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Remarks Delivered by
U.S. Secretary of Labor
Elaine L. Chao
American Council of Life Insurers
Orlando, Florida,
Tuesday, October 24, 2006
Thank you, Frank [Keating, President/CEO of American Council of Life
Insurers]. It's a pleasure to be here.
Your meeting comes at a significant time in our nation's history —
America's population reached 300 million last week. Demographers predict that
within 35 years, our country will add an additional 100 million Americans.
Because of the upcoming retirement of the Baby Boom generation, the
percentage of Americans 65 and over will rise from 12.4 percent in 2005 to 20
percent by 2030. Americans are living longer and healthier lives than ever
before. This demographic shift means new retirement security challenges for our
country. In order to meet these challenges, our economy must continue to grow
and remain competitive in the worldwide economy.
One of the most important things this Administration has done to
strengthen retirement security is to create the climate for economic growth.
The President's tax cuts have helped our economy recover and grow, despite
unprecedented challenges over the past five years. America's GDP grew at 4.1
percent in the first half of 2006, which is better than any other major
industrialized nation. We've had 37 straight months of job growth. Over 6.6
million net new jobs have been created in the last three years — more than
Europe and Japan combined.
The national unemployment rate is 4.6 percent — a full percentage
point lower than the 5.7 percent unemployment rate in the decade of the 1990s.
By contrast, Germany and France have unemployment rates close to 9 percent, and
long-term unemployment rates triple that of the U.S. And gasoline prices in
Europe average more than $6 per gallon. And as a result of the President's tax
cuts, workers and employers have had more money in their pockets to spend, save
and invest.
Our country's steady, consistent growth has provided the foundation for
a stronger retirement system. This system rests on a three-legged stool, as you
all know: pension plans, Social Security, and personal savings.
President Bush has made retirement security one of the highest
priorities of this Administration. And this Administration has launched many
initiatives to strengthen each one of these key foundations for retirement.
In January 2005, the President proposed significant new reforms to
strengthen private sector defined benefit pension plans of the 44 million
Americans who depend upon them. The President also proposed several initiatives
to encourage personal savings. And the President initiated a national dialogue
on strengthening Social Security. He proposed several ways of approaching this
issue that would protect the benefits of current and near retirees, while
giving young people a greater return on their investment.
The successful passage of the Pension Protection Act of 2006, which
President Bush signed into law on August 17, 2006, was an important step
forward in improving retirement security. Your help was essential in passing
this important legislation and I want to commend the American Council of Life
Insurers for its strong support.
The Pension Protection Act reformed the defined benefit pension system
and made significant improvements to defined contribution plans as well. It was
modeled on the President's proposals to:
- Reform the funding rules to strengthen pension plans;
- Increase disclosure to workers, so they can make informed decisions
and understand the status of their plans;
- Reform the premium structure paid to the Pension Benefit Guaranty
Corporation; and
- Encourage greater worker participation in retirement savings plans.
The first goal of the President's defined benefit reform proposal was
to strengthen the funding rules to ensure employers keep their retirement
promises.
Under the old rules, a confusing system of different measures masked
the truth about plan funding. One measure could show a plan to be nearly 90
percent funded. But when the plan was terminated, its holding could amount to
less than 50 percent of the funds needed to keep its promises. The Pension
Protection Act changed this, by changing the way plans measure their assets and
liabilities.
The new Act also requires plans to fund 100 percent of their
liabilities, instead of 90 percent under the old rules. And it responsibly
balances the need to reach full funding with the cash flow needs of plan
sponsors. It prudently allows them to amortize the funding shortfalls over
seven years.
And the Act requires plans to use a discount rate based on a yield
curve of corporate bonds and up-to-date mortality tables. This amounts to a
market-based "reality check."
The President's second goal, to provide increased disclosure, will
increase transparency and accountability to workers. The Act will affect both
defined benefit and defined contribution plans. Defined benefit plans must
provide workers with annual notices that show their current funding percentage.
And these notices must show the funding percentages for the previous two years,
as well. And defined contribution plans must provide workers with quarterly
benefit statements, so they can monitor the performance of their investments.
To achieve the President's third goal, the Act reforms the premiums
that private sector employers pay to the federal insurance program to better
reflect the real risks and costs. This has been a real challenge.
Last year, Congress increased the flat rate premium for the first time
in 14 years. And it established new risk-based premiums for under funded
pension plans. This change, combined with the improved funding requirements,
should significantly reduce the more than $20 billion deficit facing the PBGC.
The fourth major goal, to increase worker participation, is one of the
most significant improvements made by the Act. By facilitating the adoption of
automatic enrollment plans, the legislation will boost worker retirement
savings.
Automatic enrollment in 401(k) or similar defined contribution plans
will have a significant impact on participation. Studies show that automatic
enrollment in 401(k) plans increases participation rates from 66 percent to 92
percent! The Act reduced two barriers to automatic enrollment. The first was
state payroll laws that required affirmative authorization to deduct employee
contributions. And the second was the potential fiduciary liability for
investing those contributions.
The law requires the Department of Labor to issue regulations
describing appropriate default investment options for automatic enrollment
plans. It gave us only six months, or until February of next year, to do so!
But we're on track.
As you know, the Department recently issued a proposed regulation
establishing a safe harbor for default contributions invested in any of three
investment options appropriate for long-term savings. The comment period for
this proposed regulation will close next month. And your comments on this
proposed regulation would be very much appreciated. Stable value funds and
other low-risk investments could prove to be an important component of a
diversified investment portfolio. And they will play a role in default
investment options under this regulation.
As you also know, the Pension Protection Act requires the Department to
issue regulations by next August clarifying the fiduciary obligations of a plan
sponsor when selecting an annuity provider for a defined contribution plan.
This was an important provision. The intent of Congress was to make it easier
for these plans to adopt a feature common to traditional pension plans — a
guaranteed stream of lifetime income. Annuitization of these account balances
gives workers a way to protect themselves from outliving their savings.
I am also very pleased that the Act made permanent the higher
contributions for IRAs and 401(k) plans. And it increased access to
professional investment advice. The Department is currently reviewing the
investment advice provision of the Act to determine what regulations and
guidance are necessary for its implementation.
Passing the law was a major achievement. The next challenge is writing
the regulations to implement the law. The Act sets ambitious targets. Some
regulations are due by February. Others are due by August. And the remaining
regulations are generally due by 2008. The Department will be working hard to
meet these deadlines.
And let me mention two other important regulations that will be issued
early next year. In addition to a final default regulation notice, the
Department will also be issuing a final regulation revising the content of the
Form 5500. This is necessary because of changes made by the Pension Protection
Act, as well as the need to modernize and streamline the form to allow for
electronic filing.
The new system, called E-FAST2 — which stands for the ERISA Filing
Acceptance System — will improve the system for filing these forms. It
will be faster, more user-friendly and more accurate. And it will be less
costly.
As you can see, there is still much to do to implement the Pension
Protection Act of 2006. The input of the American Council of Life Insurers, and
many other others, helped Congress and the Administration in drafting and
enacting this legislation. Your input is important, as the regulations that
implement the Pension Protection Act of 2006 are drafted.
Our country must continue to strengthen pension plans, improve the
national savings rate and increase access to quality, affordable health care.
And our nation must continue the pro-growth policies that have created steady,
consistent growth and made our economy the envy of the world.
Thank you.
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