Report of the Working Group on Small Business: How to Enhance and Encourage the Establishment of Pension Plans

The Working Group Report, submitted to the ERISA Advisory Council on Nov. 13, 1998, was approved by the full body and subsequently forwarded to the Secretary of Labor. The ERISA Advisory Council was established by Section 512(a)(1) of the Employee Retirement Income Security Act to advise the Secretary with respect to carrying out his/her functions under ERISA.

November 13, 1998

TABLE OF CONTENTS

I. Working Group's Purpose and Scope

A. Executive Summary

II. Recommendations

III. Background and Findings

A. Impact of Demographics on Retirement Security

B. Three-Legged Stool of Retirement

C. Social Security

D. Trends in Personal Savings

E. Lack of Retirement Planning by Workers

F. Shift to Defined Contribution Plans

G. Obstacles for Small Employers

H Impact of Globalization

I. Difference in Coverage Between Large and Small Employers

J. Summit on Retirement Savings

K. How to Motivate Americans to Save

L. Contingent Workforce and Small Employer Plan Sponsorship

M. Conclusion

IV. Working Group Proceedings and Summary of Oral Testimony

V. Exhibits and Written Materials Received

A. Index for Small Business Working Group

VI. 1998 Small Business Working Group Members

WORKING GROUP ON SMALL BUSINESS: HOW TO ENHANCE AND ENCOURAGE THE ESTABLISHMENT OF PENSION PLANS.

The Small Business Working Group respectfully submits the following report to the 1998 ERISA Advisory Council.

1. WORKING GROUP’S PURPOSE AND SCOPE.A. Executive Summary.

The 1998 Advisory Council on Employee Welfare and Pension Benefit Plans created a Working Group to study the pension coverage of employees who are employed by small businesses. In choosing this topic, council members expressed concern that pension coverage for many working Americans is eroding. For a large majority who are working for small employers it is nonexistent. This universe of constituents, employers and employees need more education about the pension plan options available and incentives to establish worker retirement savings.

The primary objective of this study is to focus on the small employer community and: (1) evaluate the reasons for such paltry coverage, (2) make recommendations from the information gathered to embellish on what the Department of Labor is already doing in this area, and (3) suggest a methodology to enhance and encourage the education of workers and their employers about the need for more pension coverage. This effort is truly a laudable social and economic goal as we wrestle with the notion of a national retirement policy.

The Department of Labor has had a commitment to the small business community recognizing the need for American workers to be educated as to the importance of retirement planning and saving. The Department’s strategic goal of providing protection of workers’ benefits and the recognition that a secure work force provides economic security for workers and their families represents a strong impetus for the Working Group’s mission.Achieving financial security for retirement is a complex process that is not getting easier. The need to educate American workers and employers on the importance of planning and saving for a secure, comfortable and dignified retirement is critical. The private voluntary retirement system came into being in the last century and was enhanced following the adoption of legislation of substantive tax incentives after the establishment of the Tax Code in 1913. The growth and development of the organized trade union movement as a powerful advocate of social and economic policy for working Americans in the early 20th century fostered the need of increasing worker security. Two main tenets and perspectives of pension policy early on were working people’s security and preventing tax abuse. ERISA reinforces these principles.The Working Group heard testimony from eighteen individuals from the public and the private sectors. These individuals have recited from their varied experiences and perspectives why they believe there is a significant gap in pension program coverage for employees of small employers. They have offered comments, statistics, observations and proposed recommendations as to how our Working Group might proceed in offering definitive and specific recommendations to encourage and enhance the establishment of pension plans by the small employer community in order to provide their employees with an opportunity to reach their “golden years” with sufficient financial resources. Private retirement savings may not have the same political “sizzle” as Social Security. However, it is terribly important to make private pension plans for small employers part of the national Social Security debate. Now is the time to re-strengthen all three legs of the proverbial three-legged stool and to make a serious effort to provide a large segment of the working American public with an opportunity to fully participate in a wholesome retirement program. It is important to approach this dilemma with a single- minded focus and a sense of urgency.All of that said, the Working Group makes the following recommendations that will be elaborated on in the next section. Briefly, those recommendations include:

• Repeal of the Top-Heavy Rules

• Eliminate User Fees

• Increasing the Limits on Benefits and Contributions

• Increasing the Limits on Includable Compensation

• Develop a National Retirement Policy

• Coalitions

• Tax Incentives

• Simplified Defined Benefit Plans

 II RECOMMENDATIONS

As a result of the Working Group’s findings, it is clear that there is a need for marketing to promote the creation of plans; for education of employers and employees; and for legislation to deal with regulatory obstacles, as well as the need to create tax and financial incentives. The Working Group offers the following RECOMMENDATIONS:

A. Repeal of the Top-Heavy Rules.

In 1982, Congress enacted the so-called top-heavy rules because of perceived abuses among plans sponsored by small employers. The top-heavy rules are qualification requirements and have no counterpart under Title I, the Labor Law provisions of ERISA.

A plan is top-heavy if key employees have accumulated 60% or more of the contributions and benefits under the plan. In order to determine whether or not a plan is top-heavy, plans are required to maintain a detail analysis of who is receiving plan benefits. This complex testing is in addition to equally complex testing to determine whether or not the plan satisfies the non- discrimination rules of the tax code. Although similar in purpose, the non-discrimination rules define highly paid and rank and file employees differently and require different tests to determine whether or not a plan satisfies its requirements

In any year in which a plan is determined to be top-heavy, additional qualification requirements apply. First, the plan must provide for more rapid vesting of benefits. Vesting standards were first established by ERISA in 1974. In 1982, when Congress added special rules for top-heavy plans, the more rapid top-heavy vesting schedules significantly increased the likelihood that short tenured employees received pension benefits. Top heavy rules prescribed a 2 to 6 year graded vesting schedule as compared to a then 5 to 15 year graded vesting schedule for non-top heavy plans. In the alternative, the top-heavy rules prescribed a 3-year cliff-vesting schedule as compared to a then 10-year cliff-vesting schedule for non-top heavy plans. Under the top-heavy graded vesting schedule, a participant is 20% vested after 2 years of service and his or her vesting percentage increases by 20% for each additional year. Under top-heavy three-year cliff vesting, participants become fully vested after three years of service.

The top heavy vesting schedules' impact have been significantly diluted by subsequent changes in the vesting schedules, which apply, to all plans. Specifically, the Tax Reform Act of 1986 amended ERISA to promote faster vesting for non-top heavy plans. The Tax Reform Act of 1986 vesting schedules provides for 3 to 5 year-graded vesting or 5-year cliff vesting. While there are still marginal differences in top heavy and non-top-heavy vesting schedules, we believe that the number of participants who would not have vested benefits if the top-heavy rules were repealed currently is relatively small.

TEFRA also established minimum benefit and contribution rules for all non-key employees in top-heavy plan, but not for other plans. These rules were enacted because before TEFRA some qualified retirement plans were able to provide rank and file plans’ participants with little or no benefits by coordinating their plans with Social Security benefits. For defined benefit plans, TEFRA required that each non-key employee receive an accrued benefit equal to 2% of the participant’s average compensation for each year of service up to a maximum of 20% of compensation. In a defined contribution plan, non-key employees must receive a contribution equal to 3% of compensation, or the highest percentage contributed to a key employee, if less. For purposes of determining the minimums, integration with social security benefits is disregarded.The Tax Reform Act of 1986 eliminated methods of coordinating with Social Security that resulted in some rank and file participants receiving little or no benefits. The new so-called “permitted disparity rules” which apply to all plans which coordinate with Social Security modified the types of benefit formula that effectively denied rank and file individuals private pension benefits and required that they provide minimum benefits. In addition, regulations implemented by Treasury after the Tax Reform Act of 1986 generally tightened the non-discrimination requirements, which apply to all qualified retirement plans, assuring that rank and file employees receive greater accrued benefits or contributions. As a result of the changes in the non-discrimination rules, we believe that most plan participants in top-heavy plans are already receiving benefits above the top-heavy minimums.In 1974, ERISA imposed a combined plan limit on the maximum amount of permitted benefits when an employer maintains both defined benefit and defined contribution plans. In such a case, the sum of a participant’s “defined benefit fraction” and a participant’s “defined contribution fraction” cannot exceed 1.0. Normally, when calculating these fractions, the dollar limits for a defined benefit plan ($130,000 in 1998) and defined contribution plans ($30,000 in 1998) are multiplied by 1.25. Under TEFRA, the dollar limits were multiplied by 1.0 rather than 1.25 for top- heavy plans, which had the effect of reducing the maximum amount of benefits or contributions which key employees in a top heavy plan could receive as compared to highly compensated employees in a non-top-heavy plan. A top-heavy plan could “buy” back the 1.25 fraction by providing addition minimum benefits to non-key employees, unless the plan was “super-top-heavy”, in which case the reduced 1.0 fraction could not be avoided.In 1996, Congress repealed the combined plan effective in the year 2000 because of its complexity, as part of the Small Business Jobs Protection Act. Congress also repealed the corresponding provisions of the top-heavy rules, which provided for reducing the combined plan limit, also effective in the year 2000.

Although it is possible that plans of larger employers can be top-heavy, as a practical matter, plans of small employers, covering fewer employees, are more likely to be top-heavy. Even if a plan passes the new non-discrimination tests implemented after the Tax Reform Act of 1986, the plan must still be tested for top-heaviness. Calculating whether a plan is top-heavy substantially adds to the burden and complexity of maintaining a qualified retirement plan. Witnesses testifying before the Advisory Council were unanimous in their view that pension laws and regulations are too complex. In addition, a majority thought that current pension law and regulations discourage small employers from establishing qualified retirement plans. Among the requirements most frequently cited as unnecessary and burdensome were the top-heavy rules.

With the changes implemented by the Tax Reform Act of 1986 and the Small Business Job Protection Act of 1996, the top heavy rules, originally enacted in 1982, do little more than add a significant layer of administrative complexity. Whatever the merits of the rules when first enacted in 1982, it is clear that the protections they afford to participants in top-heavy plans have now been applied, by subsequent changes in other pension rules, across the board to participants in all qualified retirement plans.

The top-heavy rules under Internal Revenue Code Section 416 should be repealed. They no longer provide significant protections to rank and file employees. Their effect is largely duplicated by other rules enacted subsequently. Despite their limited utility, all employers must test for top- heaviness. Since most small employers are not capable of performing these tests on their own, they represent an additional and largely unnecessary cost of maintaining a qualified retirement plan. They also create a perception within the small business community that pension laws target small businesses for potential abuses. This too discourages small business from establishing qualified retirement plans for their employees.

B. Eliminate User Fees.

The Internal Revenue Service has for many years had a practice of issuing determination letters to employers opining that their retirement plan conforms in form to the complex rules established under the Internal Revenue Code for qualified retirement plans. Although employers are not required to obtain determination letters, given the adverse tax consequences of a subsequent determination that a plan is not qualified, employers, as a practical matter, generally seek determination letters.

For many years, the Internal Revenue Service reviewed requests for determination letters without imposing a fee. As part of the Revenue Act of 1987, Congress directed the Internal Revenue Service to collect user fees for determination letters. Budget laws in 1990, 1995 and 1996 extended the IRS’s authority to collect user fees through September 30, 2003. The user fees were imposed at a time when there was significant pressure to generate additional revenue to reduce the budget deficit. Under Revenue Procedure 98-8, the Internal Revenue Service has established a fee schedule taking into account the time and expense of reviewing different types of plans. The fees for determination letters range from $125 to $2,000 depending on the type of plan involved. These fees are in addition to the costs of having plan documents and requests prepared in order to receive a determination letter.The Internal Revenue Service has a strong interest in encouraging employers to seek determination letters. The IRS review of the plan is likely to reveal any serious drafting errors or incorrect elections, in the case of a master or prototype plan. The frequency with which Congress has changed required provisions for qualified retirement plans increases the potential for inadvertent error. The Internal Revenue Service would prefer that a plan be correctly drafted at the outset rather than go through the complicated, expensive and draconian process of disqualifying a plan.

The imposition of user fees adds another financial obstacle to the adoption of qualified retirement plans by small business. Although user fees apply to all employers—large and small— the cost of establishing a plan is more acutely felt among small employers. User fees do not vary by size of employer. While a $700 user fee for an individually designed qualified plan is an insignificant cost for a Fortune 500 employer, it may well be an insurmountable obstacle for a small employer. The small employers choice may be to not seek a determination letter, with the attendant tax risks, or worse to not establish a qualified retirement plan because the costs are too high.Now that the budget deficit has become a budget surplus, the economic justification for user fees is much diminished. User fees should be repealed.

C. Increasing the Limits on Benefits and Contributions.

Since ERISA was enacted in 1974, the Internal Revenue Code has provided overall limits on the contributions and benefits under qualified retirement plans. These limits apply to all Section 401(a) qualified retirement plans, Section 403(b) tax deferred annuities and Section 401(k) simplified employee pension plans. There are special rules, which permit a higher defined benefit limit for certain government-sponsored defined benefit plans.

The limits are expressed differently for defined benefit and defined contribution plans. For defined benefit plans, the limit on the annual benefit payable is the lesser of 100% of high three-year average compensation or a dollar amount, which is indexed ($130,000 in 1998). There are special rules that require the benefit to be actuarially reduced for benefits commencing prior to Social Security retirement age (which ranges from age 65 to age 67). There is a minimum benefit of $10,000, which is not indexed, and which can be paid without regard to the normal limits, if the plan participant has at least 10 years of participation and does not also participate in a defined contribution plan.

For defined contribution plans, there is a limit on the maximum annual addition to a defined contribution plan of the lesser of 25% of compensation or a dollar amount, which is indexed ($30,000 in 1998). An annual addition is the sum of employee contributions, employer contributions and reallocated forfeitures.

Both the defined benefit limit and the defined contribution limit apply in the aggregate to all plans of that type sponsored by the same employer.

An additional limit applies if an employee participates in both a defined benefit plan and a defined contribution plan sponsored by the same employer. In such a case, the sum of the participant’s “defined benefit plan fraction” and the participant’s “defined contribution plan fraction” cannot exceed 1.0. Congress repealed this complex rule as part of the Small Business Job Protection Act of 1996 for years after 1999.The defined benefit and defined contribution plan dollar limit were indexed by ERISA and were originally established in 1974 at $75,000 and $25,000 respectively. From 1976 to 1982, the indexing feature was allowed to operate as intended and the dollar amounts grew to $136, 425 and $45, 475. Under the Tax Equity and Fiscal Responsibility Act of 1982, the dollar limit on defined benefit plans was reduced to $90,000 and the dollar limit on defined contribution plans was reduced to $30,000. Furthermore, the dollar limit on defined contribution plans was frozen at the $30,000 level until the defined benefit dollar limit rose to $120,000 so that the relationship between the dollar limits became 1: 4. For years after 1994, the indexing was modified so that changes in the dollar amounts would be in multiples of $5,000 adjusted downward to the next lowest multiple.

These reductions in the dollar amounts are widely believed to have been revenue driven. These reductions had the net effect of adjusting downward the maximum amount of benefits and contributions that highly-paid employees can receive in relationship to the contributions and benefits of rank and file employees. Witnesses before the Advisory Council testified that these changes have had the perverse effect of “de-linking” retirement benefits of key employees from those of other employees. Key employees looked to non-qualified deferred compensation plans to satisfy their benefit needs rather than establish a qualified retirement plan or enhance an existing qualified retirement plan in which their benefits are significantly reduced.In order to give key employees the incentive needed to establish qualified retirement plans and expand coverage, we recommend that the $30,000 dollar limit on defined contribution plans be increased to $50,000 which will help partially restore the dollar amount to the level it would have grown to had the indexing continued without alteration since the dollar limit was first established in 1974.

Second, we recommend that the $90,000 dollar limit on defined benefit plans be increased to $200,000 which will restore the dollar amounts lost through alternations in the dollar amount since 1974, while maintaining the 1:4 ratio established in 1982 as part of TEFRA.

Third, we recommend, that in the future, indexing occur in $1,000, not $5,000, increments which has had the effect of retarding recognition of the effect of inflation.

Fourth, we renew the recommendation of last year’s ERISA Advisory Council that the minimum $10,000 dollar limit on defined benefit plans be increased and indexed. The minimum benefit amount helps increase the benefits of rank and file employees and its value has been badly eroded since 1974. We recommend that the minimum defined benefit dollar amount be increased to $30,000 and be indexed.Fifth, we recommend that actuarial reductions of the defined benefit plan dollar limit should be required only for benefits commencing prior to age 62. This was the rule originally enacted in 1974 as part of ERISA. It was changed as part of the Tax Reform Act of 1986 and has had the effect of significantly reducing the maximum benefit of participants electing early retirement.

D. Increasing the Limits on Includable Compensation.

Under ERISA, there was no dollar limit on the amount of annual compensation taken into account for purposes of determining plan benefits and contributions. However, as part of the Tax Reform Act of 1986, a qualified retirement plan was required to limit the annual compensation taken into account to $200,000, indexed. The $200,000 limit was adjusted upward through indexing to $235, 843 for 1993. As part of the Omnibus Budget Reconciliation Act of 1993, the limit on includable compensation was further reduced down to $150,000 for years after 1994. Although indexed, adjustments are now made in increments of $10,000, adjusted downward. In 1998, the indexed amount is $160,000.

Witnesses before the Advisory Council testified that these changes, like the reductions in the dollar limits on contributions and benefits, have had the perverse effect of “de-linking” retirement benefits of key employees from those of other employees. As a result, key employees looked to non-qualified deferred compensation plans to satisfy their benefit needs rather than establish a qualified retirement plan or enhance an existing qualified retirement plan. We recommend that the limit on includable compensation be restored to its 1988 level of $235,000 and be indexed in $1,000 increments in the future.E. Develop a National Retirement Policy

Utilize public service spots on television, radio and in the printed media to educate the public and raise the awareness of the need to prepare and save for retirement.

Utilize the Chambers of Commerce (U.S., state, and local) and other community and business associations to promote the importance of retirement savings.

Encourage state legislatures to develop mandatory core curriculum courses at elementary and high schools on personal financial management.

Create speakers' bureau on retirement planning and savings for presentations at industry gatherings of small employers.

F. Coalitions

Promote the development of coalitions to offer pooling vehicles for small employers. For multiemployer plans created by collective bargaining an amendment to the Labor Management Relations Act may be needed to allow small employers without a collective-bargaining agreement, to continue to participate in these existing plans. This recommendation deserves further study and consideration.

G. Tax Incentives

Offer tax incentives for employers without a qualified plan to adopt in a plan. Tax credit could be offered to reimburse for the administration of the plan as well as for retirement education costs incurred for the employees.

H. Simplified Defined Benefit Plans

The Working Group restates its support of the recommendation made by 1997 Working Group on Defined Contribution vs. Defined Benefit Plans to create a simplified defined benefit plan.

III. Background and Findings

A. Impact of Demographics on Retirement Security

The combination of social, political and economic factors over several decades contributed to creating a blueprint for retirement security along with the recognition that a vehicle that would provide a modicum of financial security for older Americans, once their work life ended and their retirement began, would do much to thwart the specter of poverty. Over the last four decades America has experienced a demographic tidal wave of a growing and aging population commonly referred to as the “age wave” that has in recent times reinforced and focused national attention on the need to evaluate where we are today and determine how to continue to provide a secure retirement system for older people.B. Three-Legged Stool of Retirement

Traditionally, the three-legged stool of retirement, Social Security, personal savings and a retirement plan, commonly referred to as the “three cornerstones” of retirement income, has been promoted as the most effective combination to provide a secure retirement.All three -- Social Security, a pension plan, and personal savings -- can most effectively support and strengthen the three-legged stool. Unfortunately, each of these cornerstones is in various stages of serious threat of erosion in one form or another and has been characterized as America’s looming retirement security crisis. The need for education with regard to savings, pensions and long-term retirement planning is of paramount importance. Our failure to address this crisis portends for serious long-term societal ills.C. Social Security

For the past two decades various pundits have articulated that we face a crisis and some predict the potential insolvency of the unreliable “pay-as-you-go” Social Security system. They argue that a result of the alleged inadequate funding, and unrealistic investment objectives as well as the impending retirement of the baby boom generation, and the dramatically shifting top heavy demographic landscape in our nation which will place the burden of entitlements onto the younger generation, our Social Security system is seriously threatened.D. Trends in Personal Savings

The personal savings practices of a large portion of society are also in serious jeopardy. The Commerce Department’s latest national income and product accounts data shows that Americans are saving less than at almost any time since the department began collecting the data in 1929. Its recently-adjusted figures report that Americans saved only 2.1 percent of their disposable income in 1997; in June 1998 the figure hit a staggering 0.2 percent annualized rate. Twenty-five years ago, in 1973 and 1974, the savings rate reached a postwar high of 9.5 percent, and it hovered at about 7 to 8.5 percent well into the 1980’s.According to a study done last year by the non-profit research organization Public Agenda and underwritten by Fidelity Investments, 46 percent of Americans said they have saved less than $10,000 for retirement, including money saved in their retirement plans.

Consumers account for 62% of the Gross National Product in the United States today. According to Juliet Schor in her book “The Overspent American”, the majority of Americans are intent on “Competitive Consumerism”. They try to acquire the trappings of the rich by acquiring the most and latest toys. Schor flogs the American way of life for its excesses, its materialism and its dangerously pervasive messages that “you are what you own”.Americans want to keep up with the Joneses, but cannot – too many of the Joneses have become millionaires. The diabolical marketing by corporations of the capitalist conspiracy keeps American consumers buying beyond their income. Life has become a see -- want -- borrow -- and buy bummer. Americans spend more than they realize, hold more debt than they admit, and ignore many of the moral conflicts surrounding acquisitions. It seems a paradox: despite a booming economy reflecting eight years of substantial growth, more than a million Americans file for bankruptcy each year. Consumer bankruptcy filings shot up 29% from 1995 to 1996. Last year, in 1997, they jumped another 20% to a record high of 1.4 million. In 1985 only 350 thousand individuals filed for bankruptcy.The flood of credit card offers in mailboxes has helped propel consumer debt to record levels. Some experts say the spike in bankruptcies has come from ease of filing for bankruptcy and the loss of the stigma that bankruptcy once brought. One could easily observe that we have created a system to consume and accrue debt when, in reality, we should be asking the question “what are society’s goals” with respect to savings and debt and offering an approach as to how to address them.Recently, in Philadelphia, a couple earning a combined income of $75,000, who were sending their children to private school at a combined cost of $7,500 a year and renting a Mercedes, filed for bankruptcy. The bankruptcy judge found that the couple did not abuse the law, commenting that “The debtors are persons who became accustomed to living with the amenities of the upper middle class and have been unable to completely adjust themselves to a somewhat altered financial depression.”Congress is currently grappling with this vexing problem. The result may be the tightening of the bankruptcy code denying individuals the benefits now enjoyed. The result could have a profound effect on the quality of life.

History is a great teacher -- often repeating itself – for many reasons. Why, might we ask? People have not changed much over the course of modern civilization. History sets precedents and gives people ideas. In this age of extremes and the new world order, the ability to meet the needs of a modern, rapidly changing globalized economy rests more and more on the shoulders of the individual. This means that for consumers the future is in their hands.We have had the luxury of living in an era, especially, over the last fifteen years of one of the most scintillating periods in U.S. economic history. The complexity and speed with which innovation has revolutionized the world of finance have reached a proportion where it is difficult to comprehend all of the dynamics of this fast-paced change from moment to moment. In the American economic “miracle” everything should be up has gone up – GDP, capital spending, incomes, the stock market, employment, exports, consumer and business confidence. Everything that should be down is down – unemployment, inflation, interest rates. This litany of America’s economic success may sound tinny to those who feel their lives are buffeted by forces over which they have virtually no control. People are working harder than ever before. The gap between the well to do and the poor has been growing. The options for unskilled workers keep shrinking, as does the “safety net” that is supposed to protect them if they fall out of the economy altogether. The natural American tendency to feed a national optimism and sense of renewal that rides over the potholes of politics and defies predictions of calamity must be held in check.When the Clinton Administration introduced the notion of health care reform early in the first term our national conscience was awakened to the fact that over 35 million working Americans were without health care coverage and that number has increased to 43 million in 1998. Today, with prescription drug costs skyrocketing, it is shocking that 145 million Americans are not covered by a prescription drug plan. As we face the most profound demographic change in the history of our nation – the “age wave” – many American consumers are ill-prepared for retirement.E. Lack of Retirement Planning by Workers

We are in what Arthur Levitt, Chairman of the Securities and Exchange Commission, recently characterized as a “financial literacy crisis”. One out of two Americans has no pension coverage. Three out of four Americans do not know how much they will need to retire. Three out of four Americans do not know the difference between a stock and a bond. One out of three workers who is offered a 401(k) plan does not participate. One out of five has saved nothing for retirement. A recent poll showed that people fell into these various categories:21% are planners

15% are impulsive

19% are deniers (believing they won’t live long enough)26% are strugglers (and need help)

 With people living longer lives, the period of retirement will be almost as long as the period of working. Institutions shunting more responsibility onto the shoulders of the individual mandates the necessity for individual knowledge and individual action. The individual cannot go it alone. With mergers and acquisitions, downsizings, restructuring and re-engineering, the world of workers is riddled with tragedy and high anxiety.

F. Shift to Defined Contribution Plans

Much has happened to change the private pension plan system as well as the methodology for delivering benefits. Since the 1970’s, qualified defined contribution plans, participants, and contributions have grown as a percentage of the employment based retirement system. According to the findings from the Form 5500 series report filed with the Department of Labor for 1994 the count of private pension plans filing was about 690, 350, a 2% decrease from 1993. The number of defined benefit plans decreased by 11% to 74,400, while the number of defined contribution plans has decreased by less than .5% to 615,900. The number of defined benefit plans has decreased each year since 1986. The 1994 count is only 43% of the peak total of 175,000 plans in 1983.The long-term patterns of decreases in the defined benefit plan active participants and increases in defined contribution plan active participants continued in 1994. Defined benefit plan active participants decreased by 2% to 24.6 million. Defined contribution plan active participants increased by 2% to 40.4 million.

We have witnessed during the last two decades some serious trends that could best be characterized as the “deinstitutionalization” of retirement benefit coverage as evidenced by the statistics recited above. Many employers have shifted the responsibility for providing for retirement income from their shoulders to the shoulders of the worker as witnessed by the precipitous decline of defined benefit plans and the increasing proliferation of defined contribution plans where tomorrow’s retirees’ income security will likely depend increasingly on his or her life-long money management skills and decisions.What would normally have been considered an issue that most people would readily rally around and support, namely, the creation of a pension plan for employees, has become a debate about who is responsible for the employee’s long-term retirement income goals. Perhaps the shift of pension coverage or, more importantly, the lack thereof, has become more noticeable and profound for employees of small employers.G. Obstacles For Small Employers

A major portion of small employers do not offer retirement benefit programs to their employees because of various obstacles including the tax laws, regulatory issues, administrative costs, fear and a misperception as to what employees want in a compensation package. As a result, it was determined to undertake a much-needed examination of the issues that confront small businesses and their employees in the area of pension programs and retirement planning.

Who cares? Over two-thirds of small business employees are not covered by a retirement plan largely because companies’ revenues are uncertain or employees prefer high wages or other benefits. Therein lies the charge to this Working Group as to how to enhance and encourage the establishment of pension plans offered by the small employer community.Retiring workers with a pension plan will be able to supplement their Social Security benefits with their retirement income. Those workers with low incomes who do not have the ability to save and are not covered by a pension plan will be at risk at an extremely vulnerable period of their lives. The burden of this responsibility cannot be placed with the children of those retiring baby boomers who themselves are facing dramatic changes in the world of work as we move through this modern industrial transition known as the “new world global economic order” into the 21st century. This new era is not a forgiving one. It is dominated by instant communications; the accelerated flow of capital, and global interdependence and interconnectedness as evidenced by the economic shock waves occurring in other countries that rocked the American financial markets during the summer of 1998.H. Impact of Globalization

With the onset of accelerating and widespread globalization over the past two decades, global competition among many American employers has skyrocketed. Global capitalism is being unleashed with an intensity and scale we have not witnessed before in economic history, in a world where national governments are wrestling with the reality that they are becoming progressively less able to protect businesses, investors, and individuals from the evolving and sometimes brutal free market forces. When you assimilate and crunch this down to the ground where most of us function, these changes will drive household decisions on jobs, savings, buying houses, education, and the ability to provide a comfortable and financially secure retirement. This intensity will continue. Many organizations will increasingly deal with uncertain profit margins. Certainly the flexibility to quickly divest a business venture or to terminate a business with the least obligation can be a competitive advantage for an organization competing globally. Defined contribution plans were perceived by some businesses to be more preferable to defined benefits plans when they were unsure of their organizations’ stability, viability, and profits. During periods of stock market turmoil small business’ financing strategy can stall and for some their financing efforts can go into a tailspin. Small firms have fewer resources and financing alternatives when the wealth of people who provide the seed money is in jeopardy.I. Difference in Coverage Between Large and Small Employers

The private voluntary retirement system has been relatively successful for individuals employed by large companies. We have been less successful in promoting and providing coverage among employees of small companies. In the small employer community there are an array of reasons why pension plans are not offered to their employees. In a world were the predominant concern is “will today’s workers be able to maintain their pre-retirement standard of living” and, it appears that most of the retirement debate centers on whether to privatize Social Security or at least invest some of its funds in the stock market, the Working Group has struggled and wrestled with the challenge as to how to promote the recognition of the need to create retirement programs for a large segment of the working population, some 32 million as estimated by the Department of Labor, that are without coverage.J. Summit on Retirement Savings

In 1997 Congress passed and the President signed into law the Savings Are Vital to Everyone’s Retirement Act (SAVER). The Act called for an initial Summit on Retirement Savings to be held on June 4th and 5th of 1998. The mission of the Summit was to determine how best to raise awareness of the need for pension and individual savings so that working Americans and their families may enjoy a comfortable and secure retirement. This is an issue that must capture the attention of government, employers, employees, the media, community organizations, schools and families to work towards communicating the need to build retirement security and in a more pervasive way, a national retirement policy.Delegates to the Summit represented the leadership from political parties, large corporations, small businesses, labor organizations, and numerous trade groups dealing with employee benefits, personal finance and retirement issues. Of large concern were the barriers that Americans face when saving for retirement and the challenges and obstacles employers’ face when providing retirement plans. Clearly, the mantra for retirement security is the need to educate all to its importance.This fact was reinforced by three surveys that were released around the time of the Summit. The surveys showed that Americans are worried about saving enough for retirement. They also feel that they need more education to properly plan for it and believe they will keep working part-time after they retire in order to make ends meet.

Just one in four respondents to the 1998 Retirement Confidence Survey of the Employee Benefit Research Institute (EBRI) said they believe they would have enough money to live on after they retire. The survey polled 1,500 individuals aged 25 and older. Their average age was 43. The survey found confidence hadn’t budged in six years, despite a booming stock market and sharp rise in mutual fund retirement investing.K. How To Motivate Americans To Save

What can motivate American workers to save for their retirement? The study found fear that was a factor for nearly half of those respondents who were saving. Some 48% said watching retirees struggle motivated them. Some 37% cited “time running out” as a motivator.A second study by the same group, EBRI, showed employees of small businesses need help from their employers to both motivate and educate them on the value of retirement planning. A telephone survey of 601 small companies, those with 100 or fewer employees, found only about a third of workers were covered by retirement plans. Few workers at these companies even inquired about retirement planning, according to the survey. When there were plans, the most popular was the 401(k) plan.

In those companies with plans, only about half offered retirement education to workers and consequently, the study concluded, only about one employee in five participated. In large companies, eight out of ten employees participated, due largely to educational efforts.

Still another survey conducted and released by the American Association of Retired Persons found baby boomers willing to work well into their retirement years. Eight out of ten polled said they wanted to work at least part-time jobs after they retire, mostly to maintain what they admitted was an indulgent lifestyle. But a fourth said they believed they would have to work from necessity. Today, just 12% of those over 65 now are working.

In March 1998 the Securities and Exchange Commission initiated a campaign that aimed to motivate individuals to learn how to save and invest wisely. The “Facts on Saving and Investing Campaign” is a response to the need for heightened money management and investment skills among Americans. Financial knowledge, skill and awareness are particularly important given the increased individual responsibility Americans face for funding their retirements.As recited above, Americans need to save more and invest wisely because they can expect to live longer and many do not expect Social Security and Medicare to provide benefits comparable to those that beneficiaries receive today.

L. Contingent Workforce And Small Employers Plan Sponsorship

The globalization of the economy has forced companies to restructure, re-engineer, merge with and acquire other businesses in order to heighten their competitiveness. The growing cost of running a business, especially a smaller one, has increased the practice of leasing or hiring contingent employees. For those small employers that do not lease employees workers’ compensation rates have gone through the roof. Despite an increasingly tight labor market, fewer small businesses are offering health care and retirement benefits. This would seem to defy conventional wisdom that employers are being forced to offer better perks to attract employees as the unemployment rate has dropped to levels not seen since the 1960’s.Small employers are hiring independent contractors, temps, part-time and younger, less- experienced people who may believe that they have less need for pension benefits but instead seek higher salaries.

For those small employers who might give thought to providing retirement benefits they are confronted by the apparent complexities associated with creating pension plans. Part of the confusion may also be attributed to the number of plans or options in existence.

The Department of Labor, through various offices, has done a great deal in its outreach effort to promote the awareness for the need to create retirement vehicles for employees of small employers. This group became a target group in 1995 when the department recognized that it had to be a catalyst to promote a national campaign to educate Americans on the need to save for retirement. Other groups targeted were women and minorities.

Brochures have been created and disseminated through organizations, at public appearances of the Secretary and Assistant Secretary and through partnerships developed with private sector groups such as the National Association of Women Business Owners.

Work groups and task forces have been developed as well as coalitions with business and community-based organizations like the Chamber of Commerce, the Small Business Council of America, the Small Business Association, the Hispanic Radio Network and African-American publications. An interactive web site (///) has been established and the department maintains an 800 number (800-998-7542) where inquiries can be made and information can be obtained.

Small employers who have a plan find that their ability to hire and retain good employees is enhanced. Also, a pension plan can have an impact on employee attitude and performance and certainly facilitate an employee’s ability to prepare more substantively for retirement.Those small employers who do not have a pension plan who were surveyed recited three main reasons why (1) they see their employees’ preferences for wages and other benefits; (2) the cost of set up and administration as well as government regulations; and (3) their uncertain revenue stream makes it difficult to commit to a plan.When asked what changes would lead to serious consideration to establish a plan the following responses were given: (1) an increase in profits; (2) providing a business tax credit for starting a plan; (3) an increase in demand from their employees; and (4) allowing key executives to save more in a plan (i.e., eliminate the non-discrimination requirements).

The notion of employers having the ability to pool resources and participate in a coalition or multiemployer-like vehicle might enhance the willingness to establish plans. Multiemployer plans as a retirement delivery system offer: (1) economies of scale; (2) no regulatory compliance obligations; (3) the requirement to pay the contribution; (4) a pooling of actuarial costs; (5) security from investment risk and volatile fund fluctuations; (6) access to professionals - attorneys, accountants, actuaries, investment managers and investment consultants; and, (7) portability for employees.

M. Conclusion

We all have a role to play in the effort to create a national retirement policy and improve working Americans’ retirement goals. Improving the opportunity for a secure retirement for all will do much to impact the economic well being of the United States.Government, labor leaders, trustees, administrators, corporate leaders, investment managers, consultants and other professionals, employers and employees alike may play different roles in the retirement equation but we should all be bound together for one sole purpose: to enable working women and men to retire with a modicum of financial well-being and dignity.

IV. WORKING GROUP PROCEEDINGS AND

SUMMARY OF ORAL TESTIMONY

Meeting of May 4, 1998

Stephen Lee

Law Specialist

Office of Policy and Research

Pension and Welfare Benefits Administration

Mr. Lee participates in the National Economic Council's working group on pensions and helped develop the SIMPLE plan and the Administration’s SMART proposal as an alternative to the SAFE proposal.Mr. Lee began his testimony by indicating that the NEC defined small businesses as being “a hundred or fewer” and that the legislation is targeted at businesses of this size. Additionally, the Form 5500 has a cut-off for certain filings of a hundred or fewer. He provided an overview of the kinds of plans that are available to small businesses and distributed a brochure on Simple Retirement Solutions. He discussed the defined benefit plans which generally are not used by small businesses except for professional organizations such as doctor and lawyers. He indicated that it is the agency’s experience that “most small businesses tend to sponsor defined contribution plans” because of the inherent burdens of administration.Mr. Lee commented on the relatively new Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) and indicated that the “nice thing about this plan is that the IRS has issued a model form”. The form is completed and given to the employee which satisfies all the disclosure requirements. Employees can defer up to $6,000 of their salary and the employer can either match employee contributions up to three percent or make a contribution of two percent pay for all eligible employees.The next plan discussed was the Simplified Employee Pension Plan (SEPP) which has been available since 1978. Mr. Lee indicated that this type of plan has not been all that popular. The employer contributions are limited to 15% of an employee’s annual salary or $24,000. It is a very simplified kind of form and plan to adopt.Mr. Lee commented on the 401(k) which are more expensive to operate. Another problem with 401(k) plans are the non-discrimination rules relating to highly compensated employees which reduce the amount these employees can contribute. This makes for a more complicated plan although there are other features which are attractive such as plan loans which the other plans can’t offer. One other feature is that a prototype plan can be used thus cutting down on the expense of having an attorney draft the plan.Finally the last type of plan is the payroll deduction IRA. Mr. Lee indicated that these “are not very popular because you can only put away $2,000.” This is attractive to low-income workers as a way for them to save. There is no model form for this but there are prototype programs which are easy to adopt.Mr. Lee briefly commented on the money purchase plan which is not in the brochure. This type of plan allows for the employer to contribute a set percentage each year which can’t be changed. This is different than a profit sharing plan or the SIMPLE plan as the employer can lower the percentage or skip the contribution if the company has a bad year. This is probably the reason that money purchase plans are not as popular although there are significant tax advantages to the employer to have both a money purchase plan and a 401(k) plan.Next Mr. Lee went on to the legislative area. He indicated that there are two proposals that the Council might want to focus on which are the American Society of Pension Actuaries (ASPA) simplified benefit plan proposal entitled Secure Assets for Employees (SAFE) and the Administration’s proposal called Secure Money Annuity or Retirement Trust (SMART). Both of these proposals are designed to get rid of a lot of the complicated testing that exists with plans and to simplify the rules. The SMART plan would limit compensation up to $160,000, where as the SAFE proposal is really targeted to more middle-income workers where the limit would be $100,000. The SMART plan would have PBGC insurance coverage while the SAFE proposal would not. The benefits are richer under the SAFE proposal as you are allowed to contribute 2% per year of participants’ compensation while the SMART plan allows for only 1%. Additionally, the SAFE plan allows for the employer to go back ten years to make contributions which would allow for a lot more money being contributed to the plan. The SMART plan does not allow for this.A question was raised by Council member Ms. Uberti regarding providing the Council with a grid that includes the options for small employers, the types of plans, contribution limits, when contributions are required, deduction limits, etc. Apparently, there is such a document that will be available soon and the Council was directed to Ms. Watson of the Department.

The issue of too many choices was discussed with Mr. Lee suggesting that it would be no surprise if SAFE or SMART went inactive this year. He concluded by restating the following points: (1) The Administration is going forward with a simplified DB plan proposal to include defined medical plans. (2) The payroll deduction IRA proposal which ought to operate more like 401(k) plans is very positive. (3) The simple regulatory options per se don’t go far enough, and the focus is needed beyond regulatory and structural issues as to what else can be done to promote increased plan coverage among small employers. (4) EBRI’s small business retirement survey results targeted a concrete data collection on the underlying, critical issues impacting women, minorities, and employers.Linda Jackson-King

Public Affairs Specialist

Pension and Welfare Benefits Administration

Ms. Jackson-King recited how the Department of Labor was marketing pension plans to the small business community which included a demonstration on the Small Business Retirement Saving Program--Employer Advisor.

Ms. Jackson-King gave a brief history of why the Department has focused on the small business owner and how the small business owner became one of the target groups of the Retirement Savings Education Campaign and the American Savings Education Council (ASEC). The Retirement Savings Education was launched by the DOL in July of 1995 with 65 public and private sector organizations to educate Americans of all ages, all backgrounds, all workers; that it is very important to take individual responsibility for saving for your retirement; but that it is crucial to recognize the inability to maintain a particular standard of living in retirement without preparation.

One of the charges of the ASEC is providing or making it very clear where individuals can get information they need to become more educated about their retirement. ASEC wants everyone to have the ability to know the choices available to them and the sources that are available to them to learn about these choices. Ms. Jackson-King wanted the Council to know that her organization is very pleased that we are studying this issue.

According to Ms. Jackson-King the ASEC is currently targeting three very specific groups: women, minorities and small businesses. Women and minorities typically have lower wages which causes pension participation rates to be disproportionately lower. ASEC has prepared several brochures, one of which is Top Ten Ways to Beat the Clock and Prepare for Retirement. This publication has proven to be quite effective and is ASEC’s signature piece. All of the publications or packets are distributed during public appearances of the Secretary or Assistant Secretary in addition to out reach programs of the Department. The National Association of Women Business Owners has also been a good source for distributing these materials.The Department has an 800 number for individuals to call to get information and referrals. The 800 number in included on each of the pamphlets that are being distributed. The number is 1-800- 998-7542.

Ms Jackson-King discussed current media campaigns which included a supplement in The Washington Post regarding a profile story of a small business owner and a 401(k) plan. An interactive web site is being developed for small businesses. The web site asks a series of questions of a small business owner and it leads them to a chart to see what their options are based on the answers to the questions. The Council was invited to view the web site. Another project is a small business video which is being done with the Chamber of Commerce and the Small Business Administration.

It was clear from the presentation that the Department and ASEC are endeavoring to reach out to as many people as possible to help them understand the necessity to save for retirement.

Meeting of June 8, 1998

Carol Gold, Director

Employee Plans Division

Internal Revenue Service

Ms. Gold began her testimony by stating that she would be addressing specifically the tax advantages that are available to enhance and encourage the establishment of pension plans. She approached the topic by giving a detailed history of the tax treatment of employer-provided retirement plans.

An example was provided of two workers earning the same compensation and saving for retirement over the same period--one saving through a savings account and the other through a tax-qualified retirement plan. The difference, almost triple, in the accumulation available for retirement through the tax-qualified plan illustrates the powerful incentive of deferred taxation.

Ms. Gold pointed out that with a tax incentive some individuals will take advantage of the incentive without effectively fulfilling the social policy--accumulation of retirement savings- -that led to the tax treatment itself. To avoid this, the nondiscrimination rules were enacted in 1942. She pointed out that there are two perspectives that have led to the current law: increasing worker security and preventing tax abuse. ERISA blends the two perspectives by clearly providing worker protection and the prevention of tax abuse.

Ms. Gold stated that the tax expenditure for qualified retirement plans is estimated at about $75 billion a year that is not collected in current income taxes because people have money saved for them in tax-exempt trusts to be taxed when distributed at retirement. She indicated that a tax expenditure is like a subsidy, and therefore it is effectively taking social policy to its logical extreme to assure that this subsidy is benefitting society as a whole. To do this, there are a number of rules that are administered by the Department of Labor and the Internal Revenue Service, i.e. the nondiscrimination rules, the benefit and contribution limits and the distribution rules.

Ms. Gold stated that the Internal Revenue Service has made efforts to combat the fear of the cost and complexity of maintaining a plan through its model or prototype program which enables a small employer to buy an approved plan for a low fee. Also, the Service's voluntary compliance programs alleviate the small employer's fear of the loss of tax benefits by allowing the employer to audit its own plan and correct the mistakes without consequences on audit by the Service.

Dr. Paul Yakoboski

Employee Benefit Research Institute

Dr. Yakoboski discussed the results of the Employee Benefit Research Institute’s (EBRI) very first small employer retirement survey, which was released just before the National Summit on Retirement Savings. According to Dr. Yakoboski, the number one area where retirement plan coverage is lacking in the workplace is among small employers. Of the 35 million Americans who work for employers with under 100 employees, 25 million of them are not covered by a retirement plan.The survey identified three main reasons for small employers not offering a retirement plan: (1) Small employers view wages and/or other benefits as more important to their employees (cited by 22%). This is consistent with previous research which has demonstrated that retirement benefits come in a distant second as a desired benefit by employees, (2) Excessive administrative costs and government regulations (cited by 35%, respectively), and (3) Uncertain revenue making it difficult to commit to a plan (cited by 16%). In addition, many small employers have a misunderstanding about costs. For example, one-third of those without a plan did not know that a plan can be set up for less than $2,000, and many believe that they are legally required to match 401(k) contributions.

Conversely, employers that do offer plans see real benefits, particularly the major impact on employee attitudes and performance (35%), on their ability to hire and retain good employees (35%), and not surprisingly, on an employee’s ability to prepare for retirement (54%).When small employers without a plan were asked what would make them consider offering a plan, their response in order of importance-- increase in business profits and a business tax credit (>60%), reduce administrative requirements (50%), and increase demand from employees and/or allowing key executives to save more (50%).

Dr. Yakoboski further suggested that the findings indicated that, in order to make significant progress in increasing plan sponsorship among small employers, small employers’ concerns about offering plans must be clearly addressed. Also, effective policy must make retirement planning and saving a priority for employees of these firms.David S. Blitzstein, Director

Office of Negotiated Benefits

United Food & Commercial Workers

David Blitzstein's responsibilities include advising the over one thousand UFCW local unions nationwide on issues related to pensions and health insurance bargaining. He also serves as a trustee of the UFCW Industry Pension Fund, a $3 billion multiemployer fund that covers 150,000 workers and retirees.

He pointed out that a unique feature of the UFCW is its sponsorship of multiemployer Taft- Hartley funds that deliver negotiated pension and health insurance benefits to one million UFCW members, and another 350,000 retirees. In total, 8 million Americans are covered by multiemployer plans. The legal framework of multiemployer funds was mandated by the Taft-Hartley Act of 1947. These funds are established under collective bargaining and administered by a board of trustees equally represented by labor and management. Multiemployer plans are governed by ERISA, and therefore, plan trustees live under the fiduciary codes of ERISA. Taft-Hartley funds exemplify the concepts of industrial democracy inherent in our collective bargaining system, giving workers a voice in the administration of their negotiated benefit programs. The UFCW sponsors over 150 multiemployer funds including local, regional and national plans. Half of these funds are pension plans.

One of the weakest coverage gaps, Blitzstein asserted, in the private pension system consists of workers employed by small business. He referred the Working Group to the recent study by the Employee Benefit Research Institute which verifies this fact. Only 36% of workers at employers with 25-99 workers, and 15% of those employers with fewer than 25 workers actually participated in employer-based retirement plans. In comparison, two thirds of workers at employers with 100 or more employees participated in retirement plans. Small employers with 25-99 workers had a sponsorship rate of less than 50%, and 20% among employers with fewer than 25 employees. In contrast, the sponsorship rate for employers with 100 or more workers is 85%. These facts suggest that small employers require special attention by policy makers if the nation is going to be successful in closing the private pension plan coverage gap.

Mr. Blitzstein recited that 50% of the American workforce, some 53 million workers, do not participate in a retirement plan, and 35% have no opportunity to participate because their employer does not sponsor a plan. Lower than average participation and sponsorship rates disproportionately affect low-wage workers, part-time workers, women and minorities. Moreover, participation and sponsorship trends have been essentially static for the last 20 years. The employer-based pension system has to expand if the nation expects to fulfill the retirement needs of future generations of Americans.

He believes that one of the barriers to improved pension coverage in the U.S. is the decline of organized labor representation and collective bargaining as a proportion of the workforce. There is a direct correlation between union membership and pension coverage- nearly 80% of union members have pension coverage, compared to less than 40% for non-union workers. Pension coverage in the private workforce accelerated from 10% to nearly 40% in the post-World War II decade primarily through the demands of organized labor. Unions have traditionally promoted pensions in collective bargaining and have educated their members about the necessity of planning and financing retirement. The decline of unions has weakened the demand for pension sponsorship and silenced a major intermediary in retirement education. The pension coverage trends attest to this. The resurgence and growth of organized labor is definitely consistent with the Council's and the Department of Labor's goals of increasing pension coverage on a national scale.

Small businesses face special challenges in sponsoring pension plans. The EBRI survey of small employers suggests a number of reasons why small businesses don't offer retirement plans. These reasons include: employees have other compensation-related preferences; set-up and administrative costs are too high; the complexity of government regulations; the expense of required company contributions; lack of knowledge on how to start a plan; the sense that pensions don't reward performance; and, the concern that owners can't benefit from pension coverage.

The UFCW has found contrary evidence to the contention that employees prefer wages and other benefits to pensions. The UFCW does extensive opinion polling of its members and has found consistently across all age groups that their members prioritize pensions just behind wages and equally with health insurance. Also, research by Douglas Krause of Rutgers University suggests a strong correlation between pension coverage and superior productivity performance. Krause found that companies that established profit-sharing plans experienced first-year productivity increases by 3.5%-5% higher than companies that didn't, and that these productivity increases were sustained over time.

Small employers face a serious management information void when it comes to pension planning. They simply don't have the in-house expertise to establish and administer a plan without outside help. Just starting the pension planning process is costly and time-consuming. Retention of legal counsel and a benefit consultant is probably beyond the budgets of most small employers. The fact is, start-up costs can be a legitimate barrier to pension sponsorship.

Blitzstein asserted that these institutional constraints are real and must be addressed. This raises the question as to what other options do small businesses have if they want to establish a pension plan for their employees? He stated that UFCW believes that small businesses should consider multiemployer pension plans as a retirement delivery system option.

Multiemployer plans offer significant advantages to small employers that they could never attain on their own. Some of these advantages include economies of scale. Multiemployer plans covering thousands of participants can offer a small employer a host of efficiencies equal to that experienced by a Fortune 500 company. These efficiencies allow a small employer to allow benefits beyond their budgets if they were to purchase the same benefit independently. Most importantly, a multiemployer plan could be a small employer's best opportunity to provide a defined benefit pension plan to their employees.

For example, employers contributing to a multiemployer plan have virtually no regulatory compliance obligation other than to pay contributions when due, accompanied by whatever documentation is required for the plan to apply payments correctly. In addition, multiemployer plans have certain regulatory advantages over single employer plans because they fall into certain collective bargaining exemptions which allow for relaxed IRS design controls. These circumstances allow a small employer to concentrate management resources on their business instead of being distracted by administering a pension plan. This approach happens to converge with a popular management trend of "outsourcing" employee benefit plan administration, which has received much attention among large corporations.

Blitzstein pointed out that large multiemployer plans like the UFCW Industry Pension Fund can offer small employers tremendous administrative cost efficiencies. A study prepared by Edwin C. Hustead of the Hay Group for a Pension Council conference in May 1996 found that a small employer with 15 workers would have an annual administrative expense of $619 per employee to operate a stand-alone defined pension plan. The same report estimated the annual administrative expense of $345 for an employer of 75 workers. The annual administrative expense for an employee group of 15 to operate a defined contribution plan was $287. In comparison, the annual administrative expense per participant for the UFCW Industry Pension Fund is $86 which included investment expenses. If you apply the difference in these administrative costs to benefits in the UFCW Fund, an employer could buy a $29.00 per month per year future service benefit for his employees in a 15-employee unit, and $14.25 for a 75-employee unit. This arrangement allows the small employer to spend his dollars on benefits instead of administrative overhead, something that most employers should find very attractive.

The pooling of actuarial and investment risk in a multiemployer plan provides another attractive feature to small employers. By participating in a larger plan a small business gains security from investment risk and volatile funding fluctuations. Employers get absolute predictability of cost during the course of a collective bargaining agreement, unless they have negotiated otherwise. In addition, because plan funding is pooled over a number of employee groups, small employees gain uniformity of pension costs regardless of the demographic characteristics of their particular employees. At the same time, by participating in a larger investment pool, a small employer gains access to professional money managers and investment consultants which in the experience of the UFCW National Pension Fund translates into higher investment rate of return of 12% annually for the past 10 years with an average investment expense of 26 basis points. These investment results are totally out of reach for any small employer pension plan. In the case of the UFCW National Pension Fund, these higher than expected investment returns have resulted in benefit improvements for employees without any necessary increases in employer contributions. Thus, hundreds of small businesses have been able to increase pension benefits for their employees without increasing their costs -- a "win-win" for labor and management.

Multiemployer funds can also provide coverage to non-collectively bargained groups, including shareholder employees and owners of incorporated companies, subject to law, regulation, and the plan rules. Thus, in many cases, the owner can participate in the same plan with his employees, alleviating the need to create a separate retirement vehicle for himself and his salaried employees. This design flexibility should be exceedingly attractive to small employers.

Blitzstein cautioned that a barrier to multiemployer plan utilization by employers is that benefit professionals have counseled them to avoid participation in multiemployer plans because of the potential for withdrawal liability, the legal obligation companies have under ERISA for their share of a plan's unfunded vested benefit liability if they should leave the fund. However, this advice seems self-defeating and socially irresponsible. The withdrawal liability amendments to ERISA were legislated to protect multiemployer plans from financial insolvency. The fact is these laws have been tremendously successful. Multiemployer pension plans are exceedingly well funded according to the Pension Benefit Guaranty Corporation. The PBGC multiemployer insurance pool has run surpluses for the past dozen years in stark contrast to the single employer plan insurance pool which experienced its first surplus last year. Most multiemployer plans are so well funded today that withdrawal liability does not currently exist. The concept of withdrawal liability is good public policy. Any small employer considering participation in a multiemployer plan should see withdrawal liability as a positive protection against irresponsible employers, who, without the obligation of withdrawal liability would be able to dump their financial costs on other employers.

Another important feature of multiemployer funds is benefit portability. One of the most serious problems in the employer-based pension system is the ability to continue the benefit accrual when the employee changes jobs. Job change creates substantial leakage in the employer-based pension system, weakening future retirement income. The multiemployer pension system is unique in its provision for pension portability. Multiemployer plans provide full benefit portability for workers that move from job to job within the sponsoring union's jurisdiction. This includes complete credit for service with all past and current contributors on the same basis as those who stay with one employer. This internal plan portability is enhanced by reciprocal arrangements through which plans co-sponsored by affiliates of the same International Union recognize service under any of the other plans that have joined the agreement, this providing more complete portability for work under union contract anywhere in the country. Most of the UFCW's multiemployer plans are linked by reciprocity agreements.

Blitzstein concluded that multiemployer plans offer some outstanding advantages and incentives to small employers. This little-know pension delivery system should be given serious consideration by small businesses who want to provide their employees with superior retirement benefits. If the policy makers really want to address the pension coverage gap in the employer- based retirement system, they should find ways to promote and encourage the multiemployer plan model.

David Kemps

Manager of Employee Benefits Policy

U.S. Chamber of Commerce

Mr. Kemps began by sharing some ideas from the U. S. Chamber of Commerce which the Chamber believes work, as well as some of the barriers faced by small employers starting a pension plan. Mr. Kemps commented that the misconception that owners of small businesses will sell their business when they reach retirement age and live off the proceeds is not true. They need a pension plan for themselves and want one just like the rest of us. They also want a plan in order to attract and keep quality employees. Mr. Kemps further noted that the Chamber sees examples all the time, especially among high- tech firms, where a pension plan and other benefits make a real competitive difference.

According to the U.S. Chamber of Commerce, the simple IRA has proven successful. However, one major concern—the major reason why many employers don’t have it—is the mandatory employer contribution feature. The Chamber findings indicated that for very small employers, ten employees or less, the matching contribution feature is not a deterrent. Nonetheless, the matching contribution feature of the simple IRA does become onerous for firms with 25, 50, or more employees. The Chamber has established an arrangement with Fidelity for their members and themselves. For employers with 25 employees or more, Mr. Kemps emphasized that the 401(k) plan is the plan of choice, and it has been very successful. Even though the costs can be fairly high, firms of this size have found it affordable. Moreover, there are no required contributions from the employer.Mr. Kemps stated that the idea of a payroll deductible IRA, included in the Portman- Cardin bill, will be very attractive the small employer. The payroll deductible IRA eliminates the matching contribution feature; thus, opening the opportunity to offer plans to small employers that have the desire but cannot afford the match. According to Mr. Kemps, the Chamber has been working hard with the appropriate branches of government to make a payroll deductible IRA a reality. One drawback is the possibility of small deduction amounts. He suggested one conduit worth exploring is to encourage payroll service bureaus to market payroll deductible IRA programs to their small employer clients. Mr. Kemps emphatically emphasized that pension plans have to be marketed!—small employers don’t wake up one morning and say, “I would like to have pension plan for myself and my employees.”The Chamber diligently seeks to reach small employers through various levels of the Chamber. For example, if a person is a member of U.S. Chamber, the Chamber has made arrangements with Fidelity Investments whereby the person can have access to Fidelity’s range of plans. A similar concept, with other entities, can be explored with State and Local level Chambers, and through various business groups and associations.Mr. Kemps further commented that the barriers for small employers are costs, both contribution and administrative, and the many rules and regulations. A survey of the Chamber’s membership revealed that a major deterrent is the top-heavy rule. It not only keeps small employers from having plans, but also keeps the providers from marketing a plan effectively to them. Kemps concluded that lastly, apathy is a barrier, i.e. employees, especially younger employees, can always find other priorities for the money than retirement savings. Kemps suggested the creation of a computer program that shows the effect on take-home of putting away various percentages into a retirement plan. Employees would be surprised that it will not be that much of a burden on their take-home pay.Meeting of July 7, l998

R. Theodore “Ted” Benna

President, 401 (k) AssociationMr. Benna began his testimony by explaining what the 401 (k) Association does--set up and administer 401 (k) and 401 (k) SIMPLE plans for small employers. He stated that studies indicate that 50% of the workforce does not have any form of private retirement coverage. The most significant gap in coverage is with the employees of small employers.

Mr. Benna proceeded to discuss the barriers to small employers in setting up and maintaining a plan. These barriers are twofold: 1) administrative cost and 2) complex tax laws and regulations. In addressing the cost barrier, Mr. Benna stated that it is possible to provide a high quality/low cost 401 (k) plan for the small employer market. The 401 (k) Association program is priced at $700 a year for full service, compared with the $3,000 to $4,000 a year charged by other providers.

In discussing the complex legal barrier, Mr. Benna cited the top heavy rules as a major deterrent. The plans of small start-up companies invariably will be top heavy and the problem will be there for at least five years. This will cause the employer to have to make the three percent minimum contribution which is difficult for many employers. the top heavy rules coupled with the discrimination testing relative to the contributions of highly compensated and non-highly compensated employees are very challenging concepts for the small employer to understand.

Mr. Benna made the following recommendations that would make it easier for small employers to establish retirement plans: (1) Eliminate the top heavy rules, or, (2) Simplify the rules by:(a) Changing the key employee definition to include only 5percent owners without applying the attribution of stock ownership to family members, (b) Eliminating the 5-year rule both for determining key employees and for determining whether a plan is top heavy, (c) Reducing the 3 percent minimum contribution to a 2 percent automatic contribution or a dollar for dollar match up to 3 percent of compensation, and (3) Allow a $1,000 tax credit towards the cost of establishing a plan.

Mr. Benna pointed out that while the complex top heavy rules applicable to regular 401 (k) plans do not apply to the SIMPLE 401 (k), it is not always the answer. The SIMPLE 401 (k) is great where it fits, but is simply not an alternative for many small businesses. The level of required employer contribution is much more than most small employers can afford. Starting with this contribution level also creates a longer term problem for companies that are expected to grow. On the other side, some employers would like to be able to make higher contributions than the SIMPLE 401 (k) allows.

The following recommendations for law changes were made in order to make the SIMPLE 401 (K) a better option for small businesses: (1) Eliminate or make optional the contribution requirement for 5% owners, (2) Permit employee deferrals only with a lower maximum contribution limit for 5% owners, (3) Permit transfers from an IRA SIMPLE to a 401 (k) (4) Permit a discretionary profit sharing contribution.

Mr. Benna opined that realistically the biggest barrier of all to the establishment of retirement plans by the small employer is economic resources. A lot of small businesses will not be reached in terms of retirement plans, but there is a subgroup with 5 to 10 employees that are addressable by continuing to listen to what the barriers are that prevent the establishment of plans.

Alan Kanter

President, Alan Kanter & Associates, Inc.

The small business market, which Mr. Kanter served for over 26 years, is an employer with 100 or less employees. Of the 600 plus plans administered, 80 percent have less than 25 participants and about 50 percent less than 10. The service provided is personalized, hands-on, without any products to sell, and is usually to a founder-owner without the internal staffing to stay abreast of the complex and constantly changing rules and regulations.

Based on Kanter’s experience, he found that small employers only adopt retirement plans if there is a tax incentive for them to do so. Thus, if his firm can show an employer that 60% or more of the monies contributed accrue to the benefit of themselves and family members, they are ready to listen. He has also found that employees of small employers are more concerned with salary rather than fringe benefits. However, once an employee has been with an employer with a plan, it is contagious because it becomes an important consideration with a new employer if they change jobs.According to Kanter, the savings rate in the United States is very low. With respect to retirement plans, the percentage of small businesses that have them is very low, something in the order of 17%. Thus, increasing participation on the part of small business, Kanter believes, can help to improve the savings rate in our country plus accomplish several other good things for the small employer. Once a plan is established, it does help to attract and retain a better employee. Besides benefiting the employer tax wise, there is a “trickle down” effect that benefits all employees. Many employees that have been with an employer for a long time have account balances approaching six figures or more, all of which is employer contributions.Kanter commented that one trend among small employers that he has found disturbing is the proliferation of 401(k) plans as a substitute for the pension plan. Thus, the burden for saving is shifted from the employer to the employee. He believes the 401(k) plan is a wonderful supplemental plan, but the employer should provide a basic benefit.

Kanter observed a major stumbling block making the small employer reluctant to adopt a plan is the complex rules and regulations. In addition, the laws are constantly changing. Admittedly, the changes have been more positive over the last few years to simplify things compared with what occurred through the 1989 act when we went through TEFRA, DEFRA and RIA.

Those were very challenging laws to small businesses. The number of retirement plans that Kanter’s firm administers dropped from over 1200 to 600 over a period of two years. Of the 600 plans currently administered, only about 35 are defined benefit plans compared with 250 before. Of the 35 defined benefit plans currently, about 30 of them cover the owner of the business and spouse. Kanter recommended terminating many of the defined benefit plans where there was no longer a tax benefit associated with many of them, and the small plan audits in the 1989-90 time frame made them difficult to justify. With the change in the law in 2000, many employers will be encouraged to establish defined benefit plans. Kanter further deemed that the incentives offered under the Portman-Cardin bill are encouraging.What can be done to encourage small employers to establish plans? - (1) Educate the public on the need to save. Think of savings as a three-prong approach, Social Security, personal savings, and retirement savings, (2) Eliminate IRS user fees, (3) Simplify regulations.

Beverly A. Holmes, Vice President

Massachusetts Mutual Life Insurance Company

And

Julie R. Weeks, Director of Research

National Foundation for Women Business Owners

Beverly Holmes, Vice President of Retirement Services at Massachusetts Mutual Life Insurance Company, and. Julie Weeks, the Director of Research for the National Foundation for Women Business Owners (National Foundation) focused their testimony on women-owned small businesses based on a recent study conducted by the National Foundation. MassMutual commissioned this study and it is the first to focus specifically on women business owners and retirement planning. As of 1996, there were nearly 8 million women-owned businesses in the United States, generating nearly $2.3 trillion in revenues.

The National Foundation conducted telephone interviews with a nationally representative random sample of business owners with 10 or more employees—399 women business owners and 211 men business owners. The survey asked business owners: 1) whether they offered retirement plans; 2) what the characteristics of those plans were; 3) what they considered important when designing and maintaining those plans and; 4) what factors were important to them when making decisions about retirement matters.Small business owners are becoming more concerned about the issue of retirement. However, retirement is still not rated as one of the most critical issues facing women and men business owners with ten or more employees. Those issues ranking the highest were maintaining business profitability, finding and keeping qualified employees, managing cash flow, and managing and maintaining business growth. Nevertheless, more than half of the business owners surveyed indicated that they are more concerned than they were a year before about retirement issues, both for themselves and their employees. The level of concern is higher among business owners who are over the age of 35 and among those who do not yet have a retirement plan in place.

Among the employee benefits offered by the business owners surveyed, the most common are paid vacation (93%), health insurance (86%), life insurance (64%), and parental leave (60%). About half of the businesses surveyed currently have a retirement plan in place for qualified employees. The share of businesses with retirement plans rises with business size: 86% of the firms with 100 or more employees offer retirement benefits compared to 42% of those firms with only 10 to 19 employees. Women business owners are somewhat less likely to have a retirement plan: 49% of women-owned businesses, compared to 54% of men-owned businesses, currently offer a retirement plan. Interestingly, the survey shows this gender difference occurs predominantly among firms with 20 to 99 employees. Women business firms with 10 to 19 employees are just as likely as the male-owned business firms of the same size to offer a retirement plan.

In the businesses that offer retirement plans, about three-quarters of the eligible employees participate. Women business owners have typically had their retirement plans in place for a shorter period of time than male business owners. Both men and women business owners recognize that offering retirement benefits aids in the recruitment and retention of valuable employees. Fully three-quarters of the men and women business owners offering retirement plans indicate that having a plan has helped them recruit new employees, and 85% state that the retirement plan has helped retain their current employees.

Male and female small business owners identified some of the same key factors as affecting their satisfaction with a retirement plan. The factors they identified are: 1) regular statements that employer and employees can use to track plan performance; 2) an unwillingness to expose their own or their employees’ investments to risk; and, 3) the cost to set up and manage the plan 60% of the business owners would like to see a higher rate of return on investments, 42% would like to see more employees participate in the plan, and 37% would like to see less time and paperwork for their staff.Half of the business owners surveyed who do not offer a retirement plan for their qualified employees. Many indicated that they are gathering information and discussing the issue of retirement. Although many of the business owners who do not yet offer retirement plans acknowledge their merit in attracting and retaining valuable employees, both the men and women in this group identify cost as a key deterrent. For 33% of the business owners, the expense of setting up and maintaining a retirement plan is a problem. While some of the business owners reported that their employees do not want or need a retirement plan (19%), others indicated that their company is too small (11%) or not profitable enough (13%) for a retirement plan. However, about 40% of these employers intend to offer a retirement plan in the future year.

According to Ms. Holmes, what is clear from the National Foundation survey is that the level of coverage is directly related to the size of the employer. There are significant gaps in retirement plan coverage between large employers, which usually sponsor retirement plans, and small employers, which sometimes sponsor retirement plans, and between the small employers and very small employers, which frequently do not sponsor any retirement plans. The National Foundation survey found that 86% of firms with 100 or more employees offers retirement plans compared to 42% of firms with only 10 to 19 employees. The National Foundation survey also found that women owned firms with 10 or more employees were somewhat less likely to have a plan in place, and those with a plan in place have had it for a shorter period of time than their male counterparts. The gap in coverage by plan size means that more than twenty-five million employees who work for employers with less than 100 employees face an uncertain retirement, unless the retirement system can overcome the major deterrents to establishing a retirement plan among small employers.

The first step in closing the coverage gap is to understand better the needs of small employers. Among those challenges is the cost of establishing and administering a small employer retirement plan. Here Ms. Homes pointed to some positive developments. The competition for the retirement business of small firms has become fierce, as retirement plan providers focus on the small employer sector as the last big opportunity for growth in retirement plans. There is much more communication via the media and from providers with small employers about retirement benefits today. Establishing a plan is much less expensive today than many small business owners realize. Finally, retirement plan providers are offering small employers state of the art plan features and services formerly available only to large employer plans.

The National Foundation survey found that for 33% of small business owners without retirement plans, the expense of setting up and maintaining a retirement plan is a key deterrent to establishing a retirement plan. MassMutual believes that a start up tax credit for small business retirement plans would encourage new plan formation.

A second often cited obstacle to small employer plan formation is administrative complexity. Further simplification of the pension laws is both possible and desirable. Among the reforms, which MassMutual believes would be helpful to small businesses, are the repeal of the “top-heavy” rules, which impose expensive and complex regulations on businesses where 60% or more of accrued benefits are held by “key employees.” As a practical matter, this extra layer of regulation was targeted to small employers. Subsequent changes in the law have largely made the top-heavy requirements redundant.A third desirable change is the creation of a new simple defined benefit plan for small employers. Fourth, higher contribution and benefit limits as well as higher limits on includible compensation are also desirable.

Finally, retirement plans are not viewed as the most important benefit needed to attract and retain employees. The National Foundation Survey found that retirement benefits ranked 5th in importance among employee benefits after paid vacation, health insurance, life insurance, maternity or paternity leave and disability insurance. It is not enough simply to target small business owners. It is also important to target employees of small employers with information on the need to plan and save for retirement. According to Ms. Holmes, this will build demand among small employers considering which forms of compensation are most important to their employees. More resources need to be dedicated by both the private and public sectors to educate those employees.

Robert M. Landau, Esq.

Feder & Associates

Representing the National Coordinating Committee of Multiemployer Plans

Mr. Landau defined a multiemployer plan as a joint labor-management effort to provide benefits to employees on a non-profit basis. These plans are specifically intended to provide economic, cost efficient, guaranteed benefits for employees of small businesses. He recited as major differences and advantages of the multiemployer plan over 401 (k) plans the following: (1) guaranteed income replacement and (2) ability to provide past service benefits.

The following recommendations were made as a way to foster retirement plans among small businesses and particularly provide multiemployer plans as a viable option:

Eliminate the Code Section 415 benefit limits tied to compensation and the benefit limits that artificially suppress early retirement benefit limits

Repeal Code Section 412 funding limits for multiemployer plans

Provide tax credit for initial tax year to employers who participate in multiemployer plans

Facilitate merger of single employer plans into multiemployer plans

Disseminate through the DOL more information on multiemployer plans.

Meeting of August 11, 1998

Lana Keelty, Legislative Counsel

National Rural Electric Cooperative Association

The National Rural Electric Cooperative Association (NRECA) represents approximately one thousand rural electric cooperatives whose average size is about 35 employees. The NRECA offers both defined benefit and defined contribution plans. In addition to those plans, NRECA started a mutual fund in late 1990. The combined assets of these funds approached $5.6 billion in 1997.

The Defined Contribution Plan

At the end of 1997, more than 900 rural electric systems participated in the association's 401(k) savings option, covering more than 50,000 participants. Assets held by the plan exceed $2 billion. Participants may invest in five (5) diversified funds that invest in a range of securities including domestic equities, international equities, short and long term bond funds and money market funds. Assets are managed by in-house portfolio managers. The plan includes a loan option. Plan participants pay no account fees and are not charged make fund changes, plan distributions or plan amendments. Operational expenses are deducted from plan assets.

The Defined Benefit Pension Plan

The defined benefit plan provides employers with flexibility in plan design, professional asset management and plan administration support and services This plan essentially provides 100% coverage, a uniform benefit formula and is not integrated with Social Security. The plan has assets in excess of $3 billion and covers more than 850 rural electric systems with 50,000 plan participants. The plan pays benefits, either as a lump sum or as a monthly annuity to participants at retirement (or early termination of employment) and to beneficiaries upon a participant's death. The plan is organized as a multiple employer plan.. These services range from assistance in plan implementation, enrollment and record keeping to employee communication material, seminars and conferences.

June Robinson

Special Assistant to the Deputy Secretary

U.S. Department of Labor

June Robinson reviewed the following commitments of Secretary Herman and former Undersecretary Berg to the small business community: (1) the critical need for American workers to be educated as to the importance of retirement saving and planning, (2) the department’s strategic goal of providing protection of worker benefits and the recognition that a secure work force provides economic security for workers and their families and increases compliance with worker protection laws and encourages the provision of worker retraining.Ms. Robinson then went on to tell the Working Group that in the furtherance of these goals the DOL administers 140 federal statutes covering 10 million employers and 100 million employees. The Pension and Benefits Welfare Administration (PBWA) of the DOL protects pensions, health plans and employee benefits relevant to small businesses. It has regional offices and broad outreach programs.

Within the DOL and under the Small Business Regulatory Enforcement Act (SBREA), Special Assistant Robinson’s group provides small businesses with compliance assistance regarding DOL enforcement programs. The Small Business Administration Programs and the Regional Fairness Boards set up under that Act actively involve small business owners. Each of the ten (Federal) regions has a board of five small business owners that constitutes a “sounding board” for small businesses in those regions.As part of their outreach to small businesses the DOL prepared a special presentation for the Annual Conference of the National Black Chamber of Commerce. The presentation highlights Special Assistant Robinson shared were as follows:

Americans save four pennies of every dollar.

One of 2 Americans has no pension coverage at work.

One of 3 workers offered 401(k) plans does not participate.

Only one out of 4 Americans knows he or she will need to save for retirement and how much that retirement will cost.

One of 5 has saved nothing for retirement.

Small businesses employ 40 million workers, yet only 8 million of them are covered by pension plans.

Women earn less than men and female employment is high in service and retail positions -- industries with low pension participation rates.

Women switch jobs more often than men and move in and out of the work force to care for children or aging relatives reducing their ability to participate in long-term pension plans.

Within the private sector 46 % of white employees participate in pension plans compared to 26 % participation of Hispanic American and 38 % participation of African American employees.

Robinson concluded her remarks by discussing methods of communication with small business. Although the trend may be toward electronic information dissemination, many small businesses either cannot afford or do not rely on the Internet. The PBWA ?s education efforts should continue by utilizing pamphlet mailings and by personal contact at conferences.

Finally, in reply to questions from Council Members Mackell and Blackwell concerning the Department’s experience with changing levels of interest by small businesses in this subject, Ms. Robinson responded that interest among small employers in providing pensions to their employees is a relatively new phenomenon. Historically, small businesses have raised issues about fair labor standards and minimum wages more frequently than about pensions or retirements.Today, the DOL outreach efforts involves the National Association of Women Business Owners and a very wide variety of other associations. An example of this effort included the recent establishment by the National Black Chamber of Commerce of junior chambers of commerce on 10 college campuses to help collegiate entrepreneurs learn the responsibilities of business ownership and the retirement savings concept.

Russ Sullivan

Legislative Director and Tax Counsel

for Senator Bob Graham (Florida)

Mr. Sullivan reiterated that more women are working, and they are a higher percentage of the work force. There is increased mobility of workers, both in older and younger workers making portability of pension coverage important. The workforce in general includes fewer unionized workers – and therefore, generous or “high” retirement coverage plans are not available to a large percentage of workers. There continue to be low numbers of defined benefit plans.The legislative changes mandated by SB 2339 include a 6 year “phase in” of the PBGC premium for new plans rather than 100% applied at the beginning. In addition, this act reduces the look-back rule from 5 years to 1, so top heavy employers only have to look back one year to see if the employer’s contribution levels met the nondiscrimination requirements.Liz Liess

Counsel to the Senate

Special Committee on Aging

Liz Liess is Counsel to the Senate Special Committee on Aging that oversees income security, Social Security, and pension issues. Ms. Liess’ comments focused on the fact that retirement income is based on a three-legged stool of Social Security, employer-sponsored retirement plans and personal savings.Small business employers believe that employees prefer other kinds of benefits, such as health insurance to pension benefits.

Employers dislike administrative costs of pension plans

Small businesses with uncertain revenues don’t want to commit to a plan.Small business owners do multiple jobs themselves and don’t hire pension experts to assist in pension plan administration and set up.Under current law a family member is treated as a key employee regardless of his compensation.

Ms. Leiss alerted the Working Group to potential new legislation similar to SB2339, the Portman-Cardin bill, which is pending in the House of Representatives. If enacted this law would modify the family aggregation rule so a family member is not automatically treated as a key employee. Furthermore this legislation would redefine “key employee” to conform more closely to a highly compensated employee. For example, a key employee would be a 5% owner or an officer with compensation exceeding $80,000.Furthermore, the legislation exempts employers from top-heavy rules if they adopt the 401(k) safe harbor. It exempts them from having to make a very costly 7% contribution for each employee and prevents “top-heavy” rules from being triggered by employee contributions. Matching contributions would count toward the employer’s contribution requirement and shortens the look-back rule from 5 years to 1. In addition, the confusing requirement that “non-top heavy” plans must include top-heavy plan language in their plan documents is repealed.The program would offer a tax credit of $500 in each of the first 3 years of the plan's operation. Another tax credit for employers with 50 or fewer employees who offer matching contributions to employees would be created. The credit would be available in each of the plan’s first 5 years to match 50 % of contributions up to 3% of compensation but only for non-highly compensated employees. The credit would be refundable against payroll taxes, so employers with no federal income tax liability would be refunded against payroll taxes paid. The costs for businesses would be reduced by a repeal of fees ($100-$1,000) currently imposed on employers who seek IRS letters saying their plans are qualified. Finally, it would equalize the less restrictive cap on IRA contributions with the more restrictive cap on simple 401(k)'s.Council Member Cohen observed that the three witnesses favored creation of some kind of a tax credit, that “top heavy” rules were enacted in 1982 under a false perception that small employer plans were frequently abusive.Council Member Cohen reminded those present that: SB 2339 incorporates the following recommendations from the ERISA Advisory Council of 1997 to:

Create a simplified defined benefit plan.

Repeal the full funding limit, not just gradually increase it from 150 % to 170 %

Require that employers automatically send to defined contribution plan participants individual account benefit statements.

Require employers who sponsor defined benefit plans to send statements.

Meeting of September 8, 1998

Marla Kreindler, Esq.

Partner, Katten, Muchin & Zavis

And

Perry Shwachman, Esq,

Partner, Katten, Muchin & Zavis

Marla Kreindler noted that the various alternatives for a small business that wants to set up a defined contribution plan include the 401 (k), the Simple 401 (k), the Simple IRA, and the SEP. Each has its own advantages and disadvantages. She also compared these plans to a 403 (b) plans (for which most small employers are not eligible). Generally, the 403 (b) has the most liberal rules and would be most attractive to small businesses. Currently, 403 (b) plans are available only to certain government and not-for-profit organizations.

She reviewed the minimum coverage rules, minimum vesting rules, contribution limits, non- discriminatin rules, distribution restrictions and other rules (including top heavy rules, reporting and disclosure and fiduciary rules) which apply to these plans. Ms. Kreindler recommended that IRC Section 403 (b) be changed to cover small businesses (perhaps with some minor modifications).

Perry Shwachman pointed out that small business owners do not have time to deal with several vendors that may be involved with a retirement plan. They would prefer to have a bundled package that covered all their needs.

Mr. Shwachman noted that current Federal Securities Laws present some obstacles to insurance companies, banks and other financial services organizations in providing these bundles packages on a profitable cost effective basis. One problem is that the 403 (b) and IRA’s do not qualify for certain exemptions relating to registration and commingling of investment funds, that other qualified plans do.Mr. Shwachman recommends that the Federal Securities Laws (Section 3 (a)(2) of the Securities Act of 1933 and Section 3(c)(11) of the Investment Company Act of 1940) be amended to allow insurance companies and banks to utilize separate accounts and commingled funds for all retirement plans (e.g. SIMPLE IRA’s) without special registration.Marysue Wechsler

Managing Director, International Foundation for

Retirement Education representing

The Certified Financial Planner (CFP) Board of Standards, Inc.

The CFP board has certified over 32,000 financial planners based on certain education, examination, experience and ethics requirements.

Ms. Wechsler noted that “the cost, complexity and liability are too great for most small business owners to consider defined benefit plans.” Defined contribution plans put more responsibility on the employee to decide how much to save and how to invest the savings. “Most workers do not have a clue how to project their potential retirement needs, or if they are saving enough to meet their future retirement needs, or if they are saving enough to meet their future retirement goals, or how to help themselves save more and at the same time meet other necessary life goals.” She also noted that they do not understand risk or know how to make investment decisions.Ms. Wechsler noted that education was the best way to motivate workers to take the necessary steps to assure a financially worry-free retirement.

To encourage employers to provide this financial education and to encourage employees to seek out this advice, she made the following RECOMMENDATIONS:

Allowing financial planning services to receive the same favorable tax treatment accorded to qualified group legal services under IRC Section 120.

Exempt financial planning services from the two percent floor on miscellaneous itemized deductions (IRC Section 67).

Provide tax credits for small businesses that provide financial education for their employees. Those providing this education should meet ceratin minimum standards, including certain ethical standards (to avoid a biased sales pitch)

V. Exhibits and Written Materials Received

A. 1998 Index for Small Business Working Group

May 4, 1998 Meeting

Agenda

Official Transcript

Executive Summary of Transcript

“Simple Retirement Solutions for Small Business,” a brochure currently being distributed by the U.S. Department of Labor.June 8, 1998

1) Agenda

2) Official Transcript

3) Executive Summary of Transcript

4) “Barriers That Keep Small Employers from Sponsoring Retirement Plans” by David W. Kemps, manager, employee benefits policy, U.S. Chamber of Commerce plus 1. a Chamber statement made on March 17, 1998 by John Kimpel re S. 957, the Pension Prosave Act before the Senate Committee on Labor and Human Resources; 2. a Chamber statement made May 5, 1998 by Lynn Franzoi on Pension Reform and H.R. 3788, the Retirement Security For the 21st Century Act, before the subcommittee on Oversight of the House Committee on Ways and Means; and 3. Nation’s Business: “Retirement Plans: Options, benefits and risks for small firms,” dated July 1997.Written testimony by David S. Blitzstein, director of the office of negotiated benefits for the United Food & Commercial Workers International Union (UFCW), entitled “The Role of Unions and the Multiemployer Plan Alternative.”News Release from the Employee Benefit Research Institute, the American Savings Council and Mathew Greenwald & Associates, Inc., on “Small Employers: Retirement Planning’s Overlooked Giant?” Including a Small Employer Retirement Survey (SERS) on “No Thank You: Small Employers Without Retirement Plans”.A Choice for Small Business Owners: SEP or SIMPLE from the Vanguard Internet Website. 7/22/97.

July 7, 1998 Meeting

1) Agenda

2) Official Transcript

3) Executive Summary of Transcript

4) Outline provided by Theodore R. “Ted” Benna for his appearance before the W.G. on July 7, 1998, including a brochure for his 401(k) Association entitled the “401(k) Starter Plan” designed for small business.

5) Written Testimony by Robert M. Landau, Feder & Associates, July 7, 1998, representing the National Coordinating Committee for Multiemployer Plans and two of NCCMP’s pamphlets: A Basic Guide to Multiemployer Plans and Annual Review, Fall 1997

6) A packet prepared by MassMutual including written testimony by Beverly A. Holmes, Vice President, MassMutual Life Insurance Company, and Julie R. Weeks, Director of Research, National Foundation for Women Business Owners; a pamphlet “Finally, a retirement program that goes the extra mile for small businesses”; a news report “Women business owners more likely to add retirement plans than men in the next five years” discussing the results of a survey conducted by NFWBO in 1997 on the topic; as well as the study, “Retirement Trends in the Small Business Market: A Survey of Women and Men-Owned Businesses” and a “Key Facts About Women-Owned Business” pocket brochure.

7) “Fewer Small Businesses Are. Offering Health Care and Retirement Benefits” by Rodney Ho, for the Wall Street Journal, dated June 24, 1998“Study: Many employees today cannot afford healthcare plans,” article from the Journal of Commerce, June 24, 1998“Online 401(k) Advisers Brace for Fidelity: Giant Plan Provider Uses Education to Skirt Legal Issues”, by Paul Katzeff, Investor’s Business Daily, June 24, 1998“Employer Firms See Burgeoning Market: Small Businesses Seek More Help in Personnel Matters” by Melanie Trottman, Dow Jones Newswires, June 24,1998.(Also provided in July to all Council members):

“401(k) Pension Plans — Many Take Advantage of Opportunity to Ensure Adequate Retirement Income,” a General Accounting Office report to the Chairman, Subcommittee on Social Security, Committee on Ways and Means, House of Representative dated August 1996.Private Pensions — Plan Features Provided by Employers That Sponsor Only Defined Contribution Plans,” a General Accounting Office report to the Chairman, Subcommittee on Government Reform and Oversight, House of Representatives, dated December 1997.“A Look at 401(k) Plan Fees,” prepared by the U.S. DOL and issued in June 1998.Final Report - a Study on 401(k) Plan Fees and Expenses, prepared for the Department of Labor by Economic Systems, Inc. and The HayGroup, April 13, 1998.

August 11, 1998 Meeting

1) Agenda

2) Official Transcript

3) Executive Summary of Transcript

4) Memo from Chair Mackell to committee members to focus discussion at the August meeting.

Senator Bob Graham’s (D-Fla.) Pension Reform Bill (S.2339) and a PWBA backgrounder on the Pension Coverage and Portability Act of 1998.Written Testimony of the National Rural Electric Cooperative Association presented by Lana Keelty, including an extensive marketing package the NRECA uses with its members (also, Ms. Keelty, legislative counsel, sent a letter August 13 answering two questions posed by members Cohen and Greenwood-Harris.

September 8, 1998 Meeting

1) Agenda

2) Official Transcript

3) Executive Summary of Transcript

4) “Simple Section 401(k) Plans Lag Behind Other Simplified Defined Contribution Plans” article from the August 17, 1998, issue of BNA Pension and Benefits Reporter by Colleen T.Congel.

5) Copy of H.R. 1891, the Representatives Portman and Cardin Bill entitled the “Staffing Firm Worker Benefits Act of 1997.”

6) “Employers Don’t Want to Be Pension Saviors” article from the Journal of Commerce, August 14, 1998.

7) Written Testimony by Marla J. Kreindler and Perry J. Shwachman, Katten Muchin & Zavis of Chicago, Ill. September 8, 1998.

8) Testimony of the Certified Financial Planner Board of Standards, Inc., presented by Marysue J. Wechsler, CFP, Managing Director of the International Foundation for Retirement Education. (Packet included “Questions to Ask When Choosing a Financial Planner”; “What You Should Know About Financial Planning; Mark of Quality”, a news release on “Americans Depending Most on Employers to Fund Retirement, Say Financial Planners in New Survey” and the CFP 1997 Annual Report.

9) Survey Findings on the number of Roth IRAs, Education IRAs and SIMPLE IRAs established in the 1st Quarter, 1998, prepared by the Investment Company Institute and provided by Senior Counsel Russell G. Galer via a Letter to Meredith Miller, dated August 28, 1998.October 5, 1998 Meeting

1) Agenda

2) Official Transcript

3) Executive Summary of Transcript

4). Draft Report of Working Group

November 12, 1998

1) Agenda

2) Official Transcript

3) Executive Summary of Transcript

4) Letter to Meredith Miller from Karen Ferguson from the Pension Rights Center dated October 31, 1998, on the topic of repealing top-heavy rules.

5) Top-Heavy and The New 401(k) Safe Harbor Rules as prepared by Kenneth S. Cohen, ERISA Advisory Council Vice Chair, November 12, 1998.

6) Second draft of the Working Group’s reportVI. 1998 SMALL BUSINESS WORKING GROUP MEMBERS

Dr. Thomas J. Mackell, Jr., Chairman (11/96-99)

Simms Capital Management, Inc.

Eddie C. Brown, Vice Chairman (11/97-00)

Brown Capital Management

Marilee P. Lau, (11/95-98)

KPMG Peat Marwick, LLP

J. Kenneth Blackwell, (11/96-99)

Treasurer, State of Ohio

Janie Greenwood Harris (11/97-98)

Mercantile Bancorporation Inc.

Kenneth S. Cohen (11/95-98)

Massachusetts Mutual Life Insurance

Barbara Ann Uberti (11/96-99)

Wilmington Trust Company

Richard (Dick) Tani (11/97-00)

Retired, William Mercer Co.

Judith Ann Calder (11/97-00)

Abacus Financial Group, Inc.

• EBSA Offices

• Organization Chart

• Final Rules

• Notices

• Proposed Rules

• Public Comments

• Advisory Opinions

• Exemptions

• Field Bulletins

• Information Letters

• Interpretive Bulletins

• EO 12866 Guidance

• Abandoned Plans

• Correction Programs

• Fiduciary Education

• For Health Plans

• For Retirement Plans

• For Small Employers

• Reporting and Filing

• Webcasts

Consumer Information

• Health Plans

• Retirement Plans

• Retirement Savings

• Questions/Assistance