).
-
The plan sponsorship and
participation rates by size of firm (number of employees) were as
follows: under 10 employees (20% coverage, 15% participation),
10-24 employees (32% coverage, 24% participation), 25-99 employees
(48% coverage, 36% participation), 100-499 employees (61%
coverage, 46% participation), 500-999 employees (68% coverage, 54%
participation), 1,000 or more employees (74% coverage, 57%
participation). See also testimonies of Ed Ferrigno, Michael
Calabrese, Ron Gebhardtsbauer, Alicia Munnell, and Patrick
Purcell.
-
The SERS defined a small employer as
one that employs between 5 and 100 full-time employees.
-
See testimonies of Richard Hinz,
Teresa Turyn, Sylvester Scheiber, and Michael Calabrese in part VI
of this Report.
-
Id. See also testimonies of Shlomo
Benartzi and Teresa Ghilarducci in part VI of this Report.
-
According to Richard Hinz, "the most
powerful explanatory variable [for pension coverage and
participation] is collective bargaining status." 81% of workers
covered by a union contract were employed by firms with a pension
plan (of which 70% participated in the plans). In contrast, 56% of
workers not covered by a union contract were employed by firms
with a pension plan (of which 41% participated). Even at various
earning levels, workers covered by a union contract have higher
pension coverage rates than workers who were not covered by a
union contract. See also testimonies of Sylvester Scheiber, Teresa
Ghilarducci and David Blitzstein.
-
See testimony of Teresa Ghilarducci
and of David Blitzstein in part VI of this Report.
-
See testimonies of Sylvester J.
Scheiber and Ron Gebhardtsbauer in part VI of this Report.
-
Id. The compound annual growth rate
in per capita administrative costs for defined benefit plans by
plan size was as follows: 15 employees-8.03%, 75 employees-6.26%,
500 employees-6.46%, and 10,000 employees-7.43%. The growth rate
for defined contribution plans was as follows: 15 employees-5.05%,
10,000 employees-4.42%. The 1996 per capita cost for a DB plan
with 15 employees was $619.93 versus $173.62 for a DB plan with
500 employees. The 1996 per capital cost for a DC plan with 15
employees was $287.20 versus $49.19 for a plan with 10,000
employees.
-
See Summary Of Comments On Defined
Benefit Plans Received By The PBGC Defined Benefit Working Group,
July 14, 1998, citing Hay Group study.
-
Id.
-
This concern was a substantial
motivation for provisions of the Economic Growth and Tax Relief
Reconciliation Act of 2001 that increased various benefit and
contribution limits and made other improvements in the tax
incentives for qualified plans.
-
See testimonies of Brian Graff, Ed Ferrigno, and Gebhardtsbauer in part VI of this report.
-
See also testimony of Ron
Gebhardtsbauer in part VI of this Report
-
See testimonies of Richard Hinz,
Cindy Hounsell, Michael Calabrese, Sylvester Scheiber, Alicia
Munnell, Ron Gebhardtsbauer, Anna Rappaport, and Patrick Purcell
in part VI of this Report.
-
See testimonies of Michael
Calabrese, Sylvester Scheiber, Alicia Munnell, and Patrick
Purcell.
-
See testimonies of Richard Hinz,
Michael Calabrese, Sylvester Scheiber, Ron Gebhardtsbauer, and
Patrick Purcell.
-
See testimonies of Teresa Turyn and
Richard Hinz in part VI of this Report.
-
See, for example, testimonies of
Cindy Hounsell, Shlomo Benartzi, Sylvester Scheiber, Alicia
Munnell, Anna Rappaport, and Diane Oakley in part VI of this
Report.
-
Id.
-
See, for example, the testimonies of
Cindy Housell, Shlomo Benartzi, and Alicia Munnell concerning the
role of human inertia.
-
See testimonies of Sylvester Scheiber, Shlomo
Benartzi, Alicia Munnell, and Ron Gebhardtsbauer
concerning the incentive provided by an employer match in part VI
of this Report.
-
See testimonies of Ed Ferrigno,
Michael Calabrese, Sylvester Scheiber, and Alicia Munnell in part
VI of this Report.
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