November 13, 1997
Dedication
This Report is dedicated in memory of VIVIAN LEE HOBBS, with gratitude for
her significant contributions to the ERISA Advisory Council. Vivian was an
attorney at Arnold & Porter in Washington, D.C. and a member of the Council
from November of 1995 until June of 1997. The quality of our experience as
members of this Working Group has been greatly enriched by her insights and
perspective, and we are the poorer for her absence.
EXECUTIVE SUMMARY
Findings:
-
The total number of defined benefit plans increased from 103,000 in 1975
to 175,000 in 1983, and then declined precipitously to 83,600 in 1993. In
contrast to the fall in defined benefit plans, the total number of private
defined contribution plans rose steadily from 208,000 in 1975 to 618,500 in
1993.
-
The decline in the number of defined benefit plans reflects a large number
of small plan terminations (particular those with fewer than 100 participants).
In 1980, the PBGC covered more than 1.5 million participants in small employer
plans; by 1996 that number had declined to less than 800,000.
-
The trend away from defined benefit plans is well underway and shows
little or no evidence of abating. There is a sharp decline in the number of
defined benefit plans of small employers. Among large employers, the most
optimistic conclusion is that the number of defined benefit plans is relatively
stable.
-
While defined benefit plans remain an important part of the employer-based
retirement system, especially among large employers, there is little or no
evidence that employers are establishing new defined benefit plans in
significant numbers.
-
There appear to be a number of reasons for the movement away from defined
benefit plans, but little consensus on the relative weight of each cause.
Perhaps the most difficult issue to assess is the extent to which regulatory
changes may be responsible for the movement away from defined benefit plans.
The Working Group agrees with the conclusion of a number of witnesses who
testified that regulatory trends have played a significant role.
-
While Congress has made focused efforts to create simple defined
contribution plans which promise to reduce costs to smaller employers, Congress
has created no comparable simplified defined benefit plan.
Recommendations:
-
The Working Group recommends that the Secretary of Labor support
legislative and regulatory changes that will restore the viability of defined
benefit plans. Defined benefit plans play a critical role in providing
retirement benefits to American workers, including those employed by small
businesses.
-
Repeal the 150% of Current Liability Limit. Although the
recent increase in the full funding limit from 150% to 170% is a step in the
right direction, the Working Group believes that a current liability limitation
on funding is inconsistent with sound retirement policy and should be repealed.
-
Change the Limits on Benefits for Defined Benefit Plans.
The Working Group recommends the following four changes: (1) the maximum dollar
limit be increased at least to the 1982 levels as indexed; (2) double the
$10,000 minimum annual benefit cap for lower paid employees to $20,000 and
index it; (3) restore the $75,000 floor for actuarial reductions at age 55 and
older; and (4) eliminate the requirement of actuarial reductions in benefits
that commence between age 62 and the Social Security retirement age.
-
Permit Pre-tax Contributions to a Defined Benefit Plan.
Currently, employees can make elective deferrals to SEPS and 401(k) plans up to
a maximum of $10,000 in 1998 indexed. Although mandatory and voluntary employee
contributions may be made to private sector defined benefit plans, such
contributions must be made on an after-tax basis. An opportunity to make pre-
tax contributions to defined benefit plans should be established.
-
Remove IRS Regulatory Delay and Uncertainty About Cash Balance
Plans. A number of witnesses commented that the failure of the Treasury
Department and the Internal Revenue Service to develop guidance for cash balance
plans has had the practical effect of discouraging employers from establishing
cash balance plans. Cash balance plans combine attractive features of both
defined benefit and defined contribution plans. Resolution of these delays and
uncertainties would encourage new plan formation of these hybrid plans. The IRS
and Treasury should make resolution of these issues a high priority.
-
Create a Simplified Defined Benefit Plan for Small Employers. Simply stated, there is a hole in the current retirement system. If
defined benefit plans are to be a viable option for small employers, legislation
needs to be enacted creating a simplified defined benefit plan. The Secure
Assets for Employees Plan (SAFE) Act of 1997, H.R. 1656, as introduced by
Representatives Earl Pomeroy (D-ND), Nancy Johnson (R-CT) and Harris Fawell (RIL)
in May, 1997, has many attractive features and provides an excellent starting
point for further consideration of a simplified, small employer defined benefit
plan.
-
Increase the Maximum Compensation Limits for Defined Benefit Plans . Currently, the Internal Revenue Code requires that compensation in
excess of $150,000, indexed to $160,000 in 1998, cannot be taken into account in
determining benefits under both defined benefit and defined contribution plans.
The compensation limit for defined benefit plans should be increased to
at least $235,000, indexed, in order to encourage defined benefit plan
formation.
-
Further Study of In Service Distributions Is Needed. There
is a growing use of pre- retirement distributions from defined contribution
plans and IRAs. By contrast, the inability to provide in service distributions
is a significant disadvantage for defined benefit plans from an employee
perspective. Given the lack of information on what is a complex, but important
issue, the Working Group recommends that the 1998 ERISA Advisory Council examine
separately the issue of pre-retirement "leakage" from the retirement
system.
-
Mandatory Annual Disclosure of Benefits. Currently, a
participant in a defined benefit plan may make a written request once a year and
receive a statement of his or her accrued benefits and accruals. The Working
Group recommends that ERISA be amended to require that defined benefit plan
participants be provided once a year with a statement of their projected
retirement benefit and their vested accrued benefit. Upon written request, a
participant should also receive a worksheet explaining how the benefit amounts
were calculated.
-
PBGC Should Assume An Educational Role. The Pension
Benefit Guaranty Corporation has a singular interest in promoting defined
benefit plans, the advantages of which are not well understood by employers and
less understood by employees. Unlike 401(k) plans and IRAs, which are constantly
being promoted by financial intermediaries, there is little or no commercial
promotion of defined benefit plans. Since the PBGC has shown little inclination
to take on this vital role voluntarily, perhaps Congress should mandate it as
part of the PBGC's mission.
TABLE OF CONTENTS
I. WORKING GROUP'S PURPOSE AND SCOPE
II. WORKING GROUP PROCEEDINGS
III. FINDINGS
IV. RECOMMENDATIONS
V. SUMMARY OF TESTIMONY
VI. EXHIBITS AND WRITTEN MATERIALS RECEIVED
VII. MEMBERS OF THE WORKING GROUP
WORKING GROUP ON THE MERITS OF
DEFINED CONTRIBUTION VS. DEFINED BENEFIT PLANS
WITH AN EMPHASIS ON SMALL BUSINESS CONCERNS
The Working Group on the Merits on Defined Contribution vs. Defined Benefit
Plans presents its report and recommendations to the 1997 ERISA Advisory Council.
The Members of the Working Group urge that the report be adopted by the Advisory
Council and submitted to the Secretary of Labor pursuant to Section 512(b) of
the Employee Retirement Income Security Act of 1974.
I. WORKING GROUP'S PURPOSE AND SCOPE
Defined benefit plans and defined contribution plans have been widely
available to provide retirement benefits to employees for the last fifty years
or more. Since the Employee Retirement Income Security Act (ERISA) was enacted
in 1974, however, the private pension plan universe has changed dramatically.
Defined benefit plans dominated the 1974 pension plan universe. Without
question, one of the most important of changes since the enactment of ERISA is
the movement away from defined benefit pension plans to defined contribution
plans and especially 401(k) plans. Recognizing the significance of the trend
towards defined contribution plans, over the last several years, the ERISA
Advisory Council has examined the implications of the growth in defined
contribution plans and has recommended a number of changes in law and regulation
relating to defined contribution plans.<1>
This year the ERISA Advisory Council turned its attention to the causes and
effects of the movement away from defined benefit plans. The Working Group on
the Merits on Defined Contribution Vs. Defined Benefit Plans heard from
fourteen witnesses and received written testimony from a number of others on
various aspects of this trend.<2> While those testifying represented
divergent interests, there was a remarkable unanimity among the witnesses on the
causes of this trend away from defined benefit pension plans and its effect on
the private pension plan universe. Consistent with its charge from the full
Council, the Working Group examined with particular interest the implications of
this trend for employees of smaller employers.<3>
The most recent data on the pension plan universe is derived from 1993 Form
5500 Annual Reports. According to the Private Pension Plan Bulletin<4> , in 1993 approximately 83.9 million Americans participated in private
pension plans.<5> The total assets in private pension plans reached
$2,316 billion in that year.<6> Today, there are 85 million participants
in private pension plans and the total assets in private pension plans exceed
$3.5 trillion.<7>
The total number of private pension plans (both defined benefit and defined
contribution plans) more than doubled between 1975, when the number was placed
at 311,000, and 1987, when the number reached 733,000. In 1993, after declining
slightly, the total number of pension plans stabilized at approximately 700,000.<8>
The numbers for private defined benefit plans alone, however, are not as
healthy. The total number of defined benefit plans increased from 103,000 in
1975 to 175,000 in 1983, and then declined precipitously to 83,596 in 1993. In
contrast to the drop in defined benefit plans, the total number of private
defined contribution plans rose steadily from 208,000 in 1975 to 618,500 in
1993. In 1975, defined contribution plans accounted for 67% of all private
pension plans. By 1993, defined contribution plans made up 88% of all private
pension plans.
Most collectively bargained plans are defined benefit plans. In 1993, 2% of
all plans were collectively bargained (16,789) and most of those remain as
defined benefit plans. Approximately 11% of all defined benefit plans (9,343
plans) are collectively bargained as compared to 1% of all defined contribution
plans (7,445 plans). <9>
In 1993, total participation in private retirement plans was 83.9 million.
Of those 64.7 million were active, 8.7 million were retired or separated
participants receiving benefits and 10.4 million were separate participants with
a vested right to a benefit.<10> There were fewer total participants in
defined benefit plans (40.3 million) than in defined contribution plans (43.6
million). However, given the historic dominance of defined benefit plans,
participants receiving benefits are overwhelmingly in defined benefit plans (8.2
million).<11> About 10 million participants were in multiemployer plans,
of which 8 million were participants in defined benefit plans.<12>
Despite their declining numbers, defined benefit plans accounted for 54% of
private pension plan assets, or $1,248 billion in 1993. <13> Among single
employer plans, the total assets of which equaled $2,091 billion in 1993,
defined benefit plans accounted for roughly one-half of all assets ($1,050
billion) and defined contribution plans accounted for the other half ($1,042
billion).<14> And although 43.6 million participated in defined
contribution plans in 1993, compared to the 40.3 million who participated in
defined benefit plans in that year, the vast majority of Americans receiving
annuity benefits because of retirement or separation from employment were in
defined benefit plans (8.2 million, or 94% of all such participants).<15>
Recent data from the Pension Benefit Guaranty Corporation (PBGC) concerning
single employer plans insured by the PBGC provided some additional perspective.<16>
From 1987 to 1990, over 10,000 mostly small employer defined benefit plans
terminated each year without any claim on the PBGC. Since 1990 terminations
have declined to fewer than 4,000 per year. Although the number of covered
participants has increased by about 18% since 1980 to a total of 33 million
participants in single employer defined benefit plans, the total number of plans
has declined sharply from an all time high of 112,000 plans in 1985 to 47,000
plans in 1996. Large plans are responsible for the growth in the overall number
of plan participants, while the decline in the number of plans reflects a large
number of small plan terminations (particular those with fewer than 100
participants). In 1980, the PBGC covered more than 1.5 million participants in
small employer plans; by 1996 that number had declined to less than 800,000. <17>
However, because much of the decline was in plans with less than 25
participants, there has been little impact on the overall number of employees
covered by defined benefit plans. Participants in single employer defined
benefit plans has remained relatively unchanged by industry, with more than
one-half working in manufacturing.
After reviewing recent trends concerning numbers and types of private
pension plans, participation levels and assets, the Working Group focused on a
number of key questions concerning defined benefit plan trends.
-
Do defined benefit plans continue to serve an important role in the
private pension plan system?
-
Is the trend away from defined benefit plans indicative of an
across-the-board decline in defined benefit plans or is it limited to certain
types of employers or certain sized plans?
-
What are the causes of this drift away from defined benefit plans?
-
To what extent, if any, is pension or tax law responsible for this trend?
-
Are changes in law and regulation relating to defined benefit plans
desirable?
-
If so, what changes are recommended?
In particular, the Working Group focused its attention on the situation of
smaller employers. Until quite recently, only a very modest percentage of small
employers (10 to 100 employees) have established private pension plans. And
although there has been an increase in the number of defined contribution plans
sponsored by small employers, the members of the Working Group share a concern
with many in the employee benefits community that too few employees of small
employers have the opportunity to participate in a private pension plan,
particularly defined benefit plans.
II. WORKING GROUP PROCEEDINGS
To achieve its goals, the Working Group held seven public meetings at which
it received oral and written testimony from a variety of individuals and
organizations having knowledge about and an interest in the issues relating to
defined benefit plans being studied by the Working Group.
On April 8, 1997, the Working Group reviewed and discussed an ABC News Nightline segment of March 7, 1997, "When You Retire" depicting issues
surrounding the change from a defined benefit plan to a defined contribution
plan by the Frontier Corporation which owns Rochester Telephone Company in New
York. Also, on April 7, Dr. Paul Yakoboski, a Senior Research Associate at the
Employee Benefit Research Institute, testified on current research on defined
benefit plan sponsorship and participation trends.
A second public hearing was held on May 13, 1997 and the following persons
testified: Richard Hinz, Chief Economist, Pension and Welfare Benefits
Administration, Office of Policy & Research, U.S. Department of Labor (DOL),
who also discussed defined benefit sponsorship and participation trends based
upon the statistical database maintained by the Department of Labor derived from
Form 5500 Annual Reports and periodic supplements to the current population
survey. Also testifying was Patricia Scahill, a Consulting Actuary with
Actuarial Sciences & Associates, Inc. and currently a Vice President of the
Society of Actuaries. Ms. Scahill presented the Working Group with
recommendations for a number of changes in law or regulation which she believed
would encourage employers to establish and maintain defined benefit pension
plans. Larry Sher, Principal and Chief Actuary, and Theresa Stuchiner, Special
Consultant, of Kwasha Lipton Group of Coopers & Lybrand HRA (Human Resource
Advisory) then testified about the development of a hybrid form of defined
benefit plan, known as a cash balance plan, which combines attractive features
of traditional defined benefit plans and defined contribution plans. Finally,
Cynthia Moore, Washington Counsel to the National Council on Teachers Retirement
testified on the features of public sector defined benefit plans, including
portability features which are rarely found in private sector defined benefit
plans.
A third public hearing was held on June 12, 1997 focusing on defined benefit
plans of small employers. The first witness was Congressman Earl Pomeroy (D-ND)
who spoke on legislation he has sponsored, the Secure Assets for Employees Act
(SAFE) of 1997, which would create a simplified defined benefit plan for small
employers. Congressman Pomeroy was assisted by James Delaplane, Legislative
Counsel from the Congressman's office. Then, Congressman Pomeroy's testimony was
supplemented by the testimony of George Taylor, president of National Retirement
Plan Services and vice president of the executive committee of the American
Society of Pension Actuaries (ASPA) and Brian H. Graff, ASPA's executive
director, who discussed the need for a simplified defined benefit plan in the
small plan arena and responded to technical questions on how the proposed SAFE
plan would operate.
A fourth public hearing was held on July 17, 1997. The first witness was
Congressman Sam Gejdenson (D-CT) who discussed legislation he sponsored, the
Retirement Security Act of 1997, which would broadly reform pension law.
Congressman Gejdenson focused his remarks on his proposal to repeal the 150% of
current liability funding limit of Internal Revenue Code Section 412( c )(7) and
his proposal to provide small employers with a $500 start up tax credit in the
year they first establish a qualified retirement plan. Congressman Gejdenson was
assisted by Francis Creighton, Legislative Assistant from the Congressman's
office. Following, a panel spoke on defined benefit plans from the perspective
of organized labor. The first panelist was Shaun O'Brien, Benefits Analyst,
AFL-CIO Public Policy Department, who testified on the concerns of organized
labor on the shift towards 401(k) plans among smaller employers. The second
panelist was David Hirschland, Assistant Director of the Social Security
Department of the United Auto Workers (UAW), who testified on the economic
efficiencies of defined benefit plans. The third panelist was Judy Mazo, the
Segal Company on behalf of the National Coordinating Committee for Multiemployer
Plans, who testified on the success of multiemployer defined benefit plans in
providing retirement benefits to employees of smaller employers.
A fifth public hearing was held on September 16, 1997. The sole witness was
Edward Friend, President and Chief Executive Officer of EFI Actuaries. Mr.
Friend spoke of the risks that defined contribution plans will not provide
adequate retirement benefits for today's retirees because of pre-retirement
distributions and other factors.
The sixth and seventh public hearings were held on October 7 and November
12, 1997. The Working Group reviewed the oral and written testimony which had
been submitted, discussed tentative recommendations to be included in its
report and reviewed drafts of its report.
III. FINDINGS
Many issues concerning the movement away from defined benefit plans are the
subject of debate. What is not open to serious question is that the trend from
defined benefit plans is well underway and shows little or no evidence of
abating. There is a sharp decline in the number of defined benefit plans of
small employers. Among large employers, the most optimistic conclusion is that
the number of defined benefit plans is relatively stable.<18> However, a
number of witnesses at the Working Group's hearings acknowledge that the
available data fail to take into account so- called "frozen" plans.
Frozen plans are plans that have not been terminated, but have ceased accruing
benefits and are no longer accepting new participants. The Working Group
believes, based on anecdotal information, that there are a significant and
growing number of frozen defined benefit plans. There is some evidence that many
employers which terminate or freeze defined benefit plans are replacing them
with defined contribution plans.<19>
While defined benefit plans remain an important part of the employer-based
retirement system, especially among large employers, there is little or no
evidence that employers are establishing new defined benefit plans in
significant numbers. The emerging large employers of today, for example high
technology companies, are establishing defined contribution plans, not defined
benefit plans. Although they are still relatively rare, a number of witnesses
focused the Working Group's attention on hybrid plans, and especially cash
balance plans, which combine the features of defined benefit and defined
contribution plans.<20> To date, however, the number of hybrid plans seems
relatively small. Cash balance plans have been concentrated in the financial
services sector and have been adopted as a replacement for traditional defined
benefit plans. The attractiveness of these hybrid plans is that they combine
desirable features of both defined benefit and defined contribution plans. A
number of witnesses commented that the failure of the Treasury Department and
Internal Revenue Service (IRS) to develop guidance for cash balance plans, as
well as several years of delay in processing determination letter submissions to
the IRS, has had the practical effect of discouraging employers from
establishing cash balance plans.
There appear to be a number of reasons for the movement away from defined
benefit plans, but little consensus on the relative weight of each cause. Among
the reasons cited by witnesses were:
-
a change in employer attitudes toward employees;
-
a shift in jobs from the manufacturing sector, where defined benefit
plans are common, to the service sector, where defined benefit plans are
uncommon;
-
a higher level of job mobility which encourages defined contribution
plans with their perceived portability and discourages traditional defined
benefit plans which reward long service employees;
-
the simplicity and transparency of a defined contribution plan where
benefits are expressed in lump sum balances vs. the perceived complexity of
defined benefit plans where accrued benefits are more difficult to understand
and appreciate, particularly by younger workers;
-
the attractiveness to employees of keeping investment gains in a rising
stock market vs. the perceived value of a guaranteed monthly income at
retirement;
-
the option for an active employee to withdraw or borrow funds prior to
retirement, which is permitted in a defined contribution plan, but is not in a
defined benefit plan<21>;
-
the more predictable annual employer costs in a defined contribution plan;
-
the obligation to pay PBGC insurance premiums for defined benefit plan
but not for defined contribution plans;
-
the opportunity for employees to make contributions to defined
contribution plans before taxes (i.e., 401(k) plans), but not to defined benefit
plans;
-
the higher costs of administering a defined benefit plan which, in recent
years, has increased dramatically due to additional regulation;
-
a desire by employers to provide a retirement plan at a reduced overall
cost, which tends to favor a defined contribution plan which, not only have
greater cost certainty, but also do not have open-ended long term liabilities;
and
-
a lack of understanding by employees of the relative advantages and
disadvantages of different types of plans and plan features.
Perhaps the most difficult issue to assess is the extent to which regulatory
changes may be responsible for the movement away from defined benefit plans.
The Working Group agrees with the conclusion of a number of witnesses who
testified that regulatory trends since 1982 have played a significant role.
Frequent changes in the law have made the administration of all qualified plans
more complex and administratively expensive, but those changes have had a
disproportionate impact on defined benefit plans. Moreover, given the annual
character of the defined contribution pension promise vs. the long term defined
benefit pension guarantee, changes in law are, by their nature, more easily
accommodated in a defined contribution plan.
Witnesses cited a number of changes in the law that may have exacerbated
the movement away from defined benefit plans. First, changes in the law
beginning in 1987 have reduced the funding flexibility of defined benefit
plans. The Omnibus Budget Reconciliation Act of 1987 placed a limit of 150% of
current liabilities on the amount of deductible contributions which an employer
may make to a defined benefit plan. Under the recently enacted Taxpayer Relief
Act of 1997, the current liability limit is increased to 155% in 1999 and then
gradually increased to 170% in 2005. According to one 1995 study, 59% of 218
plans surveyed had reached the 150% limitation, up from 42% in 1994.<22>
Current liability is based on the plan's obligations using current experience
which can vary widely from year to year and lead to unpredictable contribution
patterns. The limit was imposed primarily to raise tax revenue. The limit,
together with a 10% penalty excise tax on non-deductible contributions, has
acted to prevent employers from pre- funding plan benefits in one year when they
are financially able to do so, while in a later year they may be forced to make
larger contributions than they budgeted for. The uncertainty, and the potential
to be whipsawed, is one reason frequently cited by witnesses for employers
unwillingness to establish defined benefit plans. Witnesses called for the
outright repeal of the 150% limit, not for a relaxation of it.<23> The
Working Group was unable to determine to what extent the relaxation of the limit
may solve the problem, although initial reactions to the recent revision have
been positive.<24>
Some witnesses attributed the decline in small employer defined benefit
plans to legal and regulatory changes, particularly the Tax Equity and Fiscal
Responsibility Act of 1982 which imposed penalties on small employer plans which
are characterized as top heavy, and the Tax Reform Act of 1986, which lowered
marginal income tax rates, imposed faster vesting standards, changed the rules
for plans integrated with Social Security, authorized complex new discrimination
standards later promulgated by the Treasury Department and included a minimum
participation rule (a plan must have the lesser of 50 employees or 40% of
employees). Some witnesses characterized the plans which terminated as a result
of these changes as being tax shelters. However, other witnesses testified that
these regulatory changes were overly broad and too complex, and that
legitimate plans were terminated along with questionable ones. They noted that
once key employees no longer have a significant self-interest in a defined
benefit plan, they can turn to other means of providing for their own retirement
benefits. Among the other options are non-qualified deferred compensation
programs which have grown dramatically in recent years.<25>
While Congress has made focused efforts to create simple defined
contribution plans which promise to reduce costs to smaller employers, Congress
has created no comparable simplified defined benefit plan. Since 1974, Congress
has created payroll deduction IRAs, simplified employee pension plans or SEP, a
salary reduction simplified employee pension plan or SARSEP, and a Savings
Incentive Match Plan for Employees of Small Employers or SIMPLE, which was
enacted last year as part of the Small Business Job Protection Act of 1996. And
while defined contribution administrative costs have risen slightly for defined
contribution plans, they have risen dramatically for defined benefit plans.
According to one study, annual administrative expenses for defined benefit plans
with fifteen or fewer employees have risen from 0.32% of payroll in 1981 to
1.66% of payroll in 1996.<26> While Congress is to be applauded for
creating simplified defined contribution plans for small employers, the failure
to create a defined benefit counterpart has, perhaps unconsciously, tilted the
small employer plan universe further in the direction of defined contribution
plans.
Since defined contribution plans are not insured by the PBGC, rising costs
of PBGC premiums only serve to make defined benefit plans less attractive
relative to the employer cost of maintaining a defined contribution plan.
Although the single employer insurance program premium was $1 per participant
when the program was established in 1974, the cost has grown dramatically in
recent years. Since 1991, the PBGC has collected a variable premium of $9 per
$1,000 of underfunding in addition to the fixed premium of $19 per participant.
The Retirement Protection Act of 1994 phased out a cap on variable premiums of
$53 per participant. As a result of these changes the PBGC single employer
insurance program reported a surplus in 1996 for the first time in its history.
While the solvency of the PBGC is an important and necessary step in assuring
the retirement security of defined benefit plan participants, the rapid growth
in PBGC premiums has been an additional disincentive to establishing or
maintaining defined benefit plans.
IV. RECOMMENDATIONS
The Working Group recommends that the Secretary of Labor support legislative
and regulatory changes that will restore the viability of defined benefit plans.
Defined benefit plans play a critical role in providing retirement benefits to
American workers, including those employed by small businesses.
Repeal the 150% of Current Liability Limit. Although the
recent increase in the full funding limit from 150% to 170% is a step in the
right direction, the Working Group believes that a current liability limitation
on funding is inconsistent with sound retirement policy. Employers should be
encouraged to pre-fund their plans. The 150% limit discouraged level funding,
which is a reasonable way for employers to fulfill their benefit obligations.
Instead, the 150% limit required employers to make smaller contributions than
they desired in one year only to be required to make much larger payments in
later years. The Working Group was unable to determine whether the change in
the law in August 1997, raising the limit to 170% over a period of years, is
sufficient to eliminate this problem.
Change the Limits on Benefits for Defined Benefit Plans. In
the case of defined benefit plans, the highest annual benefit payable under a
plan must not exceed the lesser of 100% of a participant's highest three year
average compensation or $130,000 in 1998<27> adjusted for inflation. The
dollar limit was set at $75,000 indexed in 1974 and had grown to $136,425 in
1982, when it was cut back to $90,000 indexed. Downward adjustments in the limit
must be made for retirement prior to the Social Security normal retirement age,
which is 65 for participants born before 1938 and 66 or 67 for younger
participants. Previously, downward adjustments did not need to be made for
benefits that commence after age 62 and there was a $75,000 floor for actuarial
reductions at age 55 and older. There is a $10,000 minimum annual benefit limit
established in 1974 which is not indexed.
The current limits on defined benefit plan benefits eliminate the ability of
a highly compensated employee to accrue a significant qualified benefit under a
defined benefit plan. This, in turn, has reduced the attractiveness of
qualified plans for executives who become less inclined to support and maintain
qualified defined benefit plans for a broad cross section of employees. In
addition, increasing numbers of employees, including rank and file employees,
who retire early or on disability cannot receive their intended benefit under
the plan because they exceed the actuarially reduced benefit limit.
In order to make defined benefit plans more attractive, especially for
employees of small employers, the Working Group recommends the following four
changes: (1) the maximum dollar limit be increased at least to the 1982 levels
as indexed; (2) double the minimum annual benefit $10,000 minimum benefit<28>
to $20,000 and index it; (3) restore the $75,000 floor for actuarial reductions
at age 55 and older; and (4) eliminate the requirement of actuarial reductions
in benefits that commence between age 62 and the Social Security retirement age.
Permit Pre-tax Contributions to a Defined Benefit Plan.
Currently, employees can make elective deferrals to SEPS and 401(k) plans up to
a maximum of $10,000 in 1998, indexed.<29> Although mandatory and
voluntary employee contributions may be made to private sector defined benefit
plans, such contributions must be made on an after-tax basis.<30> There
appears to be basis for this inequity which confers on defined contribution
plans a tax advantage that is denied to private sector defined benefit plans. A
comparable opportunity to make pre-tax contributions should be established for
defined benefit plans.
Remove IRS Regulatory Delay and Uncertainty About Cash Balance
Plans. A number of witnesses commented that the failure of the Treasury
Department and the Internal Revenue Service to develop guidance for cash balance
plans, as well as several years of delay in processing determination letter
submissions to the IRS, have had the practical effect of discouraging employers
from establishing cash balance plans. Cash balance and other hybrid plans
combine attractive features of both defined benefit and defined contribution
plans. Resolution of these delays and uncertainties would encourage new plan
formation of these hybrid plans. The IRS and Treasury should make resolution of
these issues a high priority.
Create a Simplified Defined Benefit Plan for Small Employers. Simply stated, there is a hole in the current retirement system. If
defined benefit plans are to be a viable option, legislation needs to be enacted
creating a simplified defined benefit plan. The most serious decline in defined
benefit plans is among small employers; the most rapid increases in overall
administrative costs are also among small employer defined benefit plans.
Furthermore, defined benefit plans are made less attractive for small employers
relative to defined contribution plans due to the availability of a variety of
simplified defined contribution options.
The Secure Assets for Employees Plan (SAFE) Act of 1997, H.R. 1656, as
introduced by Representatives Earl Pomeroy (D-ND), Nancy Johnson (R-CT) and
Harris Fawell (RIL) in May, 1997, has many attractive features and
provides an excellent starting point for further consideration of a simplified,
small employer defined benefit plan. The legislation would allow an employer
with 100 or fewer employees, and without any qualified retirement plan, to
establish a SAFE plan. In general, SAFE plans would have to be fully funded at
all times and, as a result, would not have to pay PBGC premiums. The SAFE plan
provides a fully funded "floor" benefit, with a higher benefit if the
plan's experience is more favorable than conservative assumptions. The minimum
benefit is a unit benefit equal to 1%, 2% or 3% of compensation for each year of
service. Benefits would be fully vested at all times and they will be funded
either through an individual retirement annuity or through registered securities
invested in a trust. The SAFE plan would have simplified reporting, including a
simplified actuarial evaluation. It would not be subject to non-discrimination
or top heavy rules or plan limitations (including limits on contributions and
benefits, full funding and deductible contributions), other than the $160,000
limit on includible compensation. The Working Group recommends, however, that
the legislation be modified to require third party trustees and third party
administration of SAFE plans which would reduce concerns about the absence of
PBGC coverage, without a significant increase in costs.
Increase the Maximum Compensation Limits for Defined Benefit Plans . Currently, the Internal Revenue Code requires that compensation in
excess of $150,000, indexed to $160,000 in 1998<31>, cannot be taken into
account in determining benefits under both defined benefit and defined
contribution plans. Like the dollar limits on contributions and benefits, the
compensation limit has been reduced since it was first established, primarily to
raise tax revenue. Beginning in 1989, the original limit was $200,000 indexed.
By 1993, the indexed amount had increased to $235,840 until the Budget
Reconciliation Act of 1993 reduced it to $150,000. The impact of this change
has been to promote non-qualified "top-hat" plans for key executives.
However, defined benefit coverage for middle managers has also been lost,
without being replaced. The Working Group proposes that the compensation limit for defined benefit plans be increased to at least $235,000, indexed,
in order to encourage defined benefit plan formation.
Further Study of In Service Distributions Is Needed. There
is a growing use of pre-retirement distributions from defined contribution plans
and IRAs. By contrast, the inability to provide in service distributions is a
significant disadvantage for defined benefit plans from an employee point of
view. There was disagreement among Working Group members as to whether defined
contribution plan in service distribution rules should be tightened. However,
the members of the Working Group share a concern about recent changes in the IRA
rules, supported by both the Administration and the Republican majority in
Congress, to remove penalties on distributions from IRAs for first time home
purchases or to pay college expenses. While these are socially desirable goals,
they convert IRAs from retirement vehicles into savings and capital accumulation
vehicles, with the risk that funds needed for retirement will be diverted
instead to current consumption. Given the lack of information on what is a
complex, but important issue, the Working Group recommends that the 1998 ERISA
Advisory Council examine separately the issue of pre-retirement "leakage"
from the retirement system.
Mandatory Annual Disclosure of Benefits. Currently, a
participant in a defined benefit plan may make a written request once a year and
receive a statement of his or her accrued benefits and accruals.<32>
Although the same rule applies to defined contribution plans, many defined
contribution plans automatically provide benefits statements at least annually.<33>
Few defined benefit plans do. Not surprisingly, few participants understand
their defined benefit plan benefits and accordingly have little appreciation for
their value. The Working Group recommends that ERISA be amended to require that
defined benefit plan participants be provided once a year with a statement of
their projected retirement benefit and their vested accrued benefit. Upon
written request, a participant should also receive a worksheet explaining how
the benefit amounts were calculated.
PBGC Should Assume An Educational Role. The PBGC has a
singular interest in the promotion of defined benefit plans. By law it is an
institution whose sole business is providing insurance guarantees to one class
of customersdefined benefit plan participants. The Working Group believes
that the PBGC should be concerned that few, if any, new defined benefit plans
are being created, and faced with a declining book of business, the PBGC has had
no choice but to raise its single employer insurance premiums dramatically. Most
insurers, facing a similar dilemma, would promote their products in order to
find new customers. Such an effort would help to keep the "risk pool"
healthy and help avoid the need for further increases in premiums that, in
turn, drive existing customers away. We believe the PBGC has a financial
interest in promoting defined benefit plans, the advantages of which are not
well understood by employers and less understood by employees. Unlike 401(k)
plans and IRAs, which are constantly being promoted by financial intermediaries,
there is little or no commercial promotion of defined benefit plans. Since the
PBGC has shown little inclination to take on this vital role voluntarily,
perhaps Congress should mandate it as part of the PBGC's mission.
V. SUMMARY OF TESTIMONY
Meeting of April 8, 1997
Testimony of Dr. Paul Yakoboski,
Research Analyst,
The Employee Benefit Research Institute
Dr. Yakoboski began by explaining that in terms of raw numbers, the
popularity of defined benefit plans in the United States appeared to peak in the
early 1980's, and then suffer a significant decline during the past decade.
Citing Department of Labor statistics, Dr. Yakoboski reported that approximately
175,000 defined benefit plans existed in the early 1980's, and less than half
that number (approximately 84,000) existed as of March 1993. While noting that
the rapid growth in the number of defined contribution plans occurred
simultaneously with the decrease in defined benefit plans, Dr. Yakoboski
disagreed with the popular perception that defined benefit plans are being
replaced by defined contribution plans and are thus on their way to extinction.
On the contrary, he concluded that defined benefit plans, despite the aggregate
trends, remain an important part of the employment-based retirement income
system.
When asked specifically whether defined benefit plans were being terminated
and replaced by defined contribution plans, Dr. Yakoboski stated that while that
certainly does happen, because the growth in defined contribution plans greatly
outweighs the net decrease in the number of defined benefit plans, replacement
cannot fully explain the current trend. He attributed a lot of the growth in
defined contribution plans to the fact that small employers, who in the past had
not been able to offer employees any plan at all, have recently offered pension
plans for the first time by establishing defined contribution plans.
Additionally, he believed that a number of these smaller defined benefit plans
operated more as tax shelters than as true pension plans, and were terminated
when the tax laws changed and plugged the loophole. In his opinion, the rest of
the growth trend in defined contribution plans can be accounted for by employers
using defined contribution plans not to replace current defined benefit plans,
but to supplement them. This is true despite the fact that many younger
employees actually see the 401(k) as their primary plan with the defined benefit
acting as the supplement!
Dr. Yakoboski noted that the vast majority of defined benefit plans which
have vanished are very small plans, often with less than 10 active participants.
During the question and answer period, he guessed that this was partly a
function of the failure rate of small businesses in general within this period.
Dr. Yakoboski also pointed out that the number of large defined benefit plans
(1,000 to 5,000 participants) has actually remained stablewhile the very
large plans (10,000 participants and more) even experienced a small increase in
number over this same time period. In response to a question after his
presentation was finished, however, Dr. Yakoboski admitted that his numbers with
regard to defined benefit plans included plans which may have been "frozen."
Frozen plans still show up as active plans, but no new participants may enter.
A member of the Working Group pointed out that many recent mergers and
acquisitions have resulted in frozen plans.
Dr. Yakoboski acknowledged that most new large employers were not
establishing defined benefit plans. "[E]merging large employers of todaythe
Microsoft et al of the worldindeed, they are going defined contribution,
they are not going defined benefit." He also noted that employers were
creating hybrid plans such as cash balance plans.
Addressing the subject of hybrid plans, Dr. Yakoboski cited BLS data from
1993 showing that only 3% of defined benefit participants in medium and large
private companies had cash balance type plans. Although Dr. Yakoboski
characterized cash balance plans as currently mere "blips on the radar
screen," emerging mostly in the finance and service sectors, he predicted
that they would become a significant force in the coming years. Specifically,
he foresaw "the evolution among a fair fraction of defined benefit sponsors
into hybrid arrangements." Cash balance plans are hybrid plans which
combine some of the most desirable features of defined benefit plans and defined
contribution plans, and, according to Dr. Yakoboski, are very attractive to both
employers and employees. Hybrids are funded on an actuarial basis with PBGC
backing like defined benefit plans, but they allow "portable" lump sum
distributions when employees change jobs, like defined contribution plans.
Employers like these new plans because they are less expensive to set up and
maintain, and are less regulated and complex than defined benefit plans. Cash
balance plans offer greater flexibility for employers to match plan design with
their business purposes, as well as an increased ability to control or manage
their costs.
Another reason for the popularity of cash balance plans is that employees
seem to appreciate the hybrid plans more. Even though they are not as generous
as traditional defined benefit plans, employees find it easier to understand
their benefits under these arrangements. Each year, employees receive a "mythical"
account balance showing the growth of their investments. Hybrids are especially
well received by younger workers and short-term workers, who either have trouble
visualizing the abstract benefits of a pension maturing after 20 years of
service or just don't plan to stay with any one employer for that long.
Dr. Yakoboski disagreed with the popular perception that current workforce
trends show a dramatic increase in job mobility and a corresponding decrease in
job security. He reads the tables tracking job tenure published by the Bureau
of Labor Statistics up until 1991 as showing job tenure comparing favorably with
job tenure during the last four decades, and even improving for some groups,
such as women. The recent drop-off in job tenure since 1991 has occurred
primarily among older males. He believes that the "good old days" of
rock solid security never really existed, and that the market has always seen a
great deal of job churning.
Finally, Dr. Yakoboski stated that it was his belief that the recent
popularity of 401(k) plans as primary and supplemental retirement income
vehicles, the rethinking of defined benefit plans, and the recent emergence of
hybrid arrangements, were not necessarily bad things. In his opinion,
traditional defined benefit plans were actually ill-equipped to serve the vast
majority of workers twenty years ago. He argued that the job experience of
workers has actually remained more or less the sameand that the pension
system is finally changing to match that reality.
During the discussion following his testimony, Dr. Yakoboski agreed that
lower income workers were less likely to participate in defined contribution
plans than higher income workers. Just as coverage and participation rates drop
with income level, coverage in general was much lower among workers in smaller
entities than in larger entities.
In response to a comment from a member of the group, Dr. Yakoboski pointed
out that a good number of the new defined contribution plans were in the form of
457 (public sector) plans as well as 401(k) plans. According to Dr. Yakoboski,
the "federal government is leading the way with what is de facto
the world's largest 401(k) plan, otherwise known as the federal thrift savings
plan." He claimed that the federal government was sending out the message
that acceptable retirement plan practices include joining 401(k) plans with
defined benefit plans.
Dr. Yakoboski also commented that the American Society of Pension Actuaries
("ASPA") has been working to develop legislation that would simplify
defined benefit plans much in the same way that defined contribution plans were
simplified in 1996 by SIMPLE. He noted that Congressman Earl Pomeroy was
extremely interested in promoting defined benefit expansion among smaller
employers, and was keeping close tabs on ASPA's work. "[Congressman
Pomeroy] shares the view that, in some sense, the government has been biased
against defined benefit plans and biased in favor of [401](k) plans. In
particular
burdens are placed on small employers."
While he could not make any concrete recommendations as to how the DOL could
motivate small business owners to create pension plans for their employees, he
did make a few general suggestions. First, he cautioned the group that any goal
to increase the number of plans among small employers needed to be realistic.
Speaking generally about small employers, he noted that the combination of small
profit marginsproviding little extra money to invest in pension plans on
behalf of employees, and a younger workforce with a high turnover rate that is
not particularly concerned with preparing for retirementhave created an
environment in which small employers do not perceive the need to offer pension
plans.
Second, Dr. Yakoboski insisted that any course of action taken by the DOL
should be long-term. He predicted that any real change in the pension-creating
practices of small employers would come as a result of employee demand: getting
younger workers interested in long-term savings and retirement plans. The need
to educate employers and employees to recognize and appreciate the value of
pension plans can be achieved partly through the efforts of the Department of
Labor's educational campaign, and through private efforts by groups such as the
American Savings Education Council.
Meeting of May 13, 1997
Testimony of Richard Hinz,
Chief Economist,
Employee Benefits Security Administration
Office of Policy and Research
Mr. Hinz began by confirming that EBRI's data (the factual basis for Dr.
Yakoboski's testimony) was derived from the Department of Labor's (DOL) own
database. The DOL's data is compiled by analyzing the 5500 series reports filed
annually with the DOL and the periodic supplements to the current population
survey sponsored by the Social Security Administration, the DOL and EBRI.
During the question and answer period, Mr. Hinz clarified a number of points
with respect to the DOL's database. He noted that his information regarding
defined benefit plans did include plans which might be frozen. In response to a
question regarding the number of non-qualified plans in existence, Mr. Hinz
commented that people answering surveys do not differentiate between qualified
and non-qualified plans when they report participation "they are
essentially invisible in that survey data." However, he didn't think that
a lot of people were participating in non-qualified pension plans. A few of the
other members of the Working Group agreed, however, that the DOL's data with
respect to the number of filings may not a good basis for judging the
proliferation or non-proliferation of non-qualified plans, since the select
group of management and highly compensated employees which participates in these
plans often mistakenly believe they are exempt from registration requirements.
According to Mr. Hinz, there has been a relatively constant level of
participation in private pension plans in the last 20 years, staying within a
few percentage points of 50% of the total number of individuals participating in
the full-time private sector workforce. He characterized the "underlying
shift toward defined contribution plans" as a displacement rather than a
replacement, explaining that almost all of the new growth in the private pension
plan system has been in defined contribution plans.
In 1975, 87% of primary pension plan participants were enrolled in a primary
defined benefit plan and the remaining 13% participated in a primary defined
contribution plan. By 1993, the numbers had changed dramatically, with 56% of
the workforce enrolled in defined benefit plans and 44% enrolled in a primary
defined contribution plan. Although the number of defined benefit plans has
dropped, virtually all of the loss is in the smaller plans with under
100-participant plans. Mr. Hinz also pointed out that the declining number of
defined benefit plans does not necessarily indicate a reduction in defined
benefit plan participants. In fact, the number of defined benefit plan
participants decreased only slightly, dropping from 42 to 39 million. During
that same period, however, there was an enormous increase in the number of
defined contribution plan participants. Twenty years ago, there were
approximately 200,000 defined contribution planstoday there are more than
600,000. The corresponding growth in asset base, from $76 billion twenty years
ago to $1.5 trillion today, is still growing thanks to the performance of the
stock market. Mr. Hinz believed that these numbers simply reflected a growth in
coverage as the workforce has absorbed the entry of 30 million private sector
workers. Mr. Hinz reiterated that "the additional coverage, which has been
roughly half of those new workers added, has been in the defined contribution
area."
According to Mr. Hinz, "the single most remarkable development that we
have observed across this 20 year period is the [increasing] proportion of the
workforce that is covered by both a defined benefit and defined contribution
plan." In 1980, only a quarter of the workforce was enrolled in both
plans. Today, approximately one-third of the workforce participate in both
defined benefit plans and defined contribution plans. He believed that it was a
common misconception that small firms were phasing out defined benefit plans and
replacing them with defined contribution plans. In reality, the numbers are the
result of new coverage being added "in the defined contribution universe."
Among participants in plans established since 1983, 20 million workers are in
defined contribution plans (mostly in 401(k) type plans) compared to 3.6 million
in defined benefit plans.
Mr. Hinz pointed out that large firms were supplementing their existing
defined benefit plans which continue to remain very popular with
defined contribution plans, creating a dual role for the defined contribution
plan. Later on, he characterized those defined contribution plans which
operated in conjunction with a defined benefit plan as "the gravy on the
retirement income train." Mr. Hinz noted that although the number of large
defined benefit plans those which cover 1,000 or more workers has
decreased by 3% from 1984 to 1993, the number of plans covering 10,000 or more
workers the largest of the large has actually increased during
this period.<34> After Mr. Hinz' presentation, a member of the Working
Group noted that currently, laws and regulations dealing with retirement policy
do not distinguish between situations where defined contribution plans are being
used as primary plans and those where defined contribution plans are acting as
supplements. The member suggested that it might be profitable for the DOL to
incorporate the notion of primary and secondary plans into its analysis, since
this may lead to different conclusions about how public policy should be
changed.<35>
Mr. Hinz presented two theories to help explain the recent popularity of
defined contribution plans. First, he noted that industry had undergone a
general structural change from large unionized manufacturing to smaller,
non-collectively bargained firms. Traditionally, unionized manufacturing firms
provided coverage through defined benefit plans. Small non- collectively
bargained firms usually offer defined contribution plans. Second, he cited the
growing preference of both employers and employees for defined contribution
plans. Mr. Hinz emphasized the "supply and demand" dimension to
employers' decisions to offer defined contribution plans. He also took notice
of the relationship between younger workers' preference for defined contribution
plans and factors such as income level, tenure and age in the structure of the
workforce. Mr. Hinz argued that [the analysis] should not ignore the impact
that the unprecedented growth in equities in the stock market has had on the
popularity of defined contribution plans. In response to a question, he
commented that earlier testimony before the group (Dr. Yakoboski), which
attributed the decline in defined benefit plans among small employers to changes
in the laws that eliminated their use as tax shelters, was probably an
incomplete explanation of the trend.
Mr. Hinz warned against drawing overly-simple conclusions from the EBSA's
data. Specifically, he pointed out that while the median account balance for a
defined contribution plan is estimated at below $10,000, the average is much
larger ($30-40,000 per account). The differential between median and average is
due to the fact that a small number of participants have very large account
balances compared to the majority of participants.
Mr. Hinz also commented on the disparity that existed between the savings of
male and female retirees. In 1994, close to half of retirees over the age of 55
reported pension benefits. However, 57% of that number were male, compared to
the 38% that were women. According to Mr. Hinz, this disparity exists even
though "we're seeing close to parity in the earnings of benefits"
between men and women. More disturbing evidence shows that there is also a
disparity in the payment methods at retirement, with women more likely to
receive lump sum benefits than men. In 1989, 7.5 million retirees and workers
aged 40 and over were receiving lifetime annuities, while 6 million received
lump sum payments from pension plans. By 1994, the number of annuity recipients
had decreased 4% to 7.2 million, even though there were significantly more
retirees. On the other hand, the number of retirees receiving lump sum
distributions increased by 50% to 9.1 million. Of those 1994 numbers, 30% of
women received an annuity form of pension benefit and 63% received only a lump
sum. Compare this to the numbers for men: 44% received an annuity benefit and
44% received a lump sum. 7% of women and 12% of men reported receiving both an
annuity and a lump sum. Even the size of the lump sum payments reflects the
gender disparity: in 1994, women received an average of $5,000 in benefits,
while men received an average of $11,000.
Mr. Hinz concluded by focusing on the investment patterns and asset
allocation among defined contribution plans. He noted that there was not really
an enormous difference in the proportion of equities in the investment
portfolios of defined benefit plans and defined contribution plansboth
invest about 30% to 40% in equities, including a high percentage of employer
securities. In fact, some information indicates that 35%-42% of assets in the
various types of defined contribution plans are in employer securities.
However, the DOL's own information sets that number at a somewhat lower
18%--even lower (15%) if you exclude ESOPs from the equation. Many of the other
underlying differences in investment patterns can be accounted for by the fact
that the DOL includes ESOPs in the category of defined contribution plans.
During the question and answer period, a member of the Working Group asked
Mr. Hinz whether the administrative costs associated with creating and
maintaining the plans was a factor in the relative unpopularity of defined
benefit plans. Specifically, the member wondered whether that and the changes
in the tax laws were responsible for making defined benefit plans less popular
among certain small employers. Mr. Hinz found it difficult to answer the
question regarding administrative burdens for two reasons. First, the private
consulting firms which collect data on administrative costs usually represent
larger companies. These companies are generally unwilling to disclose such
information to the DOL and risk having their client's find out what their costs
are. Also, data is not usually available from smaller companies. Second,
administrative costs are often paid out of the general assets of the sponsor
rather than the trust and therefore not reported.
Mr. Hinz also noted that no one would dispute the argument that small
business owners would be more likely to sponsor a plan if they could accrue
greater benefits for themselves as compared to the other participants. The real
problem with that solution is the public policy costdistributing a tax
preference to a higher income group in order to bring lower income workers along
is a controversial idea.
Meeting of May 13, 1997
Testimony of Patricia Scahill,
Consulting Actuary,
Actuarial Sciences Associates, Inc.
Ms. Scahill presented the Working Group with a number of recommendations
that she believed would encourage plan sponsors to maintain or create new
defined benefit plans. First, in the area of plan design, she recommended that
the tax treatment of employee contributions be handled in the same way for both
defined benefit plans and defined contribution plans. This would include
allowing employees to make a pre-tax contribution to their defined benefit plans
up to the 402(g) limit that currently is applied to the 401(k) plan. Ms. Scahill
anticipated that the proposed (equally) favorable tax treatment for employee
contributions to defined benefit plans would apply to mandatory as well as
voluntary contributions.
Ms. Scahill also recommended raising the limits on includable compensation.
This she said could be easily achieved by repealing the 401(a)(17) compensation
limit, except as it applies to top-heavy plans. In the question and answer
period of her presentation, she addressed the concern that the caveat for
top-heavy plans might shift even more benefits over to the most highly paid
workers. Ms. Scahill is simply interested in seeing "the executives get
their benefits from the same vehicle" as rank and file employees. In her
opinion, if highly paid employees received meaningful benefits from a defined
benefit plan that means allowing executives to receive more money from a
qualified plan than other employees they will be more likely to view the
qualified plan as a worthwhile financial vehicle. Allowing current tax policy
to drive these limits down (in order to save short-term revenues) will give
executives an incentive to search for different pension vehicles, and
unfortunately, to create nonqualified plans for themselves and defined
contribution plans for the rank and file workers. She emphasized that allowing
pre-tax employee contributions for defined benefit plans and repealing the
limits under the 401(a)(17) rule were two of the most critical issues for
backers of small business defined benefit plans.
Second, Ms. Scahill recommended reversing the current trend towards more
restrictive Internal Revenue Code Section 415 compensation limits, restoring the
$75,000 floor on actuarial reductions at age 55 and above, and eliminating the
reduction completely for persons between 62 and the current Social Security
Retirement age. This issue was also very critical from the perspective of
trying to encourage small employers to create and/or maintain defined benefit
plans. According to Ms. Scahill, her first two recommendations are essentially
asking for a "rollback of the rules . . . put[ting] them back to where they
were."
Third, Ms. Scahill recommended that a safe harbor be added for Social
Security offset plans which are similar to what was in effect prior to tax
reform. She warned that not only were the nondiscrimination rules complicated
and very expensive for plans to negotiate, they were also ineffective from a
public policy perspective by failing to prevent unfair discrimination in
qualified plans since a large number of PIA offset plans very easily pass these
rules. In her opinion, the rules created yet another administrative burden
without really correcting the evil they sought to redress.
Ms. Scahill acknowledged that although allowing a 401(k) match through a
defined benefit plan is controversial, she believed it would encourage employers
to contribute to employee savings in some form. She suggested allowing the
match to be done through the vehicle of a cash balance plan.
Fourth, Ms. Scahill recommended treating the minor mistakes made by
employers while complying with the regulations for defined benefit plans less
severely. Egregious errors should surely be punished, but punishing small
errors by disqualifying plans does not serve plan participants well. She
believed that one factor influencing the shift from defined benefit to defined
contribution plans was the perception that defined benefit plans were
complicated and subjected employers to harsh penalties for even small mistakes.
While the penalties for non-compliance for both plans were similar, she sensed
that with defined benefit plans, "every new regulatory or administrative
complexity" was "one more nail in the coffin." Also, because
sponsors feel defined benefit plans were more complex, they probably felt that
there was more chance of making a costly mistake. In response to a question
regarding the progress of the IRS in getting sponsors to participate in its
voluntary compliance programs, Ms. Scahill commented that the IRS has not gone
far enough in terms of reducing the size of its penalties.
Fifth, Ms. Scahill recommended encouraging "meaningfully advanced
funding" for defined benefit plans. Not only does the PBGC benefit from a
well-funded pension system, but many plan sponsors like to see their plans
well-funded. Plan sponsors don't perceive the new full funding limit as a favor
supposedly helping them keep costs down by making the plan cheaper.
Instead, they see the funding limit as another burden. The rules with respect
to definitions of current liabilities are very complex. In fact, Ms. Scahill
believed that the three measures of current liability necessary to complete
funding calculations made compliance administratively complex and raised
actuarial fees.
Ms. Scahill also addressed a side-issue on the subject of the PBGC. She
believed that plan sponsors, the sponsors of large plans in particular, were fed
up with what she termed the PBGC's participation "in what might be viewed
as fairly routine business decisions."
Finally, Ms. Scahill's own personal recommendation (not made on the behalf
of her company) was to reduce the opportunity of participants to get early
access to their defined contribution money this would even the playing
field [between defined benefit plans and defined contribution plans]. She
believe that since defined contribution plans are retirement vehicles, they
should act as retirement vehicles. Also, if defined contribution plan
participants couldn't get into their account balance "cookie jars,"
they might be more receptive to having their benefits provided through defined
benefit plans. During the question and answer period, Ms. Scahill and a member
of the Working Group discussed the ineffectiveness of the current 10% premature
distribution tax in preventing leakage from defined contribution plans. Ms.
Scahill believed that the 10% tax was ineffective mostly because young people
were focused on their present day needs and were willing to liquidate their
retirement accounts to meet those needs. She recommended a flat prohibition on
liquidation, though she would still allow loans from retirement plans.
Ms. Scahill also commented briefly on the recent development of hybrid plans
which have characteristics of both defined benefit and defined contribution
plans. She specifically mentioned the cash balance plan, which is popular
because it can be explained to employees as a kind of a personal bank account.
She pointed out that the appearance of these new hybrids is so recent that the
relevant statutes and regulations have not responded to or changed to
accommodate them.
Finally, Ms. Scahill drew the group's attention to the 417(e) problem.
Section 417(e)'s requirement was intended to prevent defined benefit plans from
providing an unfairly small lump sum to participants. However, 417(e) has
resulted in the problem of sponsors with cash balance plans or pension equity
hybrid plans providing unreasonably small annuities. Specifically, the plan
sponsor must provide an unreasonably small annuity, because if they provide a
big annuity they have problems complying with the lump sum rule. As a result,
the sponsor can provide only a small annuity because larger annuities run into
difficulties under the lump-sum rule.
Meeting of May 13, 1997
Testimony of Lawrence Sher,
Principal and Chief Actuary for the
Kwasha Lipton Group of Coopers and Lybrand, LLP
Mr. Sher began by explaining, in general terms, how cash benefit plans
operated, and comparing them to traditional defined benefit and defined
contribution plans. According to Mr. Sher, cash benefit plans are hybrids. On
the surface, they appear very much like defined contribution plans. Cash balance
retain the "account balance" and portability features of typical
defined contribution plans. However, cash balance plans tend to maintain the
protection and stability of defined benefit plans. Cash balance plans operate
like defined contribution plans by expressing benefits in terms of a lump sum.
This lump sum grows in a defined manner, unlike defined benefit plans where the
benefits are expressed in terms of a deferred annuity. Although benefits under
cash balance plans are generally paid in terms of lump sum, there is no reason
that the benefits could not be distributed in the form of an annuity.
Later on, however, Mr. Sher explained that there was some disincentive to
subsidize annuities given the current regulatory environment. Specifically, "you
could end up getting whipsawed where you have the possibility of having to pay a
lump sum which exceeds the account balance."
Mr. Sher noted that another difference between cash balance plans and
traditional plans is that cash balance plans don't usually offer early
retirement subsidies. Also, social security subsidies, used to "bridge"
the time between retirement and when social security first becomes available,
are not usually offered under cash balance plans. "In fact, many companies
[which] have heavily subsidized early retirement benefits in their traditional
plan [and] that convert over to a cash balance plan . . . gradually get away
from the subsidies . . . ." Cash balance plans offer, to a limited extent,
a degree of inflation protection by using indices anticipated to exceed
inflation. Mr. Sher believed there were ways in which social security
supplements or subsidized early retirement benefits could be introduced into
cash balance plans.
The lump sum benefit earned in a cash balance plan is defined in much the
same way as it is in a defined contribution plan. There is a capital
accumulation, shown through a "hypothetical account." Benefit
credits, which are usually based on a percentage of compensation (i.e. 5%), and
interest credits are both added to this account. The benefit credits can be
age- or service- weighted, or integrated with social security on an excess-type
basis. Mr. Sher explained by giving the example of a benefit credit which
equaled 5% of pay up to the current social security wage base, plus 8% of pay
over the wage base. Interest credits do not relate to the actual investment
earnings under the planthey are usually tied instead to some outside index
such as a treasury index. Some plans use flat (%) indices rather than variable
indices.
Mr. Sher noted that, as with defined benefit plans, employees seldom made
contributions to their cash balance plans. He agreed with the previous witness
(Ms. Scahill) that this was due to the fact that defined contribution plans
received much better tax treatment and were less cumbersome to administer. He
believed that if the rules were changed to allow employees to make pre-tax
contributions into defined benefit plans, and into cash balance plans in
particular, these types of plans would become more popular.
Mr. Sher then commented on the types of employers who have adopted cash
balance plans, and what their motivations might be. He observed that, in
general, the majority of companies that have adopted cash balance equity plans
are medium and large (1,000 plus employees) telecommunications and banking
companies. He believed that these firms were motivated to choose cash balance
plans for a number of reasons. First, the nature of the employment relationship
was less paternalistic than usual. Employees at these firms tend to be more
self-reliant in their approach to employee benefits. Second, cash balance plans
provide better returns for individuals with higher rates of job mobility. Cash
balance plans, unlike other plans, tend to provide a more uniform distribution
of benefits to people not staying with the same firm until retirement (unless
the plan is heavily age-weighted).
Mr. Sher explained: if someone is jumping from job to job, under the final
average pay plan, by the time they retire they will have a much lower benefit
than an individual who earned the same wage in an identical plan but who stayed
with one employer. He attributed this to the fact that the average pay plan
benefit is based upon the employee's final average pay at the time she or he
leaves a particular employer, not the employee's final average pay at retirement
with respect to all earlier employers. The advantage of a cash balance plan is
that, like defined contribution plans, it does not make any distinction between
averages earned from different employers and average pay earned from one
employer (cash balance plans calculate the average as if an employee had worked
for a single employer, as long as the employee participated in identical plans
sponsored by each of his or her employers).
Another advantage of cash balance plans is that they operate better in an
environment of "diverse retirement practices and patterns." Final
average pay plans may have worked well in the past, but they don't work as well
where people are retiring at different ages or partially retiring and/or
changing careers often.
Finally, Mr. Sher observed that some employers were motivated by financial
factors when they decided to adopt cash balance plans. Sometimes, the cost of
administration decreases when switching from defined benefit plans to cash
balance plans. In other cases, companies terminate defined benefit plans to
avoid various taxes on excess assets.
Mr. Sher noted that most of the companies offering cash balance plans also
offer defined contribution plans, but not defined benefit plans. The cash
balance and defined contribution plans are operated as a single retirement
program, "communicated in parallel," with the contributions showing up
in the defined contribution plan and the benefit credits appearing in the cash
balance plan Unlike defined benefit plans, defined contribution plans
coordinate well with cash balance plans.
Mr. Sher concluded by comparing and contrasting cash balance plans, defined
contribution plans and defined benefit plans. He began by comparing cash
balance plans and defined benefit plans. He believed that one of the reasons
that employers prefer cash balance plans is because they facilitate corporate
acquisitions. Defined benefit plans are so difficult to integrate into other
types of plans, it is hard for the buyer to assimilate the new company's workers
into its benefit program. The ability to "monetize" the value of a
cash balance simplifies the problems that occur in mergers. In addition, cash
balance planswhich invariably pay out the full value of the account to
beneficiaries at deathprovide more valuable death benefits than defined
benefit plans. Like defined benefit plans, however, cash balance plans do not
allow elections during employmentno withdrawals from cash balances until
normal retirement agewhich effectively deals with the problem of leakage.
Although technically, loans can be offered through defined benefit plans, it is
awkward and rare.
Next, Mr. Sher compared cash balance and defined contribution plans. He
emphasized that cash balance plans had certain advantages over defined
contribution plans. Most significantly, an employer offering a cash balance
plan bears the risk of poor investments. The employer offering a cash balance
plan is under the same fiduciary requirements as with a defined benefit plan, so
if the investments do poorly, the employer must make up for it through
supplemental contributions to the plan. On the other hand, if the plans do
well, the cost to the employer is lower than that of a defined contribution
plan. Another advantage cash balance plans have over defined contribution
plans, at least from the employee's perspective, is that cash balance plans
provide base benefits independent of employee contributions. Most defined
contribution plans tend to be matching plans where the employee does not get
anything from the employer unless they personally contribute. Furthermore,
unlike the benefits under a defined contribution plan, cash balance plan
benefits can be improved retroactively. The flexible distribution feature of
cash balance plans gives employers offers more options than defined contribution
plans. And cash balance benefits can be distributed through a true annuity, an
option rarely available through defined contribution plans. Finally, cash
balance plans are more likely to be well-funded than defined contribution or
defined benefit plans.
Meeting of May 13, 1997
Testimony of Theresa Stuchiner,
Special Consultant for the
Kwasha Lipton Group of Coopers and Lybrand, LLP
Ms. Stuchiner spoke about the current regulatory environmentspecifically
the difficulty sponsors had in developing cash balance plans which could fit
into a regulatory framework designed for the traditional defined benefit. She
described the IRS and Treasury Department's response to the problem as "fairly
decent," but analogized it to "fitting square pegs into round holes."
In fact, the reason that cash balance plans are classified as defined benefit
plans is because they do not meet the statutory definition of a defined
contribution plan.
In 1991, while in the process of implementing the nondiscrimination
regulations put out to address the 1986 tax changes, the IRS and Treasury
Department came up with an approach called the "safe harbor cash balance
plan." This approach created what Mr. Sher had earlier referred to as the "whipsaw
aspect": the problem with minimum lump sum distributions [exceeding account
balances as a result of regulations]. According to Ms. Stuchiner, while the
whipsaw problem was greatly alleviated by the amendments to Internal Revenue
Code § 417(e), which changed the calculation for minimum lump sums,
problems still remain.
Next, Ms. Stuchiner addressed the problem of encouraging small business
owners to create defined benefit plans. For a number of reasons, she didn't
feel much could be done with the defined benefit plans in the small employer
environment, with the exception of small businesses that were owner-dominated.
Although there is still considerable interest among successful professional with
small numbers of employees to adopt defined benefit plans, this will not provide
meaningful coverage (in terms of numbers).
According to Ms. Stuchiner, the administrative burdensthe complexity,
difficulty and costsassociated with defined benefit plans deter interest
in these plans. She suggested building interest in defined benefit plans among
annuity providers by allowing them to design very simple cash balance plans for
small employers and getting the PBGC to underwrite the annuities. The small
employer would get the upside of investment risks, would bear the downside of
investment risks, but would escape the problem of providing the annuity. In her
opinion, the main problem with defined contribution plans is that annuities are
not available, and people don't realize how difficult it is to manage money
throughout their retirement years.
Meeting of May 13, 1997
Testimony of Cynthia L. Moore,
Washington Counsel to the
National Council on Teacher Retirement
According to Ms. Moore, who specializes in issues affecting state and local
government retirement plans, defined benefit plans have been relatively
successful in providing retirement benefits for state and local government
employees. The National Council on Teacher Retirement ("NCTR") is
made up of 71 state and local government retirement systems that serve over 11
million teachers and other public employees. Virtually all of these retirement
systems provide defined benefit plans that are similar to those in the private
sector. These retirement systems are regulated by state, not federal, laws
which are analogous to ERISA. Many of the systems are subject to the same
pension qualification requirements found in § 401(a) of the Internal
Revenue Code. Citing Department of Labor figures, Ms. Moore informed the group
that 91 percent of full-time local and state employees were covered by a defined
benefit plan. In addition to these plans, many employees also have voluntary
savings plans (403(b)'s) known as tax-sheltered or tax-deferred annuities.
Ms. Moore agreed with previous testimony (Richard Hinz and others) by
observing that the majority (75%) of terminated defined benefit plans were very
small plans which served under 10 participants, and that the number of very
large plans has remained relatively stable, even experiencing slight growth.
NCTR plans are generally extremely large plans. She also agreed with prior
witnesses that "far more defined contribution [plans are] being newly
created than there are defined benefit plans being terminated." Finally,
Ms. Moore corroborated earlier testimony (Dr. Yakoboski) by stating that
with the exception of 16 to 24 year olds Americans are not as mobile as
conventional wisdom suggests.
Ms. Moore then introduced the topic of the various portability initiatives
which have been approved by state legislatures. In 1995, South Dakota initiated
legislation called the "Portable Retirement Option" or "PRO,"
which allows short-term service employees who belong to the state retirement
system to take all or part of their employer contributions with them when they
leave their jobs. Washington State has responded to the demand for portability
by creating a hybrid plan called "Plan 3." The employer portion of
the plan is a defined benefit plan where the contribution of the employer equals
one-percent of the employee's final average compensation multiplied by the years
the employee was in service. It provides a cost of living adjustment ("COLA")
of three percent a year. The employee funded portion of the plan is a defined
contribution plan which requires the employees who are plan participants to
contribute between 5 and 8.5 percent of their salaries to the plan, the exact
number depending on their age and choice of options.
In addition, Virginia and Missouri are trying to initiate "Retirement
Reciprocity." Under "Reciprocity", funds are transferred between
the school retirement systems of different states when a teacher moves. She
noted that a number of retirement systems felt uncomfortable with this idea
because it was unclear what effect such activity would have on their tax-exempt
status. Ms. Moore found the testimony of Lawrence Sher and Theresa Stuchiner
(on cash balance planhybrids) very interesting in the context of
Colorado's initiative. Colorado was very concerned about short-term employees
and the fact that they lost their benefits completely when they moved. She felt
that cash balance plans are the answer to this type of problem.
Most states have solved the portability problem by allowing teachers to
purchase "service credits" for the years in which they worked outside
of the state in which they will retire, as well as for periods of absence from
employment. Teachers tend to be mobile professionals; also, considering the
fact that 70% of the teachers in the United States are women (who take maternity
leaves), the purchase of service credit provisions are very helpful. In
addition, the process of purchasing the credits is straightforward: the teacher
need only contact the retirement system to find out if he/she is eligible, get
proof of previous employment within former retirement system, and purchase the
credit through check or payroll deduction.
There is one problem with the voluntary purchase of "credits" by
teachers, however. There is a conflict between what the states have been
telling teachersthat they can buy credits to make up for any and all lost
timeand what the IRS, under Internal Revenue Code § 415's defined
contributions limits, tells teachers. According to the IRS, teachers may only
be able to purchase a portion of the value of lost contributions
(maximum = $30,000 or 25% of compensation). Ms. Moore noted that the NCTR has a
current proposal to resolve this conflict before Congress. Aside from this
problem, the service credit plan is easy to administer, there are a variety of
service credit options available.
Meeting of June 12, 1997
Testimony of Congressman Earl Pomeroy
Congressman Earl Pomeroy (D-ND), chief sponsor of the Secure Assets for
Employees (SAFE) Act of 1997<36>, appeared before the Working Group to
speak about the SAFE bill and suggest possible solutions to current problems
related to defined benefit plans. The SAFE bill would create a simplified
defined benefit plan for smaller employers.
Congressman Pomeroy began by recognizing that the Working Group was
addressing some of the central policy issues in the area of retirement,
especially with respect to the relative merits of defined contribution plans and
defined benefit plans in the context of small employer sponsorship. He
suggested that it would be worthwhile for government in general, and the Working
Group in particular, to explore the reasons why the number of employer
sponsored defined benefit plans has "collapsed." In his opinion,
other research by the Advisory Council on the influence of soft dollars and on
the consequences of steering plan assets towards particular investment advisors
is extremely important and could lead to better disclosure to employees in the
context of 401(k) plans. He also mentioned as an important development, the
current interest in the new SEC profile prospectus which attempts to "put
fees into context, but
in a more standardized abbreviated form than the
prospectus."
Congressman Pomeroy first discussed the impetus for his introduction of the
SAFE Act. He felt that both the lack of defined benefit coverage and limited
savings opportunities for the employees of small employers were a significant
problem and should be a priority. According to Congressman Pomeroy, small
employers employ, on the average, fewer than 20 people, and such workers have
very little opportunity to participate in a defined benefit plan (less than 6%
nationally). Employers especially small employers fear taking on
the greater risks associated with defined benefit plans. Small employers would
prefer to shift this risk to their employees. Another motive for switching from
defined benefit plans to defined contribution plans is to escape the numerous
and complex regulations and expenses associated with maintaining defined benefit
plans. Congressman Pomeroy pointed out that the number of defined benefit plans
has declined from approximately 176,000 between the years of 1982 to 80,000 in
1993. Although the market, influenced by factors such as job mobility and
employer reticence, seems to have moved away from defined benefit plans, his
appraisal of the nation's overall retirement savings goals leaves him reluctant
to "throw in the towel on [the] defined benefit structure."
Congressman Pomeroy feared that defined contribution plans had not been
adequately evaluated, especially their tendency to more easily allow leakage
than defined benefit plans allow. He noted that in rollover situations,
two-thirds of defined contribution plan rollovers were not fully reinvested.
Such problems made defined contribution plans an unlikely vehicle to help us
reach our national retirement goals. For this reason, he urged that efforts to
make defined benefit plans compatible with the work force and the concerns of
the small employer not be abandoned.
Congressman Pomeroy believed that reversing the current trend away from
defined benefit plans would require both regulatory reform (analogous to the
SIMPLE legislation for defined contribution plans) and changes in plan design;
specifically, including a significant safe harbor component. He also noted that
defined benefit plans would benefit in general from regulatory relief from
Capitol Hill. He supported the Democrats' omnibus pension reform bill which
included a provision repealing the full funding limitation he didn't
believe the current funding limitations made sense.<37> According to
Congressman Pomeroy, a bipartisan effort to find an omnibus pension bill that
could be passed by this Congress is currently underway.
Congressman Pomeroy proceeded to discuss the proposed SAFE Act in detail. .
According to Congressman Pomeroy, the SAFE Act attempts to "meld these two
priority areas; small employers and defined benefit reform." He was
pleased with the ASPA's "technical work- up" of the bill because the
SAFE format they came up with would keep defined benefit plans in the small
employer marketplace. Congressman Pomeroy's co-sponsors, Nancy Johnson of the
House Ways and Means Committee and Harris Fawell, chairman of the Subcommittee
of the Employer-Employee Relations of the House Education and the Workforce
Committee, have played prominent roles in the majority caucus of the committees
of House with jurisdiction over retirement plans
Congressman Pomeroy described some of the key features of the SAFE Act which
would make them attractive to employers. SAFE plans would provide a secure
retirement at a fixed benefit level, while retaining the most desirable features
of defined contribution plans, including portability and the opportunity for a
higher level of benefits if returns on investments are higher than anticipated.
"Unlike the existing model of defined benefit plans, the SAFE plan would
provide those additional features that engage workers more actively in the
ongoing status of their retirement savings progress." The use of a
benefit formula which provides for a minimum defined benefit plus the added
potential for further benefits (depending on investment performance) is probably
the more significant of the two features.
The minimum defined benefit level of SAFE plans, which would be contributed
by employers to each employee's plan annually, would be equal to 1-3% of
compensation for each year of service. In addition, SAFE plans would be
required to use a conservative 5% return on investment assumption to ensure that
contributions would be sufficient to provide the promised benefits. The plan
structure would be funded through either individual retirement annuities or
through trusts, and the employee's SAFE benefits would be vested (and therefore
portable) at all times. Also, SAFE plans would be subject to simplified
reporting and testing requirements, unencumbered by complicated,
nondiscrimination rules. SAFE plan sponsors will not have to pay PBGC insurance
premiums. Small employers would be able to "contract out" to third
party insurance companies the risks associated with maintaining defined benefit
plans "you don't
saddle either the employer or the employee
with the risks." Finally, Congressman Pomeroy noted that the plans would
not be subject to the current full funding limitations, and that small employers
will be able to maintain financial flexibility by adjusting the size of their
contributions to the plan depending on the yearly performance of their
businesses.
Congressman Pomeroy insisted that he was only interested in offering a plan
with relevance to the market, not just passing legislation for legislation's
sake. To achieve this, he encouraged the Group to refine the SAFE plan, which
was still in a somewhat theoretical state, with a critical "evaluation and
sharp questions." Congressman Pomeroy believed that the bill had a very
good chance of passing. In response to a question from a Working Group member,
Congressman Pomeroy indicated that Congress' response to SAFE has been "very
positive." Members of Congress viewed SAFE as a "natural complement
to the SIMPLE legislation passed last year." He also attributed Congress'
favorable response, in part, to the fact that the nation, in general, has been
sensitized to the retirement issue because the baby boomers are beginning to
turn 50.
During the question and answer period, a Working Group member responded
approvingly to SAFE's lack of upper funding limit. The member felt that if the
amount of money that small business owners could pocket could be increased, the
idea of sponsoring a defined benefit plans would become more attractive to them.
In his opinion, "the locomotive that drives a business owner to implement
the plan" is personal savings on a tax advantaged basis. Congressman
Pomeroy agreed that increasing the amount of money that small business owners
could put away for themselves would make defined benefit plans more popular, and
he pointed out that this concept was already part of the SAFE bill. In his
opinion, lifting the Internal Revenue Code § 415's limitations on benefits
will "drive the sale of the SAFE product in the marketplace." He
emphasized that encouraging the formation of defined benefit plansin
essence, getting people to save now so that the government can avoid supporting
them lateris a budget priority that warrants the necessary tax
expenditures. This was not a time for Congress to be penny wise and pound
foolish.
At the conclusion of the discussion period, Congressman Pomeroy warned that
the consequences of doing nothingof failing to enact legislation that does
for defined benefit plans what SIMPLE did for defined contribution plansis
the continued collapse of existing defined benefit plans with either no
replacement plan or replacement plans without pension opportunities or adequate
retirement savings opportunities. And in an environment where plans are
sponsored on a voluntary basis only, the government may need to take a more
aggressive approach in terms of inducing employers to sponsor plans. He
finished by soliciting member feedback on his bill, insisting that SAFE was
still a "work in progress" and that any thoughtful criticisms would be
appreciated.
Meeting of June 12, 1997
Testimony of Brian Graff, Executive Director of the
The American Society of Pension Actuaries, and
George Taylor, President of
The National Retirement Plans Services
According to George Taylor, everyone recognizes "the absolute desperate
need for a defined benefit plan in the small business arena." He also
shared his personal experience of the drop in the number of defined benefit
plans. Ten years ago, his firm administered 1,200 qualified retirement plans,
and exactly half were defined benefit plans. Today, his firm administers 1,000
plans, and only 76 are active defined benefit plans. He attributed this drop
broadly to the full funding limits, PBGC premiums, minimum top heavy benefits
and "all of the other negative pieces of legislation that obviously have
been biased to the small business owner." Brian Graff noted that a
bipartisan package of pension proposals, including the SAFE plan, was to be
introduced by Senators Graham, Hatch and Grassley today. Mr. Taylor then opened
the meeting up for general discussion.
Mr. Taylor began the discussion by responding to a question previously
directed to Congressman Pomeroy. A Working Group member had wondered whether
the SAFE plan was "too rich," that is, whether removing the Internal
Revenue Code § 415 limits would create a plan which favors the most highly
compensated professionals. Mr. Taylor pointed out that under the SAFE plan, an
employee would need to work at least 20 years to accumulate 100% of pay. Even
an employee with "very exceptional earnings" would need at least 18
years to achieve the level of compensation which, in the "current qualified
plan arena," could be achieved within a ten year period.
While the SAFE plan utilizes a funding structure designed to produce a
minimum benefit, there is no guarantee that it will always achieve this goal.
In particular, the SAFE plan does not create any post-separation obligation on
employers to provide a specific level of benefit. He explained that the
underlying investments in a SAFE plan would be in an annuity contract with a
guaranteed minimum retirement benefit. However, there is no 100% guarantee:
should the balance in a participant's account not be sufficient to purchase a
SAFE annuity with the full minimum benefit, the employer would instead purchase
an annuity with the highest value possible. Mr. Taylor pointed out that it
would be unlikely for an employee to find himself in that position.
In ASPA's view, there is no role for the PBGC in SAFE plans because the
funding method usedthe unit credit funding methodrequires that the
employer contribution equal whatever is necessary to buy the benefit using the
five percent interest rate. In any year in which plan reserves fell below the
value of the benefit, the employer would be required to make an additional
contribution. According to Mr. Taylor, the SAFE plan must parallel SIMPLE and
provide small employers with a no-risk plan with a known commitment on an annual
basis. A large part of the risk is borne by the guarantor who, at least under
the SAFE annuity, is the insurance company. In response to a number of
questions with respect to the minimum contributions requirement, Mr. Taylor
noted that the major life insurance industry trade association, the American
Council of Life Insurance, had endorsed the element of a guaranteed minimum
rate of return, and that in terms of "teeth," the minimum funding of
standard accounts rules still apply.
Mr. Taylor would not recommend the SAFE plan to the business
owner-professional whose main objective is to maximize investment yield for
themselves. He viewed the SAFE plan as ideal for the older business owner (45+
years of age), who is looking for a way to construct a retirement program that
will provide a reasonable level of benefits for him and his employees to retire
on, but not necessarily to maximize his deductions. Mr. Taylor also remarked
that the percentage of large companies which froze existing pension plans when
they created defined contribution plans was very high. In his opinion, the
cause of this drop was the current rules and regulations: the full funding
limits, PBGC premiums, minimum top heavy benefits and other legislation have
been inordinately difficult for small employers to deal with.
Another concern raised about the SAFE proposal was the adequacy of
employee protection, in the absence of PBGC insurance, against employers
stealing pension trust assets or paying plan assets out to someone other than
the rightful beneficiary. Mr. Taylor admitted that although all assets were
required to be invested in marketable securities, there was still a risk of
benefit misallocation, although he reminded the Work Group that the vast
majority of small business owners were not subject to the PBGC currently<38>.
One Working Group member suggested independent third party management for the
SAFE trust. Mr. Taylor agreed that independent third party management should be
considered, but remarked that this would add another level of (undesirable)
administrative expense to sponsoring the plan. Another member of the Group
noted that a former Working Group had taken the position that professional third
party management should be required, and commented that this would diffuse
criticisms regarding PBGC guarantees.
Answering a question regarding the amount of actual good removing PBGC
protection would do for small business owners, Mr. Taylor remarked that since
the PBGC doesn't pay liabilities and only covers the difference if the company
goes bankrupt, the benefit of PBGC protection just doesn't justify the cost per
participant. He later admitted that setting up a third party trustee would
prevent employers from essentially setting up a plan as "one more pot to
steal from."
Responding to a request for analysis regarding the kind of incentive needed
for employers to expand defined benefit plan coverage, Mr. Taylor replied that
the Academy of Actuaries has offered some statistics on that topic. He noted
that plans were more often terminated due to the uncertainty of contributions
rather than cost. He also commented that if that is true, he could see no
solution to theory that defined benefit plans were targeted during mergers as
dispensable.
SAFE plans would not be available to employers with more than 100 employees
primarily in order to parallel the SIMPLE legislation.
A member of the Working Group concluded by bringing up the issue of
leakage. Congressman Pomeroy had pointed out that defined benefit plans would
become popular only if they had "marketplace appeal." Unfortunately,
some marketplace appeal came from the ease of using some funds (money from
401(k)s, for example) to satisfy current needs. The Working Group member was
pleased to see that the SAFE proposal raised the premature distribution penalty
from 10% to 20%. In addition, he suggested prohibiting pre-retirement
distributions before the employee reached the age of 55.
Meeting of July 17, 1997
Testimony of Shaun O'Brien
Benefits Analyst for the AFL-CIO
Public Policy Department
Mr. O'Brien presented the views of the AFL-CIO Public Policy Department.
Mr. O'Brien noted the shift in the character of pension coverage from
employer-paid defined benefit plans to voluntary savings programs, including
401(k) and SIMPLE plans and its serious implications for retirement policy.
According to Mr. O'Brien the primary criterion for evaluating private pension
policy should be whether changes to the retirement system contribute to the
distribution of retirement benefits across the elder population. Organized
labor is concerned about the shift towards 401(k) type retirement plans because
of their failure to deliver retirement security to average workers. Since
401(k) plans are primarily contributory savings plans, "you have to pay to
play, and study after study indicates that low wage workers are considerably
less likely to do so." Moreover, efforts to expand coverage with 401(k)
type plans are likely to fall short of expectations.
Mr. O'Brien expressed concern that participants in 401(k) plans are overly
conservative and make sub-optimal investment choices. He also expressed concern
about easy access to defined contribution plan retirement savings through plan
loans, hardship withdrawals and post separation distributions which dilutes
defined contribution plans value as retirement vehicles. He noted that with
improvements in mortality, there is greater risk that participants will outlive
their defined contrition plan accumulations.
Mr. O'Brien recommended several efforts for the Advisory Council to
undertake. First, more careful analysis of From 55000 data is needed to
understand trends, particularly among large employer defined benefit plans. He
stated that there is anecdotal evidence of a subtle shift as companies enhance
defined contribution plans and de-emphasize defined benefit plans that has not
been adequately analyzed. Second, he noted that more needs to be understood
about how employers are funding defined benefit plans. Third, jointly-trusteed
multiemployer plans should be studied as a model for a simplified defined
benefit plan for small employers because they pool risks and provide economies
of scale that result in lower per participant costs and eliminate complexity by
providing completely outsourcing of administration.
Meeting of July 17, 1997
Testimony of David Hirschland
Assistant Director of the United Auto Workers
Social Security Department
Mr. Hirschland noted that the United Auto Workers (UAW) had a long standing
interest in defined benefit plans. He said that the UAW negotiated the first
defined benefit plan in the auto industry in 1949 and since that time has always
favored defined benefit plans as the best way to provide retirement income to
supplement Social Security. However, Mr. Hirschland noted that UAW members are
covered by both defined benefit and defined contribution plans, solely and in
combination with each other.
Mr., Hirschland noted that defined benefit plans are insurance vehicles,
while defined contribution plans are not. While there may be some group
purchasing efficiencies in defined contribution plans, there is no risk transfer
or pooling to assure the adequacy of retirement income over a retirees
lifetime.
Defined benefit plans are more economically efficient than are defined
contribution plans, according to Mr. Hirschland. First, investment expenses are
higher in 401(k) programs because individuals are making investment decisions so
transaction costs are higher. Second, aggregate returns are lower in defined
contribution plans because older defined contribution participants are less able
to tolerate risk and, with less risk, there is a commensurate lower return.
Third, investment decisions are made by participants rather than by investment
experts. Fourth, defined contribution plans cannot provide subsidized benefits,
including subsidized joint and survivor benefits and early retirement benefits
as well as full benefits in the event of disability benefits or a plant closing.
Mr. Hirschland said that a major concern expressed about defined benefit
plans is that they do not work well for individuals who change jobs often or who
begin work late in life. However, cash balance plans provide a solution to
premature termination of employment by providing an accrual greater than a
traditional final pay defined benefit plan during the earliest years of
participation. Cash balance accruals are more equal year to year. Mr. Hirschland
also recommended multiemployer plans as a model to be emulated because they
address the issues of risk and portability, because employees can carry their
pension entitlement from employer to employer as they change jobs, and because
multiple participating employers collectively assume the risks of offering a
defined benefit plan. Mr. Hirschland suggested that multiemployer type plans
should be promoted, perhaps through government incentives.
Mr. Hirschland concluded by suggesting that consideration be given to a
system which combines a multiemployer structure with a cash balance type benefit
formula which indexes benefits.. He emphasized that our national retirement
policy should not only recognize that pension coverage is important, but should
also recognize that, all other things being equal, defined benefit plans are to
be preferred to defined contribution plans.
Meeting of July 17, 1997
Testimony of Judith F. Mazo
The Segal Company, for The National
Coordinating Committee for Multiemployer Plans
Ms. Mazo, appearing on behalf of the National Coordinating Committee for
Multiemployer Plans began by endorsing the importance of Mr. Hirschland's
comments on the need for portability to be defined as a seamless retirement
income program accrued through a succession of jobs. She noted that cash balance
plans promote portability, but their growth had been hindered by the inability
of the Internal Revenue Service to work their way through technical issues and
provide reasonable guidance. She also endorsed Mr. Hirschland's theme of the
importance of promoting defined benefit plans.
Ms. Mazo said that a strength of defined benefit plans, that is, its savings
are "hidden", is also one of its weaknesses. Their advantage is that
since they are "hidden," the savings are there when the employees
need them at retirement and they cannot be tapped into prior to that time. Since
they are hidden, however, employees often fail to appreciate their value.
Communication is at the heart of this issue. Employers too often view pensions
as a human resources management tool to recruit employees. Viewed in this light,
perhaps defined benefit plans appear to be paternalistic. However, Ms. Mazo
argued that if paternalism means an employer-sponsored, employer-funded
retirement plan, that was a good thing for employees, for employers and for
society at large. Employers who provide defined benefit plans are good corporate
citizens and ought to be recognized as such, perhaps through tax code
incentives.
Focusing on the lack of plan formation among small employers, Ms. Mazo
commented on the desirability of key employees having a stake in the plan. The
fact that owner-run companies can provide benefits for owners through pension
plans does not make them bad so long as there are appropriate rules in place to
balance the benefits paid to the owner with the benefits paid to other
employees.
Important models of successful defined benefit plans are: Taft-Hartley
multiemployer plans, Social Security and state and local government plansall
of which align the interests of a board cross section of employees in the plan,
have significant economies of scale and have expert administrators.
According to Ms. Mazo, the advantages of defined benefit plans have been
eroded in recent years by regulatory changes. Design flexibility has been
hampered by: overly detailed non- discrimination and coverage rules, lower
limits on benefits, the cap on includible compensation, the minimum
participation rule, separate line of business rules and other controls, rigid
anti-cutback rules that prevent plan streamlining, technicalities on early
retirement, actuarial equivalence, incidental death benefit rules and related
subsidiary standards, court interventions and overzealous funding constraints.
Deterrents to conservative funding--including the excise tax on nondeductible
contributions and the current liability minimum funding cap--undermine the
usefulness of pension plans as long-term retirement programs. The problem is not
only the regulations themselves, but the constantly changing rules.
Ms. Mazo did not favor a simplified defined benefit plan solution for small
employers because it eliminates flexibility. This model seems to solve the
complexity problem by giving the plan sponsor just one answer. A better solution
would be to retain flexibly in order to give employers the chance to shape their
plan to meet employment objectives.
Ms. Mazo also said that the minimum funding rules should better distinguish
between plans that are underfunded because an employer has been dragging its
feet and a plan that is underfunded because it is new.
Ms. Mazo recommended that the Advisory Council look to multiemployer plans
as a model, although she acknowledged that some of the key features are not
replicable in a non-union context. First, multiemployer plans are typically more
egalitarian and less complex than the integrated, pay based formulae of single
employer plans. As a result they are easier to communicate and understand and
employees have a higher level of appreciation for the plans. Second, there is
pooling of assets by employers, which is enforced by the union. This permits
sufficient financial stability to permit attractive features, like subsidized
early retirement and spousal benefits, early retirement windows and specially
designed payment forms that otherwise only large employers could afford. Third,
there is more latitude in plan design because regulators feel that a union is an
equal partner with the employer in making decisions and because union members
are, by in large, not highly compensated. Also, when a plan is large, it is less
likely that there will be highly targeted tax and design manipulation that is
characteristic of some small employer plans.. Fourth, the hallmark of
multiemployer plans is their portability. They provide full benefit portability
for employers as they move from job to job within the sponsoring unions
jurisdiction. Moreover, many multiemployer plans have reciprocal arrangements
with other plans affiliated with the same international union to provide
complete portability for work under union contract anywhere in the country.
Fifth, there is more legal flexibility in setting funding policy for the plan as
a whole because employer contribution rates are set in collective bargaining.
As a result employers get absolute predictability of costs during the term of a
collective bargaining agreement. Sixth, the plan rather than employers have the
investment risk and the opportunity to benefit, on behalf of participants, from
investment gains. Seventh, although overregulation is a problem for
multiemployer plans, but employers do not have a compliance obligation other
than to make required contributions. In effect, plan administration has been
outsourced. Eighth, because the benefits are negotiated as part of the
collective bargaining process, the plan is communicated and better appreciated
by employees.
Meeting of July 17, 1997
Testimony of Congressman Sam Gejdenson
Mr. Feen introduced Congressman Sam Gejdenson (D-CT) who co-chairs the House
Democratic Caucus Task Force on Retirement Security. Congressman Gejdenson
recently introduced the H.R. 1130, The Retirement Security Act of 1997, in order
to expand pension coverage, increase portability, make retirement plans more
secure and achieve pension equity for women.
Congressman Gejdenson noted some of the reasons for the current
Congressional interest in pension reform: 51 million workers lack pension
coverage, there is a gender gap in retirement benefits, people are living
longer, family structures have changed and employees are switching employers
more frequently. Congressman Gedjenson's legislation, which has 84 Democratic
cosponsors, addresses each of these issues. However, as requested, he focused
his comments on elements of his bill which would help promote defined benefit
plans, particularly among small businesses. They included giving employers a
$500 tax credit to cover the costs of starting a small plan, repealing the 150%
of current liability full funding limit, repealing the limited scope audit , and
doubling the size of the maximum PBGC insured benefit.
Congressman Gejdenson asked the Advisory Council to make a clear statement
of achievable goals in its Report. He suggested that Council members call on
the chairs of Congressional committees with jurisdiction over retirement policy
to discuss the Council's recommendations.
Mr. Francis Creighton, Congressman Gejdenson's Legislative Assistant,
responded to questions posed by the Working Group on H.R. 1130, including the
provision requiring consent of a spouse for distributions from defined
contribution plans and elimination of the permitted disparity (Social Security
integration) rules. Mr. Creighton suggested that Congressman Gejdenson was open
to further discussions with the business community of any concerns they might
harbor about these proposals.
Meeting of September 17, 1997
Testimony of Edward Friend
President and Chief Executive Officer of EFI Actuaries
Mr. Friend compared a defined contribution system of retirement benefits to
Joe Camel tobacco advertising to enlist teenager smokers. Large defined
contribution account balances are "cool," just like Joe Camel.
According to Mr. Friend, employers are reluctant sponsors, "tobacco
harvesters", of a product promoted by brokers and mutual funds, the "tobacco
manufacturers"; whereas defined benefit plans "have no outspoken
advocates...no constituents...other than yesterday's leaders who are
characterized as old fashioned and paternalistic."
Mr. Friend emphasized that defined contribution plans provide either too
much or too little and said that there was no retirement planning, no objective
and no retirement policy embodied in a defined contribution plan based system.
For a defined contribution plan to provide a retirement benefit of 60% of final
average pay, accumulations must equal 600% of final pay, which, according to Mr.
Friend, requires setting aside 10% to 15% of pay each year for 30 years and not
withdrawing funds for pre-retirement purposes along the way. Few advocates of
defined contribution plans appreciate this point, according to Mr. Friend.
Again, according to Mr. Friend, while employees are driving this change to
defined contribution plans, they do not realize the problems created when moving
away from a defined benefit plan based system.
Mr. Friend contended that the most dangerous component of defined
contribution plans is the pre-retirement distribution opportunity, which he
characterized as "leakage" from the "house of retirement."
He recommended that defined contribution plans be discouraged and their most "injurious
component", pre-retirement lump sums, be eliminated by discontinuing tax
preferences for any employee contribution to a plan which permits the
distribution of lump sums prior to retirement. In addition, Mr. Friend
recommended the creation of two types of rollover IRAs, one of which allows
rollovers from plans which permit pre-tax employee contributions and from which
distributions are not available prior to age 591/2 without penalty and the other
which has no such restriction.
Mr. Friend also recommended that pre-tax employee contributions be permitted
for private sector defined benefit plans in order to "level the playing
field."
In order to discourage leakage of small sums out of defined benefit plans,
Mr. Friend recommended that the PBGC be prohibited form collecting premiums on
small sums which could otherwise be distributed to terminated employees with
vested deferred benefits prior to retirement. If employers do not wish to
maintain small accrued benefits, employers should be permitted to transfer these
amounts to a Social Security administered program.
Mr. Friend noted that employers say they do not want the investment risk
associated with a defined benefit plan, but assuming the investment risk is
advantageous because it could produce experience gains and reduce employer
costs. Mr. Friend stressed that employers can weather out the investment
volatility in a defined benefit plan while older participants in a defined
contribution plan cannot. He also noted that there are other ways to reduce
costs including: increasing retirement ages, changing from a final pay to a
career average benefit or installing a maximum on service credits.
Small employers, in particular, avoid defined benefit plans because of the
requirement that they contribute annually, without skipping. According to Mr.
Friend, the solution for small employers is to create a simplified program
defined benefit plan for small employers, administered through the Social
Security Administration and paid for by additional wage withholding. <39>
Mr. Friend concluded by calling for a review of our national retirement
policy now. He warned that defined benefit plans are being frozen or allowed to
recede, while defined contribution plans are being added, supplemented and
improved. The longer we wait to change the rules, he concluded, the more
difficult it will be to craft satisfactory solutions.
Disclaimer: *Official Transcripts/Executive Summaries of the Advisory
Council on Employee Welfare and Pension Benefit Plans are available for a fee
from the DOL- contracted official court reporter, Bayley Court Reporting, for
the April through October, 1997 meetings. Bayley's number in Washington is
202-234-7787 and the contact is Mike Shuman. As of the November meeting, the
DOL's official court reporting contract changed and that contractor is Executive
Court Reporting at 301-565-0064.
Any item in the index **(double starred) is available from the private
source, e.g. association, company, etc., as it is proprietorial in nature. It
is not in the purview of the department to distribute private organizations'
sales and marketing materials.
The final report of the Working Group will be available via hard copy
from the Public Disclosure Office of the Pension and Welfare Benefits
Administration at 202-219-8771, or via the Department of Labor's Internet
Address: http://dol.gov/dol/pwba around the first week in December, 1997.
Questions regarding the Council charter, membership, nominations process, study
issues and other related matters may be addressed to
Sharon Morrissey, Council Executive Secretary at 202-219-8921 or
202-219-8753 or via fax at 202-219-5362.
VI. EXHIBITS AND WRITTEN MATERIALS RECEIVED
The following written, videotape and other material was submitted to the
Working Group and was considered by it in its deliberations. The listed
material is part of the public record and is available for review at the
Department of Labor.
April 8, 1997: Working Group on Merits of Defined Contribution and
Defined Benefit Plans With an Emphasis on Small Business Concerns
a) Agenda
b) *Official Transcript
c) *Executive Summary of Transcript
d) Washington Post Sunday Magazine Feature on Hilton Hotel Workers, written
by Peter Perl, April 6, 1997 (introduced as topic by Michael Fanning)
e) **Information from the Employee Benefits Research Institute, provided as
a follow-up to testimony presented by Dr. Paul Yakoboski, research analyst on
April 8.
-
1996 Data on the Mobility of American Workers
-
Various Tables from the EBRI Special Report and Issue Brief, September 1994.
3. EBRI Education and Research Fund Newsletter of October 1996 on
"Growth in State and Local 457 Plan Popularity Continues
Through 1995."
4. More EBRI tables on Private Pension Plans and Participants including:
5.1 - Summary of Private-Sector Qualified Defined Benefit Plans and
Participants, Selected Years 1975-1993;
6.1 - Summary of Private Sector Qualified Defined Benefit and Defined
Contribution Plan Trends, Selected Years 1975-1993;
5.4 - Summary of Private-Sector Qualified 401(k) Cash or Deferred
Arrangement Trends, 1984-1993;
6.2 - Private Sector Qualified 401(k) Cash or Deferred Arrangement
Financial Trends.
5. Statement before the House Ways and Means Committee by Dr.
Yakoboski, on March 10, 1997, re savings and investment provisions in
the Administration's fiscal year 1998 Budget Proposal.
6. Questions and Select Charts from EBRI's 1996 Retirement Confidence
Survey conducted by Mathew Greenwald & Associates.
7. Hybrid Retirement Plans, the Retirement System Continues to Evolve,
EBRI Special Report SR-32/Issue Brief Number 171, March 1996.
8. "Changes in DB and DC Plans Occurring Mainly Among Small Plans",
excerpted from EBRI's monthly newsletter March 1994.
f) **EBRI in Focus from EBRI Notes, March 1997, provided by Kenneth Cohen.
g) Pre-packet of EBRI statistics prepared by Ken Cohen as well as cartoon "The
Employees have to assume a share of the blame for allowing the pension fund
to become so big and tempting."
h) **ABC-TV Nightline Segment on "Pension Plans vs. 401(k) Plans"
from March 7,1997 (master copy in archive file), provided Kenneth Cohen.
i) Packet provided to all members of the Council on the Health Insurance
Portability and Accountability Act (HIPAA), prepared by EBSA's Public
Affairs Division.
j) Series of articles provided by Neil Grossman, Council member and
representative of the Association of Private Pension and Welfare Plans including:
1. "Alternative Retirement Programs" by Scott J. Macey and George
F. O'Donnell for Pension & Benefits Week, January 16, 1996.
2. "Hybrid Pension Plans: A Solution for Some Employers" by Arlene
Munson and Frederick W. Rumack, Journal of Compensation and Benefits,
October, 1995.
3. "A Pension Plan for Today" by Gerald I. Angowitz and Eric P.
Lofgren, Financial Executive, January/February 1995.
4. "What's New in Pensions: Defined Lump Sum Plans" by Beverly G.
Landstrom and Thomas B. Bainbridge, for Compensation & Benefits
Review, no date listed.
May 13, 1997: Working Group on Merits of Defined Contribution and
Defined Benefit Plans With An Emphasis on Small Business Concerns
a) Agenda
b) *Official Transcript
c) *Executive Summary of Transcript
d) **"Defined Benefit Plans Combined with Voluntary Savings Plans
Continue to Work Well for State and Local Government Employees" by Cynthia L.
Moore, Washington Counsel, National Council on Teacher Retirement, in testimony
before the ERISA Advisory Council, plus two additional handouts from Ms. Moore
including, "Section 415 of the Internal Revenue Code Impairs the Pension
Portability of State and Local Government Employees" and "Types of
Service Credit that Members of the Ohio State Teachers' Retirement System May
Purchase".
e) Outline of Testimony by Patricia Scahill, Actuarial Sciences Associates
f) Presentation to W.G. on Cash Balance Plans by Lawrence J. Sher and
Theresa B. Stuchiner, Kwasha Lipton Group of Coopers & Lybrand
g) **Transcript of the ABC News Program Nightline of March 7, 1997, on "When
You Retire, How much are you willing to gamble?" (Limited copies of actual
program also are available.)
h) American Society of Pension Actuaries (ASPA) Proposes the Secure
Assets for Employees (SAFE) Plan for Small Business provided by Brian Graff,
American Society of Pension Actuaries, who is set to speak in June.
June 12, 1997: Working Group on Merits of Defined Contribution and
Defined Benefits Plans With An Emphasis on Small Business Concerns
a) Agenda
b) *Official Transcript
c) *Executive Summary of the Meeting
d) Congressional Record Entry on "Secure Assets for Employees (SAFE)
Plan Act of 1997, page E964, provided for Congressman Earl Pomeroy (D.N.D.)
Appearing before the committee
e) Written Testimony of George Taylor, President of National Retirement
System Plan Services, and Vice President of the American Society of Pension
Actuaries (ASPA) on the SAFE Act.
July 17, 1997: Defined Contribution vs. Defined Benefit Plans With
an Emphasis on Small Business Concerns
a) Agenda
b) *Official Transcript
c) *Executive Summary of Transcript
d) Prepared Testimony of Shaun C. O'Brien, Public Policy Department,
AFL-CIO and "Pension Coverage Initiatives: Why Don't Workers
Participate?" by Richard P. Hinz and John A. Turner, both of EBSA,
dated March 1996, and cited by O'Brien during his testimony
e) Pros and Cons of Defined Benefit Plans for Small Employers: Lessons
From the Multiemployer Plan Experience by Judy F. Mazo, the Segal Company
on behalf of the National Coordinating Committee for Multiemployer Plans
(NCCMP)
f) Prepared Testimony of David Hirschland, Assistant Director of the Social
Security Department of the International Union of United Automobile, Aerospace
and Agricultural Implement Workers of America, United Auto Workers (UAW)
g) Text Supplement, BNA, Joint Committee on Taxation Staff Comparison
(JCS-11-97) of Revenue Provisions in Tax Reconciliation Bill (HR2014) as
Passed by House and Senate, Issued July 11, 1997.
September 16, 1997: Defined Contribution vs. Defined Benefit Plans
With an Emphasis on Small Business Concerns
a) Agenda
b) *Official Transcript
c) *Executive Summary of Transcript
d) Discussion Group Outline and Rough Draft of Group's Final Report done
by Mr. Cohen (Not available to the public)to get a head start on the Working
Group's charter
e) Written Testimony of Edward H. Friend, ERI Actuaries, Inc. including the
following attachments:
-
"2030" "A Cautionary Tale" from the McGinn Forum, June
1996.
-
Benefit Payable at Age 65 Chart in DB v. DC Systems
-
Provisions of Possible Supplemental Defined Benefit Pension Plan,
Administered by Social Security Administration prepared by Robert J. Meyers, and
4. "Tax Policy versus Pensions: Cease-Fire in Sight?" by Ron
Gebhardtsbauer, appearing in the February 1997 edition of the American
Academy of Actuaries publication.
f) **"Towards an Understanding of the Defined Contribution Trend"
a draft by Jack L. Vanderhei, PhD., and Kelly A. Olsen, M.S.W. Employee Benefit
Research Institute, provided to W.G.
g) Defined Benefit Plans Versus Defined Contribution Plans: A Reassessment
by Donald S. Grubbs, provided to W.G. by Zenaida Samaneigo
h) Written Testimony from Gregory Conko, Policy Analyst, Competitive
Enterprise Institute
October 7, 1997: Defined Contribution vs. Defined Benefit Plans
With an Emphasis on Small Business Concerns
a) Agenda
b) *Official Transcript
c) *Executive Summary of Transcript
d) Guest Column: Fine-Tuning 401(k) Plans, by Donald Oderman, from September
29. 1997 Defined Contribution News, provided by member Thomas Mackell, Jr.
e) Spreadsheet describing various proposals concerning defined benefit plans
made in connection with the Taxpayer Relief Act, provided by member Kenneth S.
Cohen
f) First draft of the Working Group's Reported, dated August, 1997 (not
available to public)
g) "Small Businesses Lack Retirement Plans, Fidelity Poll Says,"
from Dow Jones Newswire, September 30, 1997
h) Pension Insurance Data Book, 1996 by the Pension Benefits Guaranty
Corporation
November 12, 1997:Defined Contribution vs. Defined Benefit Plans
With an Emphasis on Small Business Concerns
a) Agenda
b) *Official Transcript
c) *Executive Summary of Transcript
d) I.A.M. National Pension Fund brochure, Defined Benefit Pension Plans vs.
Defined Contribution Savings Plans (Rev. 4/91) provided by member Joyce A. Mader
e) I.A.M. Defined Benefit Plan videotape, provided by member Joyce A. Mader
f) Final draft of the Working Group's Report, dated November 13, 1997
(Anticipated to be available the first part of December, 1997, in hard copy
from the EBSA Public Disclosure Room at 202-219-8771 or via the Internet)
VII. MEMBERS OF THE WORKING GROUP
KENNETH S. COHEN
Chair of the Working Group
Massachusetts Mutual Life Insurance Company
MICHAEL R. FANNING
Central Pension Fund International Union
of Operating Engineers & Participating Employers
CARL S. FEEN
Vice Chair of the Advisory Council
CIGNA Financial Advisors
NEIL M. GROSSMAN
Association of Private Pension & Welfare Plans
MARILEE P. LAU
KPMG Peat Marwick
RICHARD McGAHEY
Neece, Cator, McGahey & Associates, Inc.
THOMAS J. MACKELL, JR.
Vice Chair of the Working Group
Simms Capital Management, Inc.
JOYCE A. MADER, ESQ.
Chair of the Advisory Council
O'Donoghue & O'Donoghue
VICTORIA QUESADA, ESQ.
ZENAIDA M. SAMANIEGO
Equitable Life Assurance Society, U.S.
BARBARA ANN UBERTI
Wilmington Trust Company
JAMES O. WOOD, ESQ.
Louisiana State Employee's Retirement System
Footnotes
<1> In recent years the ERISA Advisory Council has prepared the
following reports on defined contribution plans: Report of the Working Group on
Defined Contribution Adequacy (November 5, 1995); Report of the Working Group on
Defined Contribution Plans With an Emphasis on 401(k) Plans (November 10, 1994);
and Report of Interim Findings and Preliminary Conclusions of the Defined
Contribution Plan Working Group (November 9, 1993). Copies of these and other
reports of the ERISA Advisory Council may be obtained by written request to Ms.
Sharon Morrissey, Executive Secretary of the ERISA Advisory Council, U.S.
Department of Labor, Employee Benefits Security Administration, Washington,
D.C. 20210.
<2> A summary of the testimony received is set forth in Part V
below. A list of written and other testimony reviewed by the Working Group is
set forth in Part VI below.
<3> The Working Group would like to express its appreciation to Ms.
Karen F. Kanjian, a third year law student at Temple University School of Law
and a Summer Associate at Mass Mutual's Law Division, who helped prepare the
earliest drafts of the Working Group Report.
<4> U.S. Department of Labor, Private Pension Plan Bulletin,
Abstract of 1993 Form 5500 Annual Reports (hereinafter 1993 Abstract) , Number 6, Winter 1997 (Final 1993)
<5> 1993 Abstract, Table A1., p. 4.
<6> Id. $1.25 trillion was invested in defined benefit
plans vs. approximately $1.07 trillion invested in DC plans.
<7> Figure from the U.S. Department of Labor, as of July 1997.
<8> In 1993, the U. S. Department of Labor reported a total of
702,097 pension plans. 1993 Abstract, Table A1., p. 4. Today, the U.S.
Department of Labor estimates 690,000 plans exist. (July 1997)
<9> 1993 Abstract, Table A6., p. 9.
<10> 1993 Abstract, Table A2., p. 5.
<11> Id. The Form 5500 number for participants receiving benefits
does not include those former defined contribution participants who received
lump sum distributions of their benefits in prior years. Most recipients of lump
sum payments are defined contribution participants.
<12> Id.
<13> 1993 Abstract, Table A1., p. 4.
<14> 1993 Abstract, Table A5., p. 8.
<15> 1993 Abstract, Tables A1 and A2., p. 4-5.
<16> Pension Insurance Data Book 1996, PBGC Single-Employer
Program, Number 1, Summer 1997, PBGC Corporate Policy and Research Department.
<17> Id. Table A-13, PBGC-Covered Participants (1980-1996).
<18> Celia Silberman, "Changes in DB and DC Plans
Occurring Mainly Among Small Plans", EBRI Notes, Vol. 15, No. 3, March
1994.
<19> Kelly Olsen and Jack VanDerhei, " Defined Contribution
Plan Dominance Grows
", EBRI Special Report SR- 33 and EBRI Issue
Brief No. 190 at p.20-21 (October, 1997).
<20> Testimony of Dr. Paul Yakoboski, Patricia Scahill, Lawrence
Sher, Terry Stuchiner, David Hirschland and Judith M. Mazo. See EBRI Special
Report, Hybrid Retirement Plans: The Retirement Income System Continues to
Evolve, SR-32/ Issue Brief No. 171, March 1996.
<21> While defined benefit plans are prohibited from making in
service distributions prior to retirement, they can make pre-retirement
distributions upon termination of employment at any age. See Internal Revenue
Code Section 411(a)(7) which permits distributions of the present value of the
vested accrued benefit of up to $5,000 without the participant's consent and
for amounts greater than $5,000 with the participant's consent.
<22> Study by Buck Consultants, cited in V. O'Connell, "Old
Style ?Defined Benefit' Pensions May Stage Big Revival With Tax Law",
Wall St. J. (August 14, 1997)
<23> If the current liability limit were repealed, defined benefit
plans would still be subject to the full funding limitation of Internal Revenue
Code Section 412(c)(7), which is an amount equal to the accrued liability,
including normal costs, under the entry age normal funding method.
<24> Id.
<25> Christopher Drew and David Cay Johnson, "Special tax
Breaks Enrich Savings of Many in the Ranks of Management," New York
Times, Section 1, Page 1, Column 1 (October 13, 1996). Also see Diana B.
Henriques and David Cay Johnson, "Managers Stay Dry as Corporations
Sink," New York Times, Section A, Page 1, Column 1 (October 14, 1996).
<26> Edward C. Hustead, "Trends in Retirement Income Plan
Administration Expenses," PRC Working Paper 96- 13(University of
Pennsylvania, 1996) cited in Olsen and VanDerhei, supra, at p. 13-14.
<27> Internal Revenue Service Notice 97-58, 1997-45 I.R.B. 7
(November 10, 1997).
<28> Internal Revenue code Section 415(b)(4).
<29> Id.
<30> Governmental defined benefit plans may allow participants to
contribute on a before-tax basis. See Internal Revenue Code Section 414(h).
<31> Internal Revenue Service Notice 97-58, 1997-45 I.R.B. 7
(November 10, 1997).
<32> ERISA Section 105.
<33> The ERISA Advisory Council recommended in 1996 that defined
contribution plans be required to provide automatically vested account balance
statements annually or more frequently. See ERISA Advisory Council, "Report
of the Working Group on Third Party Trustees" (November 13, 1996).
<34> This confirmed Dr. Yakoboski's earlier testimonynot
surprisingly considering they used the same database for their information.
<35> Mr. Hinz subsequently noted that the Department of Labor
developed the analysis which makes the distinction between primary and secondary
plans and has published data demonstrating those trends for a number of years.
<36> H.R. 1656, introduced on May 16, 1997 and co-sponsored with
Representatives Nancy L. Johnson (R-CT) and Harris Fawell (R-IL).
<37> See the July 17, 1997 testimony of Congressman Sam Gejdenson
summarized below for a discussion of this legislation.
<38> ERISA Section 4021(b)(13) exempts plans sponsored by
professional service employers with 25 or fewer employees from PBGC coverage.
<39> Mr. Friend distributed a July 22, 1997 summary prepared by
Robert J. Meyers, former Chief Actuary of Social Security, describing such a
program.
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