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Employee Benefits Security Administration

Report of the Working Group on Planning for Retirement

November 14, 2001

Introduction and Overview

ERISA provides important, substantive protections for individuals in employee retirement plans, including minimum vesting and accrual standards, spousal survivor rights, safeguards against asset mismanagement and funding requirements. These and other protections, and governmental and private sector programs on the importance of saving for retirement through qualified plans and personal savings, have resulted in approximately half of working Americans approaching retirement age with modest to substantial qualified deferred compensation to supplement Social Security and private savings. 

Federal law, however, does not generally address problems that people who are approaching retirement age, and people who are already in retirement, face in preparing for and living in their years outside the labor market. These problems include assessing financial, health, and other needs in retirement; creating an inventory of financial and other resources for meeting those needs (including benefits available to them under employer sponsored and other retirement plans); and making and implementing financial and other plans for retirement.

The working group set as its agenda a study of these problems. The group focused on how individuals currently plan for their retirement and how such planning might be made more effective. We were particularly interested in identifying materials, tools, and other resources that help people plan for retirement; in determining what types of resources work best; and in assessing how to increase availability and improve coordination of resources.

In addition, we were interested in whether people approaching retirement have adequate financial tools to maximize their income without exhausting assets before death. We were particularly concerned about the availability of annuity-type instruments and the efficacy of planning strategies to replicate annuity-style payment schedules from assets held in a defined contribution format.

Some additional initial observations seem appropriate. First, during our study we were aware of some congruencies between our topic and the subject of coverage and benefit adequacy, which was the focus of another of this year’s working groups. In some senses, the two topics can be understood as two segments of a continuum, with the coverage group focused on ensuring adequate accumulation of retirement assets under employment based plans during a person’s working life (including encouraging firms to adopt plans and employees to utilize them) and our group focused on management, or as our witness Ron Gebhardtsbauer put it, de-accumulation, of those assets during retirement.

But there was also overlap between the two topics. For example, encouraging rapid asset accumulation for people who approach their seventh decade of life undersaved for retirement was a concern of both groups. And to the extent that adequate accumulation of retirement assets makes planning for and living in retirement easier, the coverage group’s topic was also in a sense our topic. As one of our witnesses, Patrick Purcell of the Congressional Information Service, observed, “you can’t take money out (of a plan) unless you’ve been putting it in.” And obviously, the more intelligently money saved is invested, the more money there will be to draw out in retirement. In reading this report, however, the reader should keep in mind that our focus is on the de-accumulation side.

Another note: for both working groups a central theme emerged: the need to increase financial literacy for the average American. Increased financial literacy would stimulate additional saving and improve both the accumulation and de-accumulation sides of asset management.

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Working Group Proceedings

The working group conducted seven public meetings. At those meetings, the group received oral and written testimony from individuals and organizations. The working group also received a variety of written materials from those who testified. The working group also considered articles published in journals and the press and Internet materials referred to by our witnesses.

At our first meeting, on April 9, 2001, the working group discussed the issues to be studied. The working group also heard testimony from Joe Canary, a chief in the EBSA Office of Regulations and Interpretations responsible for coverage, reporting and disclosure; Lou Campagna, who is responsible for fiduciary matters in the same office; and Dallas Salisbury, President of the Employee Benefits Research Institute (EBRI).

At the working group’s second meeting, on May 3, 2001, it heard testimony from Linda Jackson, a public affairs specialist in the EBSA, Office of Participant Assistance and Communications; Ellen Hoffman, a journalist who specializes in retirement issues and the author of “The Retirement Catch-Up Guide; Jonathon Forman, a tax and employee benefits professor at the University of Oklahoma School of Law; and Regina Jefferson, a tax and employee benefits professor at Catholic University.

At the working group’s third meeting, on June 11, 2001, it heard testimony from Michael McAllister, a principal at William M. Mercer, Inc.; Arthur L. Griffin, a certified financial planner; David Stupor, the Executive Director of the Bricklayers and Trowel Workers International Pension Fund; and Margy LaFond, Associate Commissioner for Communications Policy and Technology at the Social Security Administration.

On July 17, 2001, the working group held a joint public meeting with the working group studying pension coverage and benefit adequacy, reflecting the close relationship between the topics being studied by the two groups and the interest of the witnesses who spoke at the hearing. Presentations were made by the following individuals: Sylvester Schieber, Vice President, Watson Wyatt Worldwide; David Blitzstein, Director of Negotiated Benefits, United Food & Commercial Workers; Alicia Munnell, Peter F. Drucker Professor of Management Sciences, Boston College Carroll School of Management; Anna Rappaport, Principal, William M. Mercer, Inc.; Ron Gebhardtsbauer, Senor Pension Fellow, American Academy of Actuaries; Teresa Ghilarducci, Associate Professor of Economics and Director of the Higgans Labor Research Center, University of Notre Dame; Diane Oakley and Richard Hiller of TIAA-CREF; and Patrick Purcell of the Domestic Social Policy Division of the Congressional Research Service.

The working group’s next meeting was scheduled for September 11, 2001, but was cancelled because of the extraordinary and tragic events that struck our Nation of that date. The working group, however, did meet on September 12, 2001, in response to President Bush’s determination to continue governmental operations. At that meeting, we heard the testimony of Carol Stack, a professor of anthropology and education at the University of California at Berkeley, and discussed the information we had received at our earlier meetings.

At its October 12, 2001, meeting, the working group heard testimony from Melissa Kahn, a vice president for government affairs and Elaine Stevenson, a vice president for new product development, at MetLife. We also received written testimony from Steven Mitchell, a vice president at Fidelity Investments. Ms. Kahn, Ms. Stevenson, and Mr. Mitchell had all been initially scheduled to provide testimony at our September 11 meeting. The group also discussed potential findings and conclusions.

At the final meeting, on November 13, 2001, the working group reviewed a draft report and approved this final report.

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Findings

Many Americans simply do not plan for their retirement. While we cannot say with precise quantitative accuracy how many people are underplanned or undersaved for retirement, evidence presented to the working group suggested that many Americans simply do not engage in meaningful retirement planning. This is true, of course, for both accumulation and de-accumulation. We heard testimony from Dallas Salisbury, Executor Director of EBRI, that empirical studies show that a majority of Americans retire when they reach early or normal retirement age, without any meaningful analysis of either their post-retirement financial needs or the amount of income their assets can generate during their years outside the labor market. Many people simply assume that benefits under Social Security and, if they have it, their employer-provided retirement plan, will be adequate to support them. This is of course not always the case. Indeed, for middle-income earners, Social Security may provide as little as a 24% income replacement rate.

Why is this? Several of our witnesses and members speculated that there was no single cause for the lack of planning. A number of witnesses suggested that many people simply lacked the ability to find, and the financial sophistication to digest, the necessary planning information (something we discuss further in these findings). Dallas Salisbury suggested that part of the problem is a failure to confront reality (“ignorance is bliss” he noted); another of our witnesses, Michael McAllister, a principal at William Mercer, talked of the need for a “burning platform” in order to get people to focus on an issue. The retirement planning platform is apparently not yet generating sufficient heat to energize people into conscientious planning.

There is a wide array of material available to assist people in planning for retirement: The good news that our working group discovered is that there is a great deal of information available from a rich variety of resources to assist Americans in planning for retirement. We learned that such resources are produced by a variety of entities: governmental agencies (the Social Security Administration and the Department of Labor, for example); labor organizations; employers; individuals; and investment companies, insurance companies, and other financial intermediaries. The Administration on Aging sponsors pension-counseling programs in a number of states.

We also found that resources came in numerous formats and mediums: we found descriptive material on investment and planning, as well as interactive tools such as financial calculators, on the Internet; we found written materials, in book, workbook, and pamphlet forms; we found seminars, workers’ circles, and individual counseling programs.

The Department of Labor, as part of its Retirement Savings Education Campaign, has produced some publications designed to encourage people to save during their working lives. Linda Jackson, a public affairs specialist at the EBSA, indicated that part of the next phase of the Department of Labor’s campaign will include projects dealing with the de-accumulation of assets.

Social Security has also been an important source of online and other information. Margy LaFond, the Assistant Social Security Commissioner for Communication, told us that “in recent years, we have devoted our public education efforts to place more emphasis on the importance of financial planning and preparing for retirement rather than concentrating on benefits and how workers can qualify for them.” Indeed, many sources of information can be accessed through links on the Social Security web site, including privately developed retirement calculators. Among the most prominent sources of information, in part because of its near universality and in part because of its substance, are the new annual statements sent by the Social Security administration to workers over age 25, which provide projected benefits and work histories.

We have included as part of this report a bibliography of the materials we have received or been referred to during our deliberations. Two publications in particular, though, warrant some mention because of their special features: (1) “Your Retirement Planning Guide Ready or Not” by the Manpower Education Institute takes a comprehensive approach to retirement planning, which includes sections on financial planning, Social Security, legal matters, estate planning, use of time in retirement, health, housing, part-time work, and other topics; (2) “The Retirement Catch-Up Guide” by the journalist Ellen Hoffman explores planning strategies for people approaching retirement with insufficient savings and pension benefits.

“Drowning in information, starving for knowledge.” The problem is not one of lack of information. David Stupar, Executive Director of the Bricklayers and Trowel Workers International Pension Fund, told us that “there is a lot of information out there, and we’re just trying to get what we’re aware of out to [our members].” Indeed, another of our witnesses, Michael McAllister, a principal at William Mercer, captured a recurrent theme in our discussions when he said “We absolutely live in an information overload society today. . . we are drowning in information and starving for knowledge.”

Having information is not enough: people must know that they need the information; must be able to determine what resources are appropriate for their situation and needs; must be able to relate to the presentation of the information (differences in learning/listening attributes - electronic, language, gender, culture, etc.); must be able to access the resources; must be able to determine the quality of competing resources; must be able to understand the information they access and apply it to their circumstances.

It is clear that there is a huge supply of basic materials. It is not clear that it is all targeted or available to the audience that needs it. It is not clear that the varying pieces of information communicate a consistent message. To our knowledge, no agency has studied this supply of information to determine its effectiveness.

The demise of the “looking around” model of retirement planning. According to Sylvester Schieber, Vice President for Research and Information of Watson Wyatt, many Americans formerly have planned for retirement through what he termed the “looking around” model:

. . . I think up until now, at least over the last quarter century, maybe half century, the vast majority of people have had a pretty effective retirement planning model.

I think they generally have planned simply by looking around. They watched the people ahead of them in their career paths. They watched their parents. They watched their co-workers who were five years, ten years older than them. They watch how they behave and they see that as they go through life, they don’t have to know precisely what their income is. They know in very broad terms what their income is.

They don’t have to know exactly how much they’re laying away each month, but they know the kind of retirement plans they’ve been participating in. They watch old Jane or old Joe down the hall go through their careers and they see them get to be in their mid-50s or their late 50’s or their 60’s, and they see them retire, and they see how they live and behave in the retirement part of their life.

Mr. Schieber sees this model breaking down, especially for baby boomers, as we see the dissolution of employee-health plans, the decline of defined benefit plans, and structural changes in the job market. More formal retirement planning has become far more critical.

Everyone is different, something not easily captured by financial calculators and generalized advice. As every life is different, so should be everyone’s preparations for life outside the labor market. For example, all financial calculators on the Internet, by design, must rely upon a set of reasonably generalized inquiries: How much will you get from your retirement plan, how much from social security, how long do you expect to live, do you expect your spouse to outlive you, how much are your housing costs, how much do you anticipate your medical costs will be, how much do you intend to spend on travel and entertainment? Calculators differ in the types, and comprehensiveness, of their inquiries.

We heard from a number of witnesses who noted a remarkable variety of information that should be considered in planning for retirement, including how much debt you now have and anticipate having at the time you retire; whether you are likely to have dependent children, grandchildren, and parents to support in retirement; whether you have relatives and a circle of friends who can help you perform the increasingly difficult quotidian tasks of life; whether you have access to various volunteer services through church and community organizations; whether employer representations to you on post-employment benefits can be relied on; whether you have long-term care insurance and Medigap coverage. No financial calculator to which we were referred captured all of these variables.

In addition, Elaine Stevenson, vice president for new product development at MetLife, noted that expenses often increase with age: the deterioration of ordinary living skills increase dependency and expense. As Ms. Stevenson put it, “retirement is not static, and the problem with the [financial] tools that are out there today is that they base what your life in retirement is going to look like based on what it was like when you were working.” This analysis must be revisited regularly throughout retirement.

Anna Rappaport, a principal with William Mercer, illustrated this problem in her compelling “Story of Joan,” in which a married woman begins retirement with her husband still living. But she and her husband find it increasingly difficult to care for their home and yard and, ultimately, must hire someone to perform those tasks. As her retirement progresses, her husband dies. She can still drive but can no longer prepare her dinners. A few years later she is diagnosed with Parkinson’s disease, necessitating additional medical expenses. She gives up her car. Within a few years she cannot manage her own bills and finances, handle her medication, or deal with her phone answering machine. Her problems continue: a year later she cannot bathe or dress herself, although she can still feed herself. Finally, she has difficulty walking and trouble feeding herself and is moved to a nursing home.

It is, of course, impossible or at least impractical for a financial calculator to take account of everything that might be, but thinking through these kinds of issues is a critical part of determining financial readiness for retirement.

There are no available effective tools to integrate all retirement resources and needs. Mr. McCallister testified that people generally want to have “only minimal data input” when they use financial calculators. This suggests the desirability of a tool that can pull in information from various sources—for example, private-sector and public pension and savings plans, Social Security, IRAs, and other assets. At present, however, there are no financial planning tools that easily link such information. Representatives from the Social Security Administration testified that privacy issues are an obstacle to constructing such a tool.

The idea of the retirement financial portfolio should be reconceptualized. A number of witnesses, including Sylvester Schieber and Anna Rappaport, suggested that people who approach retirement age should not compartmentalize their assets but rather conceive of all their resources as part of a retirement portfolio. For example, a person should consider retiree health benefits, long-term care insurance, life insurance, their home, their ability and willingness to work part-time, the proximity of children and other relatives who can assist them with various chores, take them in, and/or help financially, as retirement assets. In a sense, this is the asset side of the types of projected expenses discussed earlier.

Women face special hardships in retirement. Women have lower pay than men during their working lives and are statistically less likely to have income from retirement plans. Moreover, because women have longer life expectancies than men and generally marry men a few years senior to them, they typically outlive their spouses. This can be especially problematic because the surviving widow’s income—both Social Security and pensions—will generally drop below the 75% of the couple’s previous income estimated as necessary to retain the same standard of living. Indeed, the qualified joint-and-survivor annuity under ERISA need only provide the surviving spouse 50% of the annuity paid while the employee was alive. Additionally, Social Security, through an anachronistic benefit formula from a time when women generally did not work outside the home, provides a more dramatic reduction in benefits for a surviving spouse who was employed long enough to earn her own Social Security benefits.

Married women also sometimes confront problems in obtaining a portion of their spouse’s pension in divorce. In addition, profit-sharing and stock bonus plans generally do not require spousal consent for benefit forms, including lump sum payments and loans, that might deprive a woman of a survivor benefit if her husband predeceases her.

ERISA was not designed to facilitate retirement planning and the possibility of liability under ERISA’s fiduciary provisions may actually raise obstacles to it. ERISA was designed to prevent fraud and promote transparency and fairness in private-sector retirement plans. Joe Canary, the Chief in the EBSA Office of Regulations and Interpretations responsible for coverage, reporting and disclosure, explained that disclosures under ERISA were “designed to give people information about the rights and obligations under the plan and the law [and] information about the financial condition of the plan and whether the plan is being administered in accordance with the plan.” It was not designed to ensure, for example, that employees were educated, advised or assisted in planning for retirement. Professor Regina Jefferson, who is a pension and tax professor at Columbus School of Law at Catholic University’s law school, similarly observed that “despite the significance of investment decisions and the fact that most participants lack the training to allocate their assets appropriately, ERISA imposes no additional educational requirements on employers who sponsor these plans.” Mr. Canary also noted that ERISA benefit statements are not among the documents that plans are required to provide automatically to participants, except when they leave employment with a vested benefit.

Lou Campagna, the Chief in the same section responsible for fiduciary interpretations, testified that ERISA’s fiduciary duties “are to act exclusively for the purpose of providing benefits to participants and beneficiaries of a plan.” He also testified that “fiduciary duties regarding communications . . . ha[ve] been the subject of much litigation.” He indicated that the Department has not provided guidelines for employers who seek to provide information about investment management and retirement planning and that some plan have been reluctant to provide more than the minimum information required under the statute in order to avoid possible litigation.

Thus, ERISA does not require or encourage employer help in retirement planning and may in fact discourage it.

The difficulties of planning for retirement have been compounded by an increasingly lump-sum payment world. Two decades ago, most employees fortunate enough to have participated in an employer-sponsored retirement plan received defined benefits: an annual annuity at retirement, terminating at the death of the employee or, in the case of a joint-and-survivor annuity, on the death of the survivor of the employee and his or her spouse. Often the plan adjusted the annuity benefit to reflect increases in the cost-of-living. The retiree did not have to have special investment or predictive skills to ensure a lifetime stream of income.

Increasingly, the move to a defined contribution world and cash balance plans has created greater emphasis on lump-sum distributions. In addition, defined contribution plans rarely offer an annuity distribution option, even to those participants who know enough to investigate such option. Once a lump-sum distribution is selected, the participant becomes responsible for determining how and when funds will be accessed for retirement.

The responsibility for assuring a lifetime stream of income will generally be on the participant in a defined contribution world. Alicia Munnell, a leading pension economist who holds the Peter F. Drucker Chair in Management Sciences at Boston University, summarized the problem in an understatement: “it is a very complicated decision to figure out how much to take out each year, and it does expose [retirees] to this risk of outliving their resources.” Anna Rappaport, a principal at William Mercer and a former President of the Society of Actuaries, observed, simply, that “outliving assets is a serious issue.” Both Professor Munnell and Ms. Rappaport also note that there is a mirror-image risk, that, as Ms. Rappaport put it, “retirees will be afraid to spend their money and live at too low a level.”

Professor Munnell and others noted that an employee can guarantee a lifetime income stream by converting his or her account balance into an annuity. Some defined contribution plans must offer the right to annuitize (in fact, must provide that an annuity is the default benefit option), but in many defined contribution plans this is not the case. Professor Munnell also observed that the private individual annuity market is far from robust and that inflation-adjusted annuities are not generally available, an observation confirmed by Elaine Stevenson, a Vice President for new product development at MetLife. We will discuss the problems of annuities in more detail in a separate finding.

In order to manage an accumulation of capital throughout retirement, a person must be able to predict the rate of return on investment, the date of death and the rate of inflation, at a minimum. One of our members, Judy Mazo, stated: “It seems like the answer is, if you know when you’re going to die and you know when the market is up, you’re in a really good position to plan for retirement.”

Several witnesses--including Dallas Salisbury, Anna Rappaport, Ron Gebhardtsbauer, a senior fellow at the American Academy of Actuaries, and Professor Jonathan Forman of the University of Oklahoma School of Law--observed that people approaching retirement tend to greatly overestimate rates of return (a Gallup poll, conducted in April 2001, alluded to by Mr. Salisbury shows that people expect a compounded annual rate of return of 19%, although that is a sharp drop from the 37% that people expected only one year ago), underestimate the possibility that they will live beyond their life expectancy (Mr. Salisbury noted that many people misinterpret life expectancy as their personal lifespan), and often fail to take into account the erosive powers of inflation. (We note that Northwestern Mutual has a life expectancy calculator on the Internet.)

Professor Jonathan Forman, Mr. Gebhardtsbauer, Mr. Hiller, and Ms. Stevenson each testified about the difficulties of developing a systematic plan to withdraw assets from a retirement plan. Mr. Hiller, for example discussed a strategy of withdrawing a set percentage from savings per year, adjusted only for increases in the cost of living. During the period 1975 through 1999, a person who withdrew 6% in the first year (and increased withdrawals thereafter to reflect inflation) would in 1999 have three times the asset accumulation he or she began with. But if the person had followed a strategy of withdrawing 8% per year on the same basis, he or she would have exhausted all savings by the end of 1996. The period 1975 through 1999 was one of relatively healthy investment return.

Compare these results to the period beginning in 1965, an era of higher inflation and lower real investment returns. If a participant had begun a 6%, inflation adjusted, withdrawal strategy beginning in 1965, she would have exhausted her assets by 1980. The Employee Benefits Research Institute polling shows that “most individuals believe they could spend between ten and fifteen percent per year of accumulated assets.” Mr. Salisbury notes that individuals who relied on this idea and withdrew 15% per year “would tend to run out of their assets prior to hitting their 74th birthday.”

Finally, Mr. Salisbury made the astute observation that many Americans live paycheck to paycheck and have not developed budgeting skills. Yet when they reach retirement age, we expect them to competently manage sums of money far larger than they are likely to have had access to while they were in the labor market. It is unrealistic to assume that most such people can develop new budgeting and management skills at retirement age.

Employers and unions sometimes provide little assistance to their employees and members in retirement planning. With some notable exceptions, few employers and unions provide meaningful advice, education, and counseling for their employees about either investment management or retirement planning. This is in part due to employer liability concerns about giving such advice; it is also partly due to lack of employee demand for such services, as they are currently delivered Mr. Salisbury, for example, indicated that the AARP stopped offering retirement planning workshops (paid for by employers) because of lack of employee interest. (It should be noted, however, that Ms. Hoffman noted that the AARP still provides special financial planning workshops for its women members, and that those workshops are popular.)

There are promising programs, however. The Bricklayers and Trowel Workers International Pension Fund, for example, sponsors retirement seminars and worker retirement study circles, and has prepared excellent materials for those programs. TIAA-CREF provides seminars and individual counseling to university and college employees getting ready to retire.

Financial planning is generally available only to the relatively affluent and is sometimes perceived to be, or is, biased. Arthur Griffin, a financial planner, discussed the types of careful and integrated advice a competent financial counselor can provide to a person planning retirement. However, Mr. Griffin noted that sophisticated services of the type he provides are generally available only to people who have at least $400,000 in financial assets. Moreover, Ellen Hoffman testified that people are often suspicious of those offering financial advice because they are not aware of how they are compensated for their advice and fear that they may be pushing certain products because of their profitability to the advisor rather than their value to the client.

The more personalized the advice, the more effective the advice will be. Almost every witness who spoke on the subject indicated that advice should be tailored to the individual to be effective. This applies, of course, to interactive and written materials, but most forcefully to meetings with employees. Small seminars are generally preferable to large meetings, and one-on-one counseling sessions are generally preferable to small seminars. Diane Oakley, a Vice President of TIAA-CREF, reported that 85 percent of their participants specifically requested personal advice on their distribution options.

Mr. Salisbury provided a personal anecdote that vividly illustrates this point. His brother, a college professor, attended a seminar on his retirement benefits. His plan offered a number of joint-and-survivor annuities, including one indexed to inflation. It also offered a single-life annuity, which in the first years of payout was of course larger than the joint-and-survivor options. The person conducting the seminar told the group that the university made no recommendations about which benefit to take and in response to questions indicated that most people selected the single-life annuity. Mr. Salisbury’s brother and his wife decided to take the single-life annuity, in large measure because his wife had a pension. Mr. Salisbury, a holiday guest at their house, learned of their decision during a breakfast conversation. He asked his sister-in-law if she knew the size of her benefit. She did not. He suggested that she find that out before his brother made his benefit selection. She agreed and learned that her pension would be less than $200 per month. With further guidance from Mr. Salisbury, she and her husband decided to select an indexed joint-and-survivor annuity, with a 75% survivor benefit. Each of the other people in the retirement seminar, however, selected the single life annuity benefit.

Few American workers choose to take annuities because of perceived high expense, lack of education, and lack of availability. Annuities, in contrast, offer a stream of income that will continue so long as the participant lives. Moreover, when indexed annuities are available, the participant is assured of an inflation-adjusted stream of income for life. TIAA-CREF offers such an annuity and its popularity is increasing, according to Mr. Hiller.

The law does not, however, require most defined contribution plans to offer an annuity benefit option and many such plans do not offer such an option. Melissa Kahn, a MetLife vice president for governmental affairs, testified that some plan sponsors do not offer annuities because of concern that they may become liable for a fiduciary breach under the Department of Labor’s Interpretive Bulletin 95-1 requiring fiduciaries to choose the “safest available annuity.”

Moreover, many employees reject annuity options when a plan makes them available but also offers other benefit options. Some of our witnesses suggested that such employee benefit choices reflect the temptation of a large lump sum payout, a lack of understanding about the value of a guaranteed stream of income for life, and a concern that they will “lose out” if they die young. Moreover, annuity conversion rates can be high if, as would be expected, they are subject to adverse selection, i.e., selection primarily by people who believe that there is a substantial probability that they will outlive their life expectancy. (We note that The Actuarial Foundation and WISER, the Women’s Institute for a Secure Retirement, have jointly prepared an excellent booklet, “Making Your Money Last for a Lifetime,” on the value of an annuity.)

It is even less likely that people will purchase private annuities when plans do not offer them as a benefit option. The private annuity market is small and costs are perceived to be high for individuals.(1)  In addition, few insurance companies actively market immediate annuities. Moreover, other than TIAA-CREF, we were unable to find any insurance company that is currently selling an inflation-adjusted immediate annuity to individuals, although MetLife is in the process of developing such a product. (We note that MetLife’s product will use government index bonds; Elaine Stevenson of Met Life testified that without such bonds, it would be more expensive to develop an indexed annuity product.)

It should also be said that even in defined benefit plans there is a trend away from annuity forms of benefits. Many defined benefit plans, for example, now offer lump sum options and in cash balance plans, almost all of which offer a lump sum option, it can be expected that most participants will take their benefits in a single payment. Moreover, the Economic Growth and Tax Relief Reconciliation Act of 2001 include features that will encourage current sponsors of money purchase pension plans--under which annuities are the normal, i.e., default form of benefit--to substitute profit-sharing plans, which do not have to offer annuities even as an optional form of benefit.

Poor Americans do not plan for retirement, they cope with old age. Poor Americans generally do not retire. Carol Stack, an urban anthropologist at the University of California and author of “All Our Kin” told us that in her ethnographic studies she

. . . observed people who have see-sawed in and out of low-skilled jobs in the service sector, immigrants who have competed for those same jobs, and divorced mothers who have toggled back and forth between work and welfare. For these hard working people there may be no place in their lives for a vocabulary of retirement, no word for it, no room to even think about it. The idea of retirement itself, and certainly the idea of planning for it, are alien to their experiences . . . Rather than planning for retirement, they worry about how to cope with old age and the illness and the declining opportunities and immobility that aging brings.

Professor Stack also observed that those poor Americans who were fortunate enough to participate in private retirement plans are often not able to complete applications and pursue those benefits, to make intelligent choices among benefit options, or to know how to skillfully invest and manage lump sums. “These can,” Professor Stack noted

. . . be difficult questions for even affluent workers; low income people have less experience and fewer resources to help them arrive at sensible answers to these questions. Low income communities desperately need access to education resources and community based advocates who can help answer these and other questions. They need financial advisors who understand their particular situation and at the same time they need ombudsmen who have the kind of knowledge that middle class people have or can seek.

Among the problems that low income workers may not be able to handle are ensuring that their social security records are inclusive and locating and applying for pensions.

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Recommendations

We recommend that the Department of Labor explore regulatory measures designed to encourage employers to provide retirement planning advice to their employees. This might include, for example, the creation of templates that could be used to provide information for employees on important retirement planning issues. We also encourage the development of appropriate regulatory or legislative relief for employers that retain independent fee based financial advisors to help their employees understand investment allocation strategies and engage in retirement planning.

We recommend that Congress fund demonstration projects under which employers, unions, community groups and other organizations would develop diverse approaches to providing retirement planning assistance and to evaluate such methods. The Bricklayers & Trowel Workers Pension Fund seminars and study groups, and TIAA-CREF seminars and individual counseling are examples of programs that might be used as models.

We recommend the Secretary urge the Administration to convene an interagency task force to develop a secure internet tool that will facilitate seamless coordination of social security benefits, pension benefits, health benefits, personal assets, housing costs, etc. The web site should permit uploading of information from other sources and should also include non-financial information and questions relevant to retirement. Attention should be focused on privacy concerns, but such concerns should be viewed as a part of the project’s design rather than as an obstacle to its development. We would encourage a public/private partnership in both development and implementation.

We recommend that the Social Security Administration consider including information and/or sources of information that could be utilized for planning for retirement in the annual Social Security letter currently being sent to individuals 25 or older. We would suggest that especially detailed and informative packages be sent to people at certain identified key moments: for example, a person’s 50th, 55th, and 60th birthdays.

We recommend an evaluation of the effectiveness of the Department’s Retirement Savers’ Education Campaign.

The working group believes that there is often great value to benefit distribution in annuity form. Although we heard testimony from at least one witness suggesting that annuities be made mandatory, we are persuaded that mandatory annuitization is neither politically feasible nor (at least arguably) desirable. Steven Mitchell, a senior vice president from Fidelity Investments—which does offer its customers a Fidelity annuity vehicle -- told us “that the best way to help individuals successfully prepare for retirement is to provide a range of options that can meet a broad range of individual needs and preferences. We believe mandatory annuitization would not [contribute to retirement planning] since it hurts as many people as it helps.” For example, a sick person, or a person who wishes to leave an estate, may prefer a lump sum payout or gradual drawing down of retirement assets. Moreover, Mr. Mitchell, as well as some members of this working group, expressed concern that introducing tax or other incentives favoring annuities might add complexity to participant decision-making and plan administration, and create an unfair competitive advantage for insurance companies over other financial intermediaries.

Nevertheless, a majority of the working group believe that annuities are seriously underutilized and without some form of intervention are likely to remain so. Indeed, one of the problems with annuities is adverse selection: those who are not likely to live out their life expectancies will avoid annuity benefits, thereby reducing the risk pool and increasing annuity costs for those who would like to protect against the risk of longevity. Moreover, there are some behavioral explanations for employee preferences for single sum payouts that might only be countered through education, development of more attractive annuity products, and other incentives to help invigorate an annuity market. It may be that the playing field is currently tilted toward non-annuity forms of benefits.

We thus recommend the following:

  • Part of the Retirement Savers Education Campaign focus attention on the value of annuities to many participants;

  • Require that all plans offer an annuity form of benefit as an option;

  • Permit plan sponsors to design defined contribution plans that subsidize annuity options if they wish to do so (by permitting plans to set up annuity subsidization accounts);

  • Encourage plans to offer benefit options that provide a partial lump sum payment and annuity benefits (as suggested by Ron Gebhardtsbauer), or perhaps give a series of partial lump sum benefits after designated periods (for example, every five years after retirement);

  • Study whether the “safest annuity standard” of Interpretive Bulletin 95-1 should be applicable to defined contribution plans if the employer prudently selects an annuity provider and discloses pertinent information about the provider to participants;

  • Permit defined contribution plans to provide annuities directly, protecting themselves from the risk of retiree longevity through the purchase of endowment or deferred annuity contracts.

We also recommend further study of what governmental interventions might be appropriate to encourage annuitization, including but not limited to the possibility of making an annuity the default option (as suggested by Professor Alicia Munnell) and creating incentives for financial institutions to create a more robust market for individual and group annuity contracts.

We also recommend study of the implications of providing PBGC protection of any such annuity distributions on either an optional or mandatory basis.

We suggest the Department of Treasury should continue to sell inflation-indexed bonds, to enable insurance companies to develop innovative, inflation-protected annuity products.

To better protect women, require spousal consent for distributions from profit-sharing plans in forms other than a joint-and-survivor annuity, or alternatively, require ratable withdrawals from plans over the joint life expectancy of the employee and spouse unless the spouse consents to another form of distribution (what our member Judy Mazo referred to as “life expectancy payouts”).

Create and expand programs for lower and middle income people who need help gathering information about their resources, understanding the information gathered, applying for benefits, appealing benefit denials when appropriate, correcting Social Security records, etc.

We recommend a study of the effectiveness of the retirement planning information that is currently available to the public.

We recommend a study of the issues of people retiring with large amounts of consumer debt, a problem that some of our witnesses indicated has received insufficient attention.

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Summary of Testimony Received

Testimony of Louis Campagna on April 9, 2001

Louis Campagna, Chief of the Division of Fiduciary Interpretations with the Office of Regulation and Interpretations, in his testimony outlined the fiduciary’s general duties, the state of the current case law, and what has been done in regard to the confusing nature of a fiduciary request for information.

Fiduciary duties include acting exclusively for the purpose of providing benefits to participants and beneficiaries of a Plan under Section 404(a)(1)(A). A fiduciary must act with the single interest of the Plan, prudently, and in accordance with the Plan documents.

Fiduciary duties regarding communications on intended changes in benefits has sparked much litigation, such as in Varity v. Howe. The 1996 Supreme Court decision recognized that a fiduciary who lies to a participant about their benefits breaches his fiduciary duty under ERISA and must provide the individual with equitable remedies. Participants brought suit against Varity after their division was spin off as an unprofitable subsidiary, later to go bankrupt. In reaching the Court’s decision, however, it expressly reserved the broader question of whether or not fiduciaries have any duty to affirmatively disclose information or only in response to employee inquiries.

Later, in Pegram v. Herdrich, the Court’s decision implied that there may be an affirmative duty. This implication has resulted in lower courts by imposing affirmative duties on plan fiduciaries to disclose accurate information that is material to the participant’s specific circumstance; not only to not misinform participant, but also to provide information when the fiduciary knows that silence may be harmful. Other cases were cited where fiduciaries failed to inform plant participant of potential negative tax consequences regarding lump sum distributions, irrevocable joint and survivor designation after retirement resulted in fiduciary breaches.

Testimony of Dallas Salisbury on April 9, 2001

Dallas Salisbury from EBRI gave testimony focused on the question: “What are the things that an individual should know when contemplating retirement?” Mr. Salisbury took the position of an individual wanting to retire in contrast with other testifiers of the day who focused on ERISA requirements or the employer regarding retirement preparation.

Mr. Salisbury began his reasoning by pointing out four concerns for the individual contemplating retirement:

  • How long might an individual live during retirement?

  • Will there be enough money to meet health care expenses?

  • What is a realistic assumption concerning rate of return on retirement savings?

  • How much can actually by spent out of accumulated store of capital/retirement savings?

Based on EBRI survey work, the first and foremost factor for an individual contemplating retirement is how long they might actually live. Longevity calculators may vary concerning life expectancy. For many individuals contemplating retirement, a long life expectancy may require more capital/savings to see them through retirement years. EBRI financial surveys point out that very few Americans have a financial plan or budget. Budgeting for savings, not only spending, is an urgent need for successful retirement planning. It proves to be difficult to budget after retirement begins.

The second concern for those contemplating retirement should be adequate funding for health care during retirement years. Most calculators for health care do not take into consideration extraordinary medical expenses or long-term care and nursing home care. Many working and retired individuals believe that Medicare pays for this type of care. However, Medicare pays only 54% of all expenses on average, resulting in very substantial gaps. There tends to be a need to include this kind of expense when planning for retirement savings.

A third factor is a realistic calculation for rate of return assumption concerning retirement savings. Recently, Paine Webber – Gallup polls show that an average investor has modified their views of compounded rates of return for the next 10 year to be 19%. This is a dramatic turndown from 37% anticipated return during the previous six-month survey. It points out a general market overestimation of anticipated return on retirement investments.

The fourth item for consideration is how much can be spent out of principal without exhausting capital during retirement years. There are various web site tools/models, including the Social Security Administration’s web site, which assists in this type of calculation. However, spending any more than three to four percent per year of accumulated assets moves one well below 95% probability of outliving those assets. From the EBRI surveys, most individuals believe they could spend between 10% and 15% per year of accumulated assets. At such a rate, an individual would run out of assets by age 74.

Mr. Salisbury pointed out that individuals earning an average wage might anticipate that Social Security would provide 42% of working salary. Many surveyed individuals expect that average wage earners expect that Social Security will give them 60% to 80% of highest wage earning years. Individually budgeted savings and budgeted retirement spending is highly recommended for those contemplating retirement, whether they are 25 or 70 years old. Financial planning, as included in Ready or Not, is essential to anyone anticipating a comfortable retirement.

Questions and answers included discussion of public service announcements (PSA) entitle, “Choose to Save,” many of which feature Mr. Salisbury. Both television and radio spots are broadcast in 47 states in an attempt to educate future retirees to save toward retirement now. Many ads are targeting young people as well as those fast approaching retirement.

Testimony of John Joseph Canary on April 9, 2001

Joe Canary, Chief of the Division of Coverage, Reporting and Disclosure with the Office of Regulations and Interpretations, presented a general overview of the disclosure requirements that are legally mandated under Title I of ERISA. Mr. Canary pointed out the when ERISA was enacted, it established a legislatively ordered array of disclosures which are including Title I or the internal revenue code, Title II or the tax qualification code and Title IV or the PBGC area of the code.

The three major objectives of the disclosures are:

  • To give people information about their rights and obligations under their plan and the law

  • To give information about the financial condition of the plan and the value of their individual benefits in the plan

  • And whether or not the plan is being administered in accordance with the law.

Employers may provide more information concerning the employee benefit plan than is required as a way of attracting and retaining employees. In a similar fashion, the government develops its own outreach program by preparing informational materials in an effort to assist and supplement the disclosure requirements being made by employers and plan administrators. One booklet from the Department is titled, “Saving Matters: Retirement Saving Education Campaign.” A range of brochures and booklets vary from shorter introductory materials to detailed comprehensive information.

The types of information or disclosures are triggered by different kinds of events for the Plan participants. The four categories or types of documents tend to be:

  • Those documents furnished by operation of the law and are provided to all participants included under the coverage of the Plan, both participants and beneficiaries. Under Title I, the basic disclosure is the summary plan description (SPD) and summary of material modifications (SMM).

  • Other documents furnished by operation of the law, but provided to particularly affected participant and beneficiaries; less than the full group of participants. When an individual leaves the Plan with deferred vested benefits, a statement advising the past participant of his benefits’ value is provided, for example.

  • Those documents required to be made available upon request by participants and beneficiaries providing certain information, such as an individual benefits statement required by Section 105 of ERISA. Individual benefits statements are provided upon request to those individuals with accrued vested benefits, for example.

  • Those documents made available for inspection and copying at a designated location under Title 1, typically the administrator’s principal place of business.

Mr. Canary’s testimony gave several examples of events that trigger certain documents requirements, particularly concerning enforcement Title I effects on Plans and participants rights during preparation for retirement. His continued questions and answers gave further descriptions and insights into the statutory minimums of disclosure.

Testimony of Jon Forman on May 3, 2001

Jon Forman is professor at the University of Oklahoma School of Law since 1985. He holds additional degrees in economics and psychology, is advisor to the Congressional Joint Committee on Taxation, a delegate to the National Summit on Retirement Savings and is an EBRI Fellow. His research focuses on retirement policy. Mr. Forman argued how federal pension policy influences the timing of retirement.

Millions of Americans retire while they are still productive. Of these, many will have the resources to enjoy all of their golden years. Unfortunately, many others will exhaust their own resources after a time, but will have become too frail to return to work.

Traditionally defined benefit plans are designed with financial incentives that induce workers to retire during certain windows of opportunity that range from early retirement through normal retirement age. Current law permits employers to design plans that impose financial penalties for continuing to work past normal retirement age or allow early retirement incentives that virtually push older workers out of the workforce at even earlier ages, institutionalizing early retirement. Under current law, Internal Revenue Code Section 401 (a) (9), participants in retirement plans generally must begin taking distributions at age 70½. Raising the distribution age would give some savings option.

Age-neutral pension policy would allow employers retire when they feel financially secure and restrict employer manipulation of financial incentives, which induce employee early retirement.

People underestimate their life expectancies, overestimate their financial resources and fail to understand the deleterious effects of inflation. Money illusion leads them to believe that they are better off than they really are, so they retire. Unfortunately, theses early retirees ages 58 or 62 leaving on an incentive plan are at serious risk of outliving their resources. Government should combat this myopic decision-making by requiring that a portion of their retirement benefits be paid in the form of inflation-adjusted annuities instead of lump sum options. Social Security provides an inflation-adjusted annuity. However, individuals should be offered inflation adjusted annuity options other than Social Security that would assure at least poverty level income. But if we really care enough to assure the every American has enough to live on throughout their retirement, the government must act paternalistically and set mandates. Government might require that individuals take a basic pension distribution together with Social Security in order to provide 125% of the poverty level.

Testimony of Ellen Hoffman on May 3, 2001

Ellen Hoffman, author, free-lance writer and speaker specializing in retirement and personal finance issues argued that millions of Americans are not prepared for retirement. She has written two books, Bankroll Your Future with Help from Uncle Sam and The Retirement Catch-Up Guide. As a journalist, her regular column, “Your Retirement,” appears bimonthly in Business Week Online and in the print version of Business Week. Also, she writes for other publications including Money and the AARP Bulletin.

Ms. Hoffman asserts that retirement today is front-page news considering recent retirement legislation and the appointment of the Social Security Commission. Millions of Americans are simply not on a track that will lead them to financial security in retirement. Most people have never had any education on financial planning and money management. Young workers do not focus on long-term planning or on their own mortality. Another reason that people are not adequately prepared is that the increase in defined contribution plans and the decline of the defined benefit plans has really added confusion to the problem. Many people simply do not have investment experience or knowledge, particularly in the stock market. Many do not know the difference between a value and a growth fund. The explosion of commercial information about investing and saving for retirement is confusing, intimidating and aggressive. Starting to realize that there’s a difference between investing and saving for retirement and that saving for retirement does not consist only of passively waiting for their money to flow into their 401(k). Brokerage houses want you to believe that your broker can also do your financial planner, even if your broker isn’t a financial planner. The solution to this confusion and complexities is to simplify the system.

Our retirement benefit system operates within the law and programs created by Congress and implemented by the Executive Branch. Many employers currently only provide information about their company’s 401(k) plan or their own retirement plan and not about other issues relating to retirement. Social security statements only tell about your Social Security benefit. Yet to prepare well, you need to consider many other programs and policies such as IRAs and others.

A solution is to provide information that is integrated and that highlights individual options and choices in planning, saving and investing for retirement. Scheduling periodic retirement planning wake up calls may be one solution to providing information and education. Pension counseling resource centers offering investment education from unbiased sources may be another solution. Employers setting up investment clubs in the workplace would allow employee participation with co-workers concerning 401(k) portfolio choices. Systematically analyzing monthly spending, home, and present income may help preparing for retirement by adjusting spending habits and contributing to savings.

AARP has a concentrated workshop program expressly for women in 42 states. The workshops involve completing worksheets showing expenses and budgets resulting in an individual strategy for saving and investing. AARP does what it can in educating and preparing both women and men for retirement. However, what is generally being done to assist future retirees to feel confident about making good decisions is not enough.

Testimony of Regina Jefferson on May 3, 2001

Regina Jefferson, professor of law at Catholic University teaches income and partnership taxation and ERISA courses. She holds degrees including a B.S. in mathematics from Howard University, J.D. from George Washington University and LL.M. from Georgetown University. Her first profession of several years was as an actuary with a consulting firm. Ms. Jefferson shared her views concerning the adequacy of existing retirement programs and pension regulations in preparing plan participants for retirement. Her remarks focused on defined contribution plans and some of the problems faced in accumulating targeted amounts for retirement. Also, Ms. Jefferson made recommendations for regulatory changes that would help to rectify the lack of insurance against risk for defined contribution plans.

In recent years, there has been discernable movement toward using defined contribution plans instead of defined benefit plans as primary retirement savings vehicles. The distinguishing characteristic between the two types of plans is risk allocation. Defined benefit plans pool assets in an aggregate trust fund and guarantee a fixed amount to participants at retirement. A defined contribution plan assigns each participant an individual account. The former holds the employer liable for the payment of promised benefits regardless of investment performance, while the latter holds the employee liable for the risk of investment performance shortfall instead of the employer.

Expected retirement benefits in defined contribution plans can be estimated by assuming an average investment return on plan contributions. However, actual retirement benefits may fall drastically short of targeted amounts. The success or failure in these plans ultimately depends on the investment decisions made by plan participants. Too often, employees do not have sufficient investment training to achieve favorable results. In contrast, employer-directed plans utilize a plan administrator or investment professional to allocate investments in a manner that protects the accounts from inflation, sudden fluctuations and unfavorable market conditions.

Despite the significance of investment decisions and the fact that most participants lack the training to allocate their assets appropriately, ERISA imposes no additional education or notification requirements on employers who sponsor these plans. Employers sponsoring defined contribution or participant-directed plans are not responsible for the investment decisions made by plan participants as long as the plan provides a broad range of investment choices. Therefore, in participant-directed plans, the employer’s liability for poor investment performance as a plan fiduciary is substantially reduced. This reduction renders many of ERISA’s general fiduciary rules irrelevant. Section 404(c) safe harbor plans raise more concerns regarding the adequacy of ERISA’s fiduciary rules, because under participant-directed plans the employer and other plan fiduciaries are almost entirely insulated from fiduciary liability for poor investment decisions made by plan participants.

There are comparative advantages for both employer and employee in employer-sponsored plans as opposed to personal savings arrangements. Participants would typically receive greater returns inside a plan, because professional financial experts are managing their accounts. Also, the employer can benefit from economies of scale resulting in lower administrative costs within a plan. The economic benefits enjoyed by employers who establish retirement plans are justifiable only if participants are, in fact, better off being covered by employer-sponsored arrangements. In order to justify the cost of private retirement systems and to achieve the objective of increased retirement income security, there should be residual fiduciary liability imposed on employers who sponsor participant-directed plans.

Presently, defined benefit plans are insured against poor investment performance. No ERISA requirements are in place to protect defined contribution plans against less-than-average investment performance. When ERISA was enacted, defined contribution plans were used primarily as supplemental plans. Therefore, lack of insurance protection had relatively little significance at that time. However, today the prevalence of defined contribution plans makes the failure to provide insurance protection a serious threat to the retiring population. One feasible solution is to propose a level of insurance protection determined by a prescribed diversification formula derived by using an indexing system to evaluate all investment funds so the level of risk of a participant’s investment allocation could be compared to the risk of the prescribed allocation. This coverage would encourage participants to choose responsible investment risk options; not simply a safety net for voluntary less-than-average risk. Concerns regarding the adoption of insurance as a safeguard for defined contribution plans might be alleviated by recalling similar concerns voiced prior to the passage of ERISA with its defined benefit plan insurance. The pre-ERISA Committee determined that was necessary to adopt insurance safeguards that would protect against employer or individual participants’ exposure to unreasonable investment risks.

Although insuring defined contribution plans present difficult tradeoffs, much of the opposition is reactionary rather than substantive. As for the relatively few substantive concerns, the overwhelming needs to respond to the current pension climate and to better prepare workers for retirement would appear to offset all of the difficulties that these issues present.

Testimony of Linda Jackson on May 3, 2001

Linda Jackson, Pension Education Campaign Manager, Employee Benefits Security Administration, reported the five years of progress made by the Retirement Savings Education Campaign at the Department of Labor. The campaign was launched by the 1995 Savers Act. Ms. Jackson’s report stressed the goal of educating American workers to save toward retirement. “Savings matters,” was the resonating message basic to her arguments.

Four major projects of the Pension Education Campaign are:

A new publication tool developed in cooperation with the North American Securities Administrators Association and the AARP is designed for individuals nearing retirement. An 800 number in cooperation with the Federal Consumer Information Center, a web site, and regional events are the means of communicating the new publication. Similar to last year’s publication tool, “Savings Fitness: A Guide to your Money and Your Financial Future,” the new publication will prove to be a comprehensive starting point concentrating on key steps in preparing for retirement. It will be completed by late summer.

Celebrity Public Service Announcements with Ed Asner, Ossie Davis, Nancy Odell, Bea Smith and Merlin Santana will start airing in June. Radio, television and some e-mail images will hit home the message, “Savings matters.” PSA’s are an excellent tool to communicate utilizing unbudgeted/free airtime; an economical approach to mass communication.

A selective retirement plan web site in cooperation with the Small Business Administration, U.S. Chamber of Commerce and Merrill Lynch allows small business owners to explore various plan options. The participant can interactively select and develop a strategy based on their particular needs. Department of Labor is developing a site called the “Retirement Calculator Café” where users can explore useful savings tools. The web site address is savingmatters.dol.gov.

The National Summit on Retirement Savings will be hosted by the President and Congress and presented by the Secretary of Labor. Although the White House has not yet announced the summit dates, it is anticipated to be later this fall. Most of the information will be provided in Spanish and English.

The Department of Labor’s role in educating American workers to save for retirement continues to include development of publications, public service announcements, web sites and seminars as opportunities are identified by the agency’s 15 field offices during the past five years.

Testimony of Michael McAllister on June 11, 2001

Michael McAllister is a principal in the Baltimore/Washington communication practice of William Mercer, Inc. since 1994. Previously, he had been national communications practice leader for A. Foster Higgins & Company. In all, he has twenty-one years experience as a consultant working with more than 100 organizations nationwide to improve communications with employees concerning retirement planning, benefits and compensation. He holds degrees from Notre Dame, Southern Illinois and the University of Minnesota.

Mr. McAllister emphasized that his remarks were not just his views, but rather a compilation of the collective experience of the men and women of the communication practice of William Mercer, about 250 consultants nationwide. Besides Mr. McAllister’s experience, data was polled through different projects and focus group research. Besides compilation of data, Mr. McAllister’s testimony cited various publications and outside consulting sources concerning retirement planning.

Two questions concerning retirement savings are the basis of Mr. McAllister’s testimony: 1) What is effective in encouraging people to plan for retirement? And 2) How is success defined; how do we define whether or not we’re effective in encouraging retirement planning?

For study purposes, employees are separated into four groups:

  • Spenders who live from paycheck to paycheck.

  • Savers are those who save a bit from every paycheck.

  • Investors go a step beyond saving to knowing what to do with savings money.

  • Planners tie together the savers and investors mentality to result in achieving savings goals.

Once the habit/practice/importance of saving for retirement has been instilled via a 401(k) plan or other retirement savings plan, then developing an individual’s skill in investing options and achieving a retirement savings goal will result in retirement confidence in the American workforce, as pointed out in the co-sponsored survey by the Employee Benefit Research Institute, the American Savings Education Council, and research firm Mathew Greenwald & Associates.

During 1998 through 2000, there was about 15% growth in workforce retirement savings. However, during January and February 2001, the survey noted a decided downturn due to Wall Street and the current economic climate.

In answer to the first question, “What is effective and what really works?”, we at Mercer Communication Consultants follow four rules:

  • Get personal. How much am I going to need in retirement? What can I do about that? What options are out there for me? How much should I save? What will savings cost me? If I’m going to save, how much is it going to hurt right now? Certainly printed statements to individuals are essential, but one-on-one or small group meetings tend to work in speaking to a person directly. web site access of 401(k) Savings Plans can allow individuals to find out what’s going on with them personally regarding their retirement savings progress. Personalized letters and account statements, but no substitute for individualized questions and answers directly with an account representative/counsellor. Keep the sessions free from sales pitches.

  • It is essential to tailor the message to different groups of employees by age and savings potential.

  • Create a burning platform that will impress individuals with the urgency of retirement savings, even when retirement is 15 or 20 years into the future. Impress individual employees that the carrot to save includes employer contributions or matches.

  • Make savings easy and inexpensive. Employees are unwilling to pay much for financial counseling or investment management fees.

In answer to the second question of “How is success measured?” Although success may seem hard to measure over the span of different organizations, benchmarks should be established from the very beginning of savings programs. An effective communication plan that will measure just how successful employees believe the plan to be, should be an ongoing process over a period of years. Measures showing increase in participation in savings plans should prove to be effective benchmarks of success. Employees’ confidence in savings plans being the means of a secure retirement might be measured in ongoing questionnaires or ongoing participant group education might be another measure.

Mr. McAllister concluded his testimony with a summary of his remarks regarding retirement savings. “What is effective?” We think it’s really four things for any organization to do. The first is to get personal. The second is to tailor the message. The third is to create a burning platform. And the fourth is to make it easy and inexpensive. “What defines success?” It’s a matter of setting the proper benchmarks, taking action and then determining whether or not that worked, and what works is the enhancement of knowledge that leads to action.

Testimony of Arthur Griffin on June 11, 2001

Arthur Griffin, Certified Public Accountant, Certified Financial Planner, Certified Fund Specialist, Personal Financial Specialist testified to the veracity of profession credentials in the field of financial planning. Mr. Griffin pointed out how his work as a CPA in tax preparation led him to take practical steps to assist his clients in preparing for retirement through financial planning. “Individuals don’t care how much you know until they know how much you care,” was a leading point in the development of his professional expertise. Mr. Griffin’s approach has been to give his clients a high degree of confidence and comfort in the advice that he might provide concerning retirement planning.

Baby Boomers don’t seem to want to make any changes in whatever it is that they’re doing presently toward preparing for retirement. However, the success of their retirement may well be based on how they have their investments positioned and how they order the utilization of those investments and those assets. Mr. Griffin’s recommendation is to use up investments outside of a 401(k) plan before touching the savings plan funds. Let the tax deferral remain in tact on retirement plans until age 70 and a half. Many individuals will pay 85% tax on their Social Security benefits due to not engaging in comprehensive and intelligent financial planning before retirement. ERISA and other programs in the United States encourage people to save. However, Baby Boomers seem to be in a mindset that inhibits a transition to retirement planning.

Providing clients with advice is the service of a financial advisor with all of the fiduciary responsibilities that go with the designations behind the name. Educating the client is different, because one has to lead the client out of the confusion caused by the financial industry concerning fees for providing various financial services. If a client is in a mutual fund, he may be paying mutual fund fees in addition to one percent management fees. With a financial advisor, a client would pay the PFA for a comprehensive financial plan and would not pay additional management fees.

Mr. Griffin pointed out that there are many advisors without generally accepted credentials advertising and practicing as financial advisors. He feels that it would be better to have more regulation concerning licensing of financial planners. It was pointed out that many individuals with less than $400,000 in retirement savings seek professional financial advice, but are taken advantage of during the retirement implementation. Furthermore, it was pointed out that employers might appropriately supply the professional advice necessary in accomplishing sound retirement planning.

Mr. Griffin concluded his testimony by answer questions from the Committee, including comments focusing on SIMPLE retirement plans and IRA’s. Much of his testimony addressed the fiduciary responsibilities of certified financial planners and credible compensation based on services rendered to clients without taking advantage of client naiveté.

Testimony of Margy LaFond on June 11, 2001

Margy LaFond, a Senior Executive and the Associate Commissioner for Communication Policy and Technology in the Social Security Administration’s Office of Communications. Ms. LaFond previously served as Director in the Office of Legislation and Congressional Affairs.

Ms. LaFond testified about the educational efforts that the Social Security Administration has developed over the last several years. She noted that “in recent years, we have devoted our public education efforts to place more emphasis on the importance of financial planning and preparing for retirement rather than concentrating on benefits and how workers can qualify for them.” The Social Security web site includes numerous retirement-security links, including privately developed retirement calculators. Among the most prominent sources of information, in part because of its near universality and in part because of its substance, are the new annual statements sent by the Social Security administration to workers over age 25, which provide projected benefits and work histories.

Testimony of David Stupar on June 11, 2001

David Stupar is Executive Director of the Bricklayers and Trowel Workers International Pension Fund. His duties include administration of the Bricklayers and Allied Craft Workers International Union’s annuity, 401(k), health and welfare, flexible benefit and local union officer pension plans. Also, he oversees the International’s Reciprocity Clearinghouse and is responsible for helping local unions establish retiree clubs focusing on post-retirement education.

Mr. Stupar’s testimony focused on retirement education programs. He stated that currently when a member of the Bricklayers International Union reaches age 57, the participant is mailed a copy of Ready or Not, the book published through the Manpower Education Institute. That reaches approximately 2,000 to 3,000 who reach age 57 each year. Additionally, a quarterly newsletter goes to all participants of all ages addressing retirement preparedness and suggesting additional pamphlets through the Government Printing Office. Both the book and the newsletter are well received.

A “study circle” or retirement seminar is offered to individuals or groups for those approaching retirement age. It covers the ground topics of health and pension benefits and other awareness education.

Speakers with expertise in financial planning and various topic are engaged for the “study circle” and retiree clubs. These groups are forums for discussing retirement goals and addressing various concerns; elevating awareness surrounding retirement before and after the event.

On the average, eight or nine masons work for a small employer. Because there is no HR Departments to handle retirement preparedness, the local union office is a good point of education for workers. Also, educating local trustees, representing 500 to 600 local pension and health and welfare funds across the country at the annual conference or International Foundation Conference. The two-day seminar precedes the conference. So, as executive director for the union and in lieu of corporate HR, we try to be proactive concerning those retirement education topics normally covered by a corporate culture.

We stand by those workers who are approaching retirement to be sure that they are receiving their maximum benefit amount. Retirement is a once-in-a-lifetime event. We approach the retirement process with them gingerly when discussing their defined benefits. In order for workers to participate in the 401(k) plan, they must contribute at least one dollar an hour going into defined benefit plans. Presently, it’s considered a supplement, since it hasn’t been around long. But 401(k) is starting to pick up interest among workers. We try to provide our participants with an access to a financial planner or retirement planner.

During questions and answers, Mr. Stupar verified that retired workers still have a vote in local official elections. For that reason, it is important for the International to stay close to retirees as members, resulting in an exemplary union program for retirees.

Testimony of Sylvester Schieber, Ph.D., on July 17, 2001

Mr. Schieber is vice president for research and information for Watson Wyatt Worldwide and made the following points in his verbal and written presentations:

Health care costs will be a major retirement cost. Employer-provided retiree health coverage is going away. The Medicare benefit is a 1960's benefit at best and is unlikely to be updated for lack of revenues. Social Security’s future is uncertain. The retirement model that we have been relying on is breaking down.

There has been a steady pattern of growth in the cost of administering pension plans. The cost burden has been somewhat higher for smaller plans. For smaller DB plans, the administrative costs outweigh benefit accruals well into a worker’s career.

Since 1980s, both the number of DB plans and number of participants in DB plans has decreased. DC plans and participation continued to grow through the 1990s.

From the early 1980s to the latter 1990s, when legislative activity was the most significant, there was a steady decline in workers covered by plans at lower income levels. There has been a stabilization in legislative activity and coverage rates since the late 1990s.

There is a much higher rate of pension coverage in the union sector than non-union sector. The long-term decline in the percentage of the workforce represented by unions has played some role in the decline in pension coverage.

The increase in labor force participation by women and their tendency towards part-time employment is also a factor in the decline in coverage rates.

As earnings rise, participation rises. As age rises, participation rises.

Employee contribution rates to 401(k) plans average about 7% of compensation.

Statistics show that even at lower earnings levels, people do save and will save if given the opportunity.

In 401(k) plans with a 100% match, participation rates are 80% or higher. A match is important to encourage participation. So, also, is communication with workers about saving.

In considering how to increase coverage and participation, we must focus on the type of plan to which our culture has driven us – 401(k) plans – and quit beating our heads against a wall trying to bring back the “good old days” of the DB plan.

The fundamental problem with our Nation’s retirement system, including the Social Security system, is that there is not enough money being put in it. The 401(k) plan system has been effective in getting money into the system, especially where there is an employer match. But, only about 50% of employers sponsor plans.

Additional voluntary retirement savings could be generated by allowing individuals to establish Social Security supplemental accounts, providing a dollar-for-dollar matching contribution, and providing tax credits for low income workers.

Social Security has to be restructured; it needs more revenue, and benefits have to be raised at the low income level.

The annual per capita increase in administrative costs for DB plans between 1981 and 1996 as 8.03% for DB plans with 15 participants, 6.25% for DB plans with 75 employees, 6.46% for DB plans with 500 employees, and 7.43% for DB plans with 10,000 participants. Administrative costs for DC plans increased between 1981 and 1996 at an annual rate of 5.05% for DC plans with 15 employees, and 4.42% for DC plans with 10,000 participants. The per capita administrative cost in 1996 for a DB plan with 15 participants was $619.93; for a DB plan with 75 participants was $345.68; for a DB plan with 500 participants was $173.62; and, for 10,000 participants was $68.33. The per capita administrative cost for a DC plan with 15 participants in 1996 was $287.20; $49.19 for a DC plan with 10,000 participants.

There is a need to educate people about the value of an annuity, a stream of income for life. People are afraid of dying before receiving value for their money. This should be addressed by product design.

Testimony of David Blitzstein on July 17, 2001

Mr. Blitzstein is the director of Negotiated Benefits, United Food & Commercial Workers (UFCW) and made the following points in his verbal testimony concerning the important role of multiemployer plans in pension coverage and participation:

The UFCW believes that all workers, including part-timers, should be covered by a pension plan. Pension coverage is a top bargaining priority, for members as well as the leadership.

The UFCW is a strong advocate of DB plans. They are measurable, secure, and provide lifetime annuities so that pensioners do not outlive their retirement income.

DC plans should be supplements to DB plans.

Multiemployer plans, which cover 5 million actives and 3 million retirees, are an untapped resource for policymakers to address pension coverage and participation problems. They offer several advantages. A multiemployer plan provides a central, pooled fund for workers in mobile, decentralized industries in which single employers would not have the money or interest to establish their own plans. These plans have internal portability; a worker who changes jobs.

Employers’ ability to exclude union employees from 401(k) plan coverage should be restricted.

Direct transfers from DC plans to DB plans should be permitted to allow a participant to convert his DC plan account into an annuity from the DB plan. There is a PBGC priority issue that needs to be resolved.

Pre-tax employee contributions to a DB plan should be allowed. A 401(k)-type structure within a DB plan should be permitted.

Employers should be granted tax credits for contributions to multiemployer DB plans.

The positive effect on worker productivity of pension coverage deserves further study.

There should be more education about DB plans. This could be advanced by requiring DB plans to issue annual benefit statements that include estimates of benefits at early and normal retirement.

Testimony of Alicia Munnell on July 17, 2001

The Peter F. Drucker Chair in Management Sciences at Boston College, Ms. Munnell was formerly a member of the President’s Council of Economic Advisors, an Assistant Secretary of the Treasury for Economic Policy, and former Senior Vice President and Director of Research at the Federal Reserve Bank in Boston, made the following points in her verbal and written presentations:

She addressed four issues: (1) many low and moderate earners do not have pension coverage even though they need more than Social Security income for retirement; (2) expansion of the employment-based pension system is unlikely and may not be in the best interest of low income workers; (3) the dramatic expansion of DC plans has created problems not associated with DB plans (i.e., voluntary participation, lump sum pay-outs, and over-investment in company stock; and (4) protection against inflation is an important issue for DB and DC plans.

In 1999, only 40% of the private sector workforce (ages 25-64) was covered by a pension plan. This coverage has remained virtually unchanged since 1979 despite the economic boom.

Pension coverage is sharply related to earnings for males and females; coverage drops off as earnings decline.

The question is how to provide pension protection beyond Social Security for low income workers.

The tax treatment of pensions is more favorable than that for any other type of savings.

The strategy of using favorable tax treatment to encourage qualified plan coverage for low income workers has failed. The current system provides very little to the bottom 40% of the income distribution.

Higher employer provided pensions would result in lower wages.

The system should be reformed by taking lower income workers out of the employment-based system and putting them into a USA-type account like those proposed by President Clinton. This would involve two components: (1) tax credits for contributions, and (2) a matching contribution for low income individuals.

A problem with 401(k) plans is the shift of the burden for providing for retirement to the employee: whether to participate, how much to contribute; and how to invest. About 25% of employees offered a 401(k) of employees offered a 40(k)plan choose not to participate. Lower income, younger, less educated, less tenured workers tend not to participate. People with short planning horizons may choose not to participate.

Plan structure also affects the decision whether to participate: whether there is an employer match, and whether plan loans are available.

Education is helpful in getting workers to participate.

Human inertia is also a factor affecting participation. The negative election movement may help increase participation.

The payment of lump sum distributions by DC plans is a problem. These create problems of under consumption in retirement as well as of outliving retirement income. Only 27% of 401(k) plan participants have an annuity form of benefit available.

Participants who receive a lump sum tend not to buy annuities from insurance companies, perhaps out of concern about loss of liquidity and the cost of annuities. Also, people are afraid of dying before getting value from the annuity.

The issue of post-retirement inflation protection has not received enough attention. Annuities tend to be fixed amounts. Inflation indexed annuities would make a good default form of benefit for DC and DB plans.

Testimony of Ron Gebhardtsbauer on July 17, 2001

A senior pension fellow of the American Academy of Actuaries, Mr. Gebhardtsbauer made the following points in his verbal and written presentations:

The rate of private pension participation has been declining. Factors include the increase in contingent workers, the increase in DC plans, and the decrease in DB plans. 401(k) plan participation rates are not as good as DB plan rates and even money purchase DC plan rates.

Coverage rates have increased among small firms, perhaps because of recent legislation. But, the legislation has not helped DB plans and large employees.

Cost of plans, particularly DB plans, discourages sponsorship. 401(k) plans can use employee pre-tax money. The volatility of contribution requirements also discourages DB plan sponsorship.

Complex restrictive and conflicting laws and regulations discourage plan sponsorship. DB plans cannot be adopted to workforce needs.

Other factors discouraging plan sponsorship are the cost of plan administration and compliance, unpredictable revenue flows (especially for new and small employers), the part-time and seasonal nature of employment, the lack of valuing of DB benefits and tax advantages, the lack of sense of need, employees’ belief that they don’t need any more than Social Security, and employers’ lack of knowledge about simple alternatives.

A Hay Huggins study showed that administrative costs have increased a lot, and these costs may wipe out the tax advantages. This is a concern for large employers as well as small employers.

DB plans have higher participation rates, involve less risk for employees, and provide annuities.

The EGTRRA added a tax credit match for DC plans but not for DB plans. This is another example of legislation favoring DC plans over DB plans. There are other problems with the tax credit provision (e.g. not refundable, so lowest paid get no match, worker won’t know match until end of the year, creates cliffs when the match rate changes).

The EGTRRA tax credit for administrative costs is limited to small employers. The credit should be increased or given to all employers.

The regulatory rules are confusing to employers and employees, and these rules can interfere with beneficial plan design. The rules need to be simplified.

There should be one pension regulatory agency to ensure consistent rules. Joint rule-making could be the first step.

Incentives are better than mandates. For example, tax credits or lower tax rates could be given to annuities. Employers could be incented with higher maximum or less regulation to have negative elections (at hire date and pay increase dates), coverage of all workers (part-time, temps, contractors).

Action that the government could take to increase coverage of low income workers include making the tax credit refundable.

Preparing for retirement was easier 25 years ago: there were fewer employers; more DB plan coverage; people saved more; workers tended to retire at age 65; retirement planning was a matter of adding DB plan monthly benefits to Social Security.

Since then: job tenures have declined steeply; particularly for men ages 45-54; retirement age is down to 62 or below; people live two years longer; employees tend to be covered by DC plans that do not provide annuities; people save less and are indebted more; and DB benefits plus Social Security are not adequate to cover basic expenses. It is a lot more difficult to decide when to retire today.

Workers may think that $100,000 is a lot to retire on. In fact, $100,000 will buy an annuity of only $10,000 per year for a male at age 65, $9,000 for a female at that age. Indexed annuities and annuities at a younger age will produce even lower annual amounts.

An alternative to an annuity is spending the right amount out of the nest egg each year. But to know how much to spend requires knowing when you are going to die. If they guess wrong, they could run out of money and be unable to return to work at an advanced age. The government would end up with the liabilities.

The remedy is education regarding the need to save, about the value of DB plans, and about the “de-accumulation” or pay-out of pension benefits.

Education is needed on when to retire; that normal retirement age should be 70, not 55 or 62. We are living longer, health status now at 70 is about what it used to be at 65, there are fewer DB plans with subsidized early retirement, and Social Security is moving to age 67. Pension plans should be allowed to increase normal retirement age to 70 and move the mandatory distribution age to 75 or 80. Perhaps participants should be allowed to transfer money between their DC and DB plans, and buy annuities from their DB plan.

The DOL web site and the SSA statements are helpful. But, effective education needs to be personalized because of variations in the amounts that workers have and how much lifetime income they would produce. For example, DC plan or 401(k) account statements the amount of lifetime income that the balance would provide (perhaps only for people over 50), although that would be a complex task.

Personalized education is needed also because income replacement needs vary. While some expenses may decline in retirement (e.g., work-related expenses, taxes), Medigap policy and long-term care costs need to be considered.

Personalized education is needed also on the issue of whether to take your pension in a lump sum.

Retirement income needed for 100% replacement of spendable income at age 65 (for a single person) ranges from 120% of wages for a person with $10,000 in income just before retirement to about 80% of pre-retirement income for a person earning $100,000 just before retirement.

The Pensions Assistance List of the American Academy of Actuaries is a listing of actuaries who are available to help people with retirement planning questions.

Annuities can provide better benefits than a “do it yourself” approach. Insurers can pay higher benefits because of mortality experience and their ability to lock-in bond yields. Annuities have additional advantages: payable for life at a fixed rate (no longevity or investment risk); inflation risk can be eliminated with indexed annuities; and annuities have tax advantages.

Public and tax policy should encourage lifetime pensions, long-term care, and Medigap policies.

Testimony of Anna Rappaport on July 17, 2001

Ms. Rappaport, a principal at William Mercer Inc., made the following points in her verbal and written presentations on the challenges of the post-retirement period which she illustrated through the “Story of Joan”:

As people age, there are significant changes in their family status, in their health, in their ability to get around, in their ability to care for themselves and their property. They may require increasing levels of paid assistance. Even if they have long-term care policies, they may need costly assistance even before the policies are triggered. The average family could not afford the costs.

Average periods of widowhood are long.

More people are working during retirement. Retirement is not well-defined these days.

Key factors in the post-retirement environment include an individual’s health and functional status, the fact that more benefits are paid as lump sums, there are longer periods of widowhood, single women are less well-off, work during retirement is increasing, and pensions and individual savings drive resources.

The Society of Actuaries has been sponsoring a Retirement Needs Framework Project to: understand the needs of the elderly, post-retirement events, and sources of security; to explore modeling of events and data; to identify mismatches or gaps in the security systems (financial products vs. income needs, public policy vs. retirement needs); and to support building better retirement systems.

Post-retirement events or risks include inflation, death of family members, changes in functional status, unanticipated needs by family members; unanticipated medical needs, changes in housing needs, and special interests. All of these events have an economic impact, vary in their predictability, may or may not be coverable by existing financial vehicles, and available vehicles may or may not be adequate.

Retirement assets are needed for basic retirement income, to pay for acute medical services, to pay for (or insure) long-term care, to help other family members, and for travel, hobbies, and retirement dreams.

The risk of out-living assets is not getting enough attention. Other mismatches include: retirement patterns and public policy; cost of special help and LTC; inadequate medical coverage; income changes vs. need changes (death of spouse); functional status change – need for help; inadequate inflation protection; family members need help; annuity products to fit needs; inability to manage large sums of cash; and tax management challenges.

These mismatches represent problems as well as identify areas for development of insurance, financial products, and benefits and identify public policy issues (Social Security, employee benefits and tax policy, and insurance policy).

One study estimated future health care costs (present value) per person at age 65 as follows: acute care - $93,500 to $114,600; LTC - $57,000 to $67,000; total cost - $150,000 to $182,000. Medicare pays about 50-55%.

LTC insurance pays under 10% of LTC needs today. Families provide most care.

Sources of security include Social Security, pensions, personal savings and assets, housing, LTC insurance, and life insurance. These should be thought of as an investment portfolio.

For 40-50% of population, Social Security is the main source of security. That is unlikely to change.

Family structure is a very important source of security.

Issues affecting women include differences in life span, many elderly women are alone, families are better off than individuals, declines in economic status at widowhood, work history effects old age security, less likely to have family care giver, and Social Security issues.

Issues around annuitization include: the risk of out-living assets; level annuities without indexation don’t do a good job; and concerns about privatization of Social Security without mandatory annuities.

The benefits of lump sum payments include: flexibility in planning; control over assets; assets are available for heirs in the event of early death; and they allow a home purchase or savings for future frailty. Threats of lump sums include: money will be spent for non-retirement purposes; out-living assets; and under-spending.

From an employer’s perspective, lump sums: may conflict with goal of providing retirement income. But employees may want them and they reduce administrative costs. Employees may want a lump sum because it gives them control over their money and many have little idea of their long-term needs. Many advisors have been recommending lump sums.

Survey shows that 64% of retirees who continue to work do so because they enjoy work or want to stay involved. 37% work to make ends meet. 37% work for health insurance or other benefits. 36% work for extra spending money. Post-retirement employment is typically not at the career company, and is self-employment or part-time.

Employers see a decline in early retirement subsidies and DB plans with the shift to DC plans. There is more flexibility for individual work schedules, few formal phased retirement programs, and quite a lot of rehired retirees.

Causes of changing retirement patterns include structural changes: Social Security is more age neutral; mandatory retirement has been ended; DC plans are more age-neutral; fewer jobs are physically demanding; family structures have changed (e.g. working spouses); and employees tend to have more employers and careers. Cyclical causes include: economic cycles; shortage of skilled workers; and very low unemployment.

There has been a large improvement in the economic status of the elderly. But, there is still too much poverty. 50% of people rely heavily on Social Security. Government systems are in decline. Savings are inadequate. LTC financing is inadequate. More people are working after retirement. The population will age dramatically. These developments present challenges to society, to employers, and to individuals to focus more on post-retirement needs and how to meet them.

There are many issues of particular concern to women, including Social Security privatization, and consents to waivers of spousal benefits.

Testimony of Teresa Ghilarducci on July 17, 2001

Teresa Ghilarducci is an associate professor of economics and director of the Msgr. Higgans Labor Research Center at the University of Notre Dame.

Professor Ghilarducci made the following points in her presentation about multiemployer and multiple employer plans:

Multiemployer plans have a surprisingly large effect on pension coverage. 30% of the 64 million workers covered by pension plans are covered by multiemployer plans (of which 46% are collectively bargained plans).

Multiemployer plans tend to cover small employers.

Tax incentives for sponsoring a pension plan decline when tax rates fall; for every 1% drop in personal tax rates, coverage falls by .4%.

Employers do not sponsor pension plans if their employees do not want them, according to traditional economic models.

The trend has been towards more cash, even though the workforce is aging. The trend is also towards the individual responsibility model of employee benefits: pension coverage is falling in most industries and occupations; job insecurity and turnover is increasing; and pension plan structures are shifting to 401(k) plans and to plans that reduce rewards for long-service with one employer.

Industry norms, as well as tax treatment and worker demand, influence plan sponsorship. The largest industries have a declining employment share and are making a smaller contribution to employee benefits relative to total compensation.

The economic consequences of the drive towards cash and lower job tenure include productivity losses, inadequate retirement income, and more elderly labor force participation.

Institutional barriers to expanding pension coverage, even where firms and workers want it, include: collective action problems and industry norms; the economies of scale – small firms cannot afford plan coverage alone; poor management that is short-sighted; and workers’ failure to reveal preferences due to lack of an effective voice.

Multiemployer plans reduce these barriers to plan coverage. Workers are induced to stay within their industry and occupation. Stability is provided despite employer change. Economies of scale are provided by the common plan. The plan can be tailored to the particular needs of specific groups Many low income industries depend on multiemployer plans to provide DB plan coverage. Some high skill industries also depend on multiemployer plans to deliver DB plan coverage. This is often because the workers are unionized.

The governance structure of a multiemployer plan favors participants and allows plans to offer more generous benefits.

Multiemployer plan coverage should be encouraged for low and middle income workers by: facilitating the sponsorship of plans by affinity groups; investigating why the pension consultants are not pushing DB plans; provide tax credits for contributions to DC plans with DB features; and encourage employers to form multiemployer plans.

Testimonies of Diane Oakley and Richard Hiller on July 17, 2001

Diane Oakley, Vice President for Association & Government Relations, and Richard Hiller, Vice President for the Western Division, TIAA-CREF Retirement Services made the following points in their verbal presentation on the retirement planning process for pre-retirees:

Part of TIAA-CREF’s charter mission is education about retirement. It sponsors retirement seminars and seminars on investing for women. Information is provided also through booklets, one-on-one counseling, software, and web sites. Internal service quality is monitored. Research on retirement issues is conducted.

Decision-making about how to take pension benefits has become more complex over the past 20 years. The need for education is more critical, particularly with regard to annuities, investment performance, inflation, the need for a lifetime income, and how even small changes in circumstances can significantly impact on resources.

There are significant implications for choosing a systematic withdrawal of assets versus a life annuity as a source of retirement income. Under a systematic withdrawal approach, a slight change in the amount of each withdrawal can make a big difference later on; assets could be exhausted. The investment mix and performance of the assets can make a big difference in how long the assets will provide retirement income. Inflation can greatly affect the adequacy of assets to provide a lifelong retirement income. A life annuity can address these risks. Annuity benefits factor in mortality of the pool as well as investment performance.

Pension coverage is extensive in the higher education community. This is largely attributable to the fact that employees and employers came together and agreed on standards for an adequate pension plan. One principle sees an adequate pension as that which would replace 60% of pay with inflation in conjunction with Social Security.

An important factor in expanding pension coverage is keeping the plan simple and easy to administer.

Another important factor is mandatory participation pension plans, as is the typical situation in the higher education community.

Employer matching contributions is another important factor in plan participation.

Pension portability is a growing issue in the education community due to increased mobility. Portable pensions are a recruitment tool in times of teacher shortages. There is a need to find more cost efficient ways to administer plans serving small employers perhaps by the Internet.

The most effective tool for helping people to make good retirement decisions is one-on-one counseling about how to structure their overall financial picture in relation to their TIAA-CREF plan. The counseling session is more valuable if the person has already attended a basics seminar.

Testimony of Patrick Purcell on July 17, 2001

Patrick Purcell, specialist in Social Legislation, Congressional Research Service, Library of Congress, made the following points in his testimony concerning pension coverage and participation in addition to submitting several papers on the subject authored by him for the CRS:

Few small employers sponsor DB plans; only 660,000 people were in DB plans of 100 or fewer participants in 1997. Yet, there were 47 million employees who worked for firms of 100 or fewer employees; 26 million full-time workers ages 25-64. In contrast, 9.2 million workers of such employers were in DC plans. This is a DC plan world now.

Only 17% of workers between ages 21-64 without employer plan coverage had an IRA in 1999.

The average personal savings rate is very low. In 2000, the rate was actually negative for the first time since 1933.

In 1998 about 66 million workers ages 25-64 didn’t have a retirement account of any kind. 59% of full-time workers lacked a retirement savings plan.

Average account balances are low: in 1998, the mean value of all IRA and 401(k) accounts was $35,000, and the median value was only $14,000. For ages 55-64, the average account balance was about $57,000. A $57,000 account for a 65 year old in May 2001 would purchase a single life annuity of only $450 per month.

Another form of savings is home ownership. We have a high rate of home ownership. But, homes are not liquid assets.

In October 2001, the average Social Security benefit for a retiree was $815 per month. Social Security reform will likely result in lower benefits.

The 66 million workers without coverage are disproportionately younger. But, many are close to retirement and face a reduced standard of living.

A retiree will likely need 80% of pre-retirement income to maintain his standard of living. But, retirement assets of the average household will not support that replacement rate.

Direct government subsidies for retirement accounts is unlikely.

One of the most important roles for government is retirement planning education. Retirement income is increasingly an individual responsibility in this DC plan world. People need more information, including employers. Government may not be devoting sufficient resources to education. Public-private cooperation is needed.

DB plans provide valuable protection against above-average longevity, against investment risk, and against career ending compensation increases. Insurance company annuities do not provide all of these protections, including pre-retirement investment risk shifting and sudden compensation increases late in your career.

Testimony of Carol Stack on September 12, 2001

Author of All Our Kin, Strategies for Survival of the Black Community and Call to Home, African Americans Reclaim the Rural South, Carol Stack has conducted in depth ethnographic research on urban and rural poverty during the past 30 years.

She pointed out that for the working poor, there is no place in their vocabulary for retirement. Many of her examples were women widowed by divorce or death. These individuals close to poverty level work longer and have lower life expectancy when approaching retirement age. Their primary resource for survival strategy is younger families whom they have helped in years past. The working poor and hard working part-timers are, more often than not, the poor people’s charity. Such charity makes it difficult for steady workers to save money or plan for retirement.

Social Security does not provide an adequate income for retirement living. Often, the working poor lack the background and experience to determine whether or not they are eligible for pension and Social Security benefits, even though they have worked for years earlier and in a different region of the country.

The most pressing need may be for government subsidized housing for the aging, working poor. Retirement plans for the working poor is often to retreat to places that are secure; for many African Americans that means the rural south.

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Additional Information Sources

2001 Index for the Working Group on Preparing for Retirement

Advisory Council on Employee Benefit and Pension Plans

(Actual Transcripts/Executive Summaries for the Council’s full meetings and working group sessions are available at a cost through the Department of Labor’s contracted court reporting service, which is Neal R. Gross and Co., Inc. 1323 Rhode Island Avenue, NW, Washington, DC 20005-3701 at 202.234.4433 or www.nealgross.com.

April 9, 2001: Working Group on Preparing for Retirement

  • Agenda

  • Official Transcript

  • Statement of Dallas L. Salisbury, President and CEO, Employee Benefit Research Institute, April 9, 2001

  • Your Retirement Planning Guide: Ready or Not from the Manpower Education Institute of the University of the State of New York, Bronx, N.Y.

  • A Union Planners’ Campaign to Retain 401(k) Assets by Amy L. Anderson, American Banker, April 2, 2001.

  • A Plan for Growth and Income: Despite the Downturn, Planners Say Stocks Should Figure Large in the Equation by Stan Hinden, special to the Washington Post, April 1, 2001.

May 3, 2001: Working Group on Preparing for Retirement

  • Agenda

  • Official Transcript

  • Written Testimony from Ellen Hoffman as well as a copy of the March 2001 issue of AARP Bulletin featuring her story on “Retire a winner:10 steps to take now” and a copy of “Living out your golden years” from msnbc.com from the Today Show, April 22, 2001.

  • Statement by Jonathan Barry Forman, University of Oklahoma College of Law, plus “Making Federal Pension Policy Work” from the Northern American Actuarial Journal, Volume 5, Number 1, January 2001 and “How Federal Pension Laws Influence Individual Work and Retirement Decisions” from The Tax Lawyer, Vol. 54, No. 1, Fall 2000, published by the American Bar Association.

  • “Rethinking the Risk of Defined Contribution Plans” by Regina T. Jefferson, witness from Catholic University, Volume 4, 2000, Number 9, Florida Tax Review.

  • Two promotional packets from the Department of Labor’s Employee Benefits Security Administration’s pension education campaign entitled Savings Fitness and Saving Matters.

  • Preparing for Retirement Abstract

  • “Stop That 401(k)!” by Daniel Kadlec, Time.com

  • International Foundation for Retirement Education Sharing Ideas by Anna M. Rappaport, FSA, MAAA, focusing on Retirement Needs: The Period After Retirement.

June 11, 2001: Working Group on Preparing for Retirement

  • Agenda

  • Official Transcript

  • Statement by Margy LaFond, Associate Commissioner of the Office of Policy and Technology, Office of Communications, Social Security Administration, plus copy of Your Social Security Statement.

  • “Retirement Planning, Part 2” by Scott Burns, May 6, 2001, Dallas Morning News.

  • “Living Longer, Living Better” Workbook by the International Union of Bricklayers and Allied Craftworkers, plus “Developing an Effective Savings Plan for Your Retirement” and the Spring 2001 copy of IPF Retirement Blueprint, the union’s quarterly publication.

  • Retirement Planning B Communication Strategies That Work by Michael F. McAllister, William M. Mercer.

July 17, 2001: Combined Meeting of Working Groups on Increasing Pension Coverage and Preparing for Retirement

Chair: James Ray (Increasing); Thomas McMahon (Preparing)

Vice Chair: Judith Mazo; Norman Stein

  • Agenda

  • Official Transcript

  • “Considerations for a Voluntary PSA Plan in Reforming Social Security”, August 2000, and Background Materials for the Joint Session by Sylvester J. Schieber, PhD, Vice President, Watson Wyatt Worldwide. (Also provided Watson Wyatt Suggests Whipsaw Fix from the Watson Wyatt Insider.

  • Written Statement of Ron Gebhardtsbauer, Senior Pension Fellow, American Academy of Actuaries, including Criteria for Retirement Plan Legislation and Regulation.

  • Written Statement of Alicia H. Munnell, Peter F. Drucker Professor of Management Sciences, Boston College Carroll School of Management.

  • Packet of Materials from Anna Rappaport, William M. Mercer, Inc., including Focusing on Retirement Needs: The Period After Retirement, Journal of Financial Service Professionals, July 2000; The Story of Joan; Characteristics of Post-Retirement Events; Making Your Money Last for a Lifetime, a pamphlet from WISER; Retirement Implication of Demographic and Family Change Symposium, November 29 - 30, 2001.

  • De-linking Benefits from a Single Employer: Alternative Multiemployer Models, by Teresa Ghilarducci, University of Notre Dame, with assistance from David Blitzstein, United Food and Commercial Workers International Union, prepared for a 2001 Pension Research Council Symposium April 30-May 1, 2001, and her slides Multiemployer Plans for Casual Labor Markets for the meeting.

  • Copies of slides used in the testimony of Richard A. Hiller and Diane Oakley, TIAA-CREF, as well as the organization’s “Your Retirement Income Planning Kit” and “Saving for Retirement: The Importance of Planning” by Professor Annamaria Lusardi of Dartmouth College for TIAA-CREF’s Research Dialogue.

  • Retirement Savings and Household Wealth in 1998: Analysis of Census Bureau Data (May 8, 2001), Pension Coverage and Participation: Summary of Recent Trends (November 6, 2000), and Older Workers: Trends in Employment and Retirement (July 26, 2000), all by Patrick J. Purcell, Special in Social Legislation, Domestic Social Policy Division, Congressional Research Service.

  • Automatic 401(k) Enrollment Can Be a Costly Benefit - Many workers fail to upgrade from low-contribution, low-risk default options, to portfolios’ detriment by Josh Friedman, Los Angeles Times, July 11, 2001.

  • Automatic enrollment survey and reader verbatims, Plan Sponsor.com, July 11, 2001.

  • Time May Not Be on Automatically Enrolled Employees Side: Hewitt Study Shows Automatic Enrollment in 401k Plans Works Against Some Employees, Helps Others, Business Wire, July 10, 2001.

September 11, 2001: Working Group on Preparing for Retirement

  • Agenda

  • Official Transcript

  • Replacement Ratio Study: a Measurement Tool for Retirement Planning by Aon Consulting, compliments of Michael J. Gulotta, former chair of the ERISA Advisory Council.

  • Packet from Fidelity Investments, including: Retirement Income Planning Guide; Getting Ready for Retirement Workshop; “Rethinking Retirement Income;” “Facing the Future” articles from past issues of Fidelity Focus, a quarterly publication for Fidelity customers, and Fidelity Portfolio Planner, and Building Futures II, the executive summary of a second comprehensive study of opportunities and challenges for workplace savings conducted by Fidelity and an asset allocation planner.

  • Written Testimony from Carol Stack, anthropologist, University of California at Berkeley.

  • Is There Enough for a Nest? Figuring Needs Ahead of Time Helps to Ensure That Goals Will Be Met” by Stan Hinden, special to The Washington Post, August 26, 2001.

October 15, 2001: Working Group on Preparing for Retirement

  • Agenda

  • Official Transcript

  • Outline of Working Group's Study by Norman Stein.

  • Written Testimony by Elaine Stevenson, Vice President of Product Development for Metropolitan Life Insurance, including slides from her PowerPoint presentation.

  • How Expensive Is a Variable Annuity?, a Feb. 10, 2001 article from Financial Planning.com.

  • Written statement by Stephen W. Mitchell, Senior Vice President of Fidelity Customer Marketing and Development, Fidelity Investments. (Materials he provided for the Sept. 11 session are included in that month’s overview as he was unable to make his presentation because of the terrorist attacks.)

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Advisory Council Members

  • Thomas McMahon, Chair

  • Norman Stein, Vice Chair

  • Catherine L. Heron

  • Janie Greenwood Harris

  • Shlomo Benartzi

  • Timothy J. Mahota

  • Judith Mazo

  • James Ray

  • Robert P. Patrician

  • Patrick N. McTeague

  • Michael J. Stapley, Advisory Council Chair – Ex-officio all Working Groups

  • Rebecca J. Miller, Advisory Council Vice Chair – Ex-officio all Working Groups

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Footnotes

  1. See “How “Expensive” is a Variable Annuity? By John L. Olsen, CLU, ChFC, February 10, 2000, www.financial-planning.com/pubs/fpi/20000210102.html.