November 13, 2001

The Working Group on Increasing Pension Coverage, Participation and Benefits is pleased to present this report and recommendations to the full Advisory Council. The Working Group urges that the report be adopted by the Advisory Council and submitted to Secretary of Labor Elaine L. Chao pursuant to Section 512(b) of the Employee Retirement Income Security Act.

Executive Summary

Decades ago, the Federal Government declared a national public policy to encourage the creation and maintenance of employer-sponsored pension plans for all workers. Despite various efforts to promote plan sponsorship and participation through income tax incentives, education and other means, roughly 50% of private sector workers lack pension benefits on the job and this coverage rate has not budged more than a few percentage points in the past 20 years or more.

Significant reasons why more employers do not sponsor pension plans for any or some of their employees include: concerns over the business realities of revenues and profit; the nature of the employer's workforce; employee preferences for cash and health insurance; the decline in unionization; the cost of setting-up and administering a plan; concerns about government regulation and liability; and a lack of information or knowledge among employers and employees.

Significant reasons why more employees do not participate in pension plans sponsored by their employers include: the growing predominance of elective plans over traditional defined benefit plans that provide automatic coverage; employees give cash wages a higher priority than pension coverage; employees give health insurance a higher priority than pension coverage; a lack of personalized information or knowledge; inertia and fear; employment patterns; a sense that pension coverage is unnecessary or futile; the lack of the incentive of an employer matching contribution; and the lack of tax incentives for lower income workers.

The Working Group recommends that the Federal Government take the following actions to further encourage the voluntary sponsorship of pension plans by employers and participation in those plans by employees: (1) promote more, individualized education for employers and employees; (2) encourage the sponsorship of defined benefit pension plans by modernizing the regulatory scheme for these plans; (3) encourage the creation and maintenance of multiemployer pension plans; (4) promote the use of automatic enrollment / negative election plans in conjunction with advance commitment programs like the "Save More Tomorrow" so as to increase both plan participation and retirement savings; (5) simplify the regulation of plans generally; (6) take a constructive approach to enforcement; (7) promote plan sponsorship as the obligation of a responsible employer by use of the government's roles as consumer and regulator; (8) target additional tax incentives to encourage particular behavior (e.g. employer matching contributions, coverage of part-time employees); (9) be mindful of the importance of maintaining tax advantages of qualified plans relative to IRAs and other tax-sheltered financing arrangements; and (10) ensure that plan participation does not disqualify low income workers from benefits under government programs; (11) create a supplemental Social Security program to which an employer could voluntarily contribute for its employees so that they can receive an enhanced defined benefit; and (12) convene an interagency task force to develop a coordinated, comprehensive program for expanding plan coverage, participation and adequacy.

Recognizing that many of these actions lie outside of the Labor Department's jurisdiction, we recommend that the Secretary of Labor use her influence as a member of the President's Cabinet and the principal administrator of ERISA to persuade the Administration and Congress to take these actions.

Purpose and Scope

Sound retirement income from employment-based pension plans and retirement savings programs for all employees has been an important national public policy objective for several decades. Yet, only about 50% of private sector workers ages 25-64 are covered by or participate in pension plans of any kind on the job.(1)  And, that percentage has not increased over the past two decades despite an economic boom, an expansion of the workforce, the authorization of new types of tax-favored retirement plans, and government-sponsored educational efforts. Fifty-five million private sector still workers lack employment-based pension coverage.(2)  Why? What can be done about it.?

Retirement income security has been said to depend on a "three legged stool:" Social Security, employment based pension plans, and personal savings. Social Security, while essential, was never intended to be the sole source of retirement income. Maintenance of a decent standard of living-indeed, avoidance of poverty-among older Americans requires substantial retirement income from sources other than Social Security. Yet, a very high percentage of the elderly continue to depend on Social Security for most, if not all, of their income.

Federal law does not require employers to establish and maintain pension plans for their employees. Plan sponsorship is voluntary. Plan participation is voluntary for employees under a large and growing number of retirement savings plans, such as 401(k) plans. To promote sponsorship of and participation in employment-based pension plans, the federal government has been relying on "tax carrots" and "regulatory sticks": favorable tax treatment conditioned on compliance with non-discrimination rules and other requirements. These tax incentives have been adjusted repeatedly over the years, and various new types of tax-favored employee pension plans have been authorized.

Despite these tax-focused governmental efforts, private sector pension coverage and participation has stagnated. Millions of workers do enjoy employment-based pension coverage, thanks largely to various tax incentives. But, as many workers lack such coverage in spite of these same incentives. A disproportionate share of these unbenefitted workers are employed in small businesses (under 100 employees), are low-earning, and/or are young.

This situation is all the more alarming because of other developments. First, the Social Security system's future is being questioned. Second, Americans are retiring earlier and living longer, requiring more retirement income. The large "baby boom" generation is approaching retirement age. Third, personal savings are at a record low, and personal debt is at a record high. Fourth, for workers who have pension coverage, the traditional defined benefit plan is being eclipsed by the Section 401(k) plan under which participation is voluntary, the investment risk is borne by the participant, and the typical form of benefit is a lump-sum distribution of whatever amount is in the participant's plan account.(3)  And, fifth, health insurance and health care costs are absorbing an increasing share of workers' and retirees' financial resources.

The road to a pension at retirement contains many entrances, exits, detours and toll booths, and navigation of that road requires the cooperation of the employer and the employee. The employer must sponsor an employee pension plan. The employee must be in the group of employees covered by the plan or for whom participation is available. If not automatically covered by the plan, the employee must elect to participate in the plan. If the plan requires employee contributions (in the form of salary deferral or otherwise), the employee must make contributions. If the plan provides for self-direction of how the employee's account is invested, the employee must invest wisely. Upon changes in employment, withdrawn from the employee's plan must be rolled over into another retirement savings program. Once reaching retirement, the employee must take benefits in a form that provides a lifetime income.

The Working Group's focus was on a subset of these issues: why more employers are not sponsoring plans for their employees (coverage) and why more employees are not participating in plans sponsored by their employers (participation).

Clearly, coverage by and participation in an employer's pension plan is essential for an adequate retirement income. Moreover, the type of pension plan in which an employee participates can have a very significant impact on the amount of the employee's benefits and the form in which they are paid (e.g. as a lump sum or as a lifetime annuity). But, the extent to which the benefits actually paid by employment-based pension plans replace pre-retirement earnings and meet the retirement income needs of pensioners are important matters that the Working Group was unable to study. We note that the Report of the Council's Working Group on Retirement Planning does address issues relating to the post-retirement income needs of pensioners and to the accumulation and distribution of retirement savings to meet those needs. We encourage readers of this Report to also read the Report of the Working Group on Retirement Planning.

Working Group Proceedings

The Working Group conducted seven public meetings at the Labor Department. At those meetings, the Working Group received written and oral testimony from a variety of individuals and organizations having knowledge of and experience with the issues being studied by the Working Group. In addition, the Working Group received written submissions from other individuals and organizations interested in pension coverage and participation issues. The Working Group also considered articles published in journals and the public press. And, perhaps most importantly, the members of the Working Group brought to the proceedings their own, considerable knowledge and experience.

At its first meeting on April 9, 2001, the Working Group discussed the issues to be studied and developed an outline to guide its proceedings. The meeting also featured a presentation by Richard Hinz, Director, Office of Policy & Research, U.S. Department of Labor and members of the Data Team from that office. The presentation provided the Working Group with a statistical overview of the current state of employment-based pension coverage and participation in the United States.

On May 3, 2001, the Working Group's second meeting featured presentations by Cindy Hounsell, Executive Director of the Women's Institute for a Secure Retirement, Ed Ferrigno, Vice President for Washington Affairs, Profit Sharing/401(k) Council, and Brian Graff, Executive Director, American Society of Pension Actuaries.

At the Working Group's third meeting, on June 11, 2001, one of its members, Professor Shlomo Benartzi of the Anderson School at UCLA, made a presentation on the Save More Tomorrow approach of using behavioral economics to increase employee participation and savings in employer sponsored plans. In addition, Michael A. Calabrese, Director of the Public Assets Program of the New America Foundation discussed a proposal for individual accounts to supplement Social Security encouraged through refundable tax credits. Teresa Turyn of the Employee Benefits Research Institute (EBRI) and Ruth Greenwald & Associates reported on the findings of their organizations' 2001 Small Employer Retirement Survey.

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

The Working Group's next meeting, on September 11, 2001, was cut short by the extraordinary and tragic events that struck our Nation on that date. Saddened, but in accordance with President Bush's directive to continue governmental operations, the Working Group continued the meeting on September 12, 2001 to discuss the presentations and other information that it had received at the prior sessions and to develop collective views on the issues.

At its October 15, 2001 public meeting, the Working Group continued its discussion and the development of collective views.

At its final meeting on November 13, 2001, the Working Group reviewed a draft report and approved this final report.


Based on the testimony and written submissions of witnesses, on additional information collected, and on the knowledge and experience of the Working Group's members, we find that the following matters appear to be significant factors affecting the decision by employers not to sponsor pension plans for all or some of their employees and decisions by employees not to participate in their employers' plans.

We note that the information on which these findings are based necessarily relies on the statements of employers, employees and others, and those statements may or may not accurately reflect true motivations.

We also note that, according to the information received, the lack of plan sponsorship is predominantly a small business problem. According to Labor Department data based on the March 2000 Current Population Survey there is a high correlation between employer size and plan sponsorship; the smaller the employer, the less likely that the employer sponsors a pension plan for its employees.(4) Accordingly, our findings place substantial weight on the 2001 Small Employer Retirement Survey (SERS) conducted by EBRI and Matthew Greenwald & Associates, a copy of which was submitted to the Working Group and about which we received testimony (as summarized in part VI of this Report).

Why do more employers not establish and maintain pension plans for their employees?

Business Realities - Business uncertainties are a major reason for not sponsoring an employee pension plan, according to the 2001 SERS.(5)  71% of the surveyed employers without plans reported that revenue or profits were too uncertain to commit to a plan; for 48% this was a major reason, and for 18% this was the most important reason. 66% of these employers gave as a reason that required company contributions are too expensive; for 46% this was a major reason, and for 10% this was the most important reason. An increase in company profits was cited by 44% of the surveyed employers as a development that would make serious consideration of a plan much more likely.

New businesses tend to be focused on survival rather than on retirement savings. The termination rate for new small businesses is high. As many as 80% close within the first four years of operation. 32% of employers in the 2001 SERS gave "business is too new" as a reason for not sponsoring a plan; for 20% this was a major reason, and for 6% this was the most important reason.

Nature of Workforce - Employees who are not full-time are less likely to be employed by an employer that sponsors a pension plan or that offers plan coverage to them.(6)  Employers are reluctant to provide pension plan coverage for part-time, part-year, seasonal, and temporary employees. To the extent that the employer maintains a plan for some employees, these types of employees may well be excluded from coverage by design.

Such workforces are common in small businesses. According to the 2001 SERS, a reason given by 63% of employers for not sponsoring plans was that their employees were largely part-time or seasonal or had a high turnover rate. For 32% this was a major reason, and for 15% this was the most important reason.

Some large and medium sized firms deliberately rely on part-time employment as a workforce structuring and management strategy, and exclude such employees from plan participation by design.

Employee Preferences - The lack of employee demand for a pension plan was given as a reason for not sponsoring a plan by 63% of employers in the 2001 SERS; for 43% this was a major reason, and for 19% this was the most important reason. Cash wages and health insurance coverage may be a higher priority for many employees.

Where an employer is offering only one benefit program, employees tend to prefer health insurance coverage over retirement savings. Health insurance has an immediate effect on the financial security of a worker and the worker's family, whereas retirement may seem a distant aspiration. As health insurance coverage becomes more expensive for the employer and the employee, there is less money to devote to retirement savings.

Statistical data seems to confirm that insufficient employee demand is a significant factor in employer decisions not to sponsor plans or to include certain employee groups in plan coverage.(7)

Decline in Unionization - Organized labor has been a major force in promoting employment-based pension coverage and participation over the past several decades. Employees who are represented by a labor union and covered by a collective bargaining agreement with their employer are the most likely of any group of employees to have pension plan coverage.(8)  They are also likely to have traditional defined benefit plan coverage that provides benefits in the form of a lifetime annuity. Unionization has also benefitted unorganized workers whose employers maintain pension plans to compete for labor against unionized employers or to make union representation less attractive for their workers.

Unionization has played a particularly significant role in providing defined benefit pension coverage through multiemployer plans to workers in industries characterized by small employers and transient employment patterns such as building and construction, trucking, maritime, clothing, services, and entertainment. Through a multiemployer plan, an employer can provide pension coverage for all of its employees by simply submitting contributions, fixed by the collective bargaining agreement, to the plan. The employer need not become involved in the administration of the plan or concern itself with government regulation of the plan.(9)

However, the percentage of the private sector workforce that is unionized has declined significantly, and this has had a significant, negative impact on plan coverage.(10)

Cost of Set-Up and Administration - 56% of employers in the 2001 SERS cited the cost of setting-up and administering a pension plan as a reason for not sponsoring a plan; for 34% this was a major reason, and for 12% this was the most important reason. Surveyed employers would be more likely to sponsor a plan if administrative costs were low, according to the SERS. Other witnesses and sources cited administrative costs, particularly for defined benefit plans, as a major impediment to plan sponsorship.

Cost of plan administration and compliance is a concern of employers of all sizes, although the impact may be the greatest on small employers. There are certain costs that are more or less fixed regardless of the size of the plan (e.g. preparation of plan documents, tax filings, creating a recordkeeping system).

Statistical data confirms that the cost of creating and administering a plan discourage plan sponsorship, particularly sponsorship of defined benefit plans. There was a steady pattern of growth in annual per capita pension administrative costs over the period 1981-1996 according to one study.(11)  Costs rose more for defined benefit pension plans than for defined contribution plans, and the costs were greater for smaller employers. According to another study, the differential cost of operating a defined benefit plan (including actuarial and participant communication costs) as compared to a 401(k) plan increased for all sizes of plans during 1981-96, with the largest increases falling on smaller plans.(12)  The PBGC's Working Group noted that the differential in costs discourages sponsorship of defined benefit plans.(13)

Acknowledging this cost issue, Congress provided in the Economic Growth and Tax Relief Reconciliation Act of 2001 a $500 tax credit for a small employer's costs of establishing a new employee pension plan. It remains to be seen whether this modest incentive will have any effect on the rate of plan sponsorship.

Government Regulation / Liability - The perception that pension plan sponsorship involves "too many government regulations" is a common concern among employers of all sizes. With respect to smaller employers, this was a reason given by 47% of those employers in the 2001 SERS for not sponsoring a pension plan for their employees. For 22% this was a major reason, and for 4% this was the most important reason.

Some employers have a discouraging sense that the laws and regulations governing plan design and operations are complex and constantly changing, and that extensive professional assistance is required for compliance. Indeed, misunderstanding of the rules among professionals is not uncommon. A perception that government enforcement might be intrusive or excessive can also discourage employers from bothering with a pension plan.

Financial disclosure of pension related costs under Financial Accounting Standards Board rules has also been cited as discouraging plan sponsorship as well as benefit enhancements such as cost of living increases. This effect has to be balanced against the value of FASB disclosure rules.

A related concern is that a sponsoring employer may be held liable for money beyond contributions. The SERS revealed that fear of liability for employees' investment decisions was a factor in the non-sponsorship decision of 33% of the surveyed employers. It was a major reason for 12% of employers, although less than 0.5% of the employers listed it as the most important reason.

Tax Incentives - In the 2001 SERS, only 1% of employers cited insufficient benefits for owners as the most important reason for not sponsoring a plan. For 42% of the employers this was a reason for non-sponsorship, and for 16% it was a major reason. On the other hand, business tax credits for starting a plan would make serious consideration of plan sponsorship much more likely for surveyed employers.

There is concern that sponsorship of tax qualified plans will be jeopardized by enhancements in the tax treatment of Individual Retirement Accounts (IRAs) and other tax-sheltered financing arrangements that are not subject to the nondiscrimination and other qualification requirements of the Internal Revenue Code that compel coverage of non-highly compensated employees. To the extent that owners and highly compensated employee see the tax incentives of qualified plans as too restrictive, they may not identify with qualified plans and lose interest in supporting improvements in such plans for other employees.(14)  Witnesses observed that increases in the IRA contribution limits may cause small employers to use that tax-favored vehicle for their own retirement savings and forego a qualified plan for their employees. There was also a concern that other tax-sheltered financing vehicles may be viewed by owners and highly compensated employees as being preferable to qualified plan coverage.(15)

Lack of Information or Knowledge - For 26% of employers in the 2001 SERS, lack of information about starting a plan was a reason for non-sponsorship. For 9% this was a major reason, and for 1% it was the most important reason.(16)

It is said about the small business market that pension plans are sold, not bought. But, plan marketers see little opportunity for profit in the small market. The costs of marketing and plan administration are high relative to the available financing.

Why do more employees not participate in pension plans sponsored by their employers?

Change To Elective Participation Plans - Traditional defined benefit plans automatically cover the employer-sponsors' employees. Employees do not have to elect to be covered. However, such traditional plans have become less common; the number of such plans has declined dramatically.(17)  Most new plans established over the past decade have been 401(k) type plans for which an employee must elect to participate and contribute. Many employees do not elect to participate for various reasons.

Perceived Cash Needs Have Higher Priority - Many employees have perceived needs to which they give a higher priority than retirement savings. These needs may include feeding a family, buying a home, educating children, or maintaining a certain lifestyle; needs that are perceived as more immediate than income for an uncertain, distant retirement.

These perceived needs are greatly influenced by omnipresent marketing of consumer goods and services through all forms of media. Recently, even government policies seem to have encouraged consumer spending over savings as a means of stimulating a recessionary national economy (e.g. Administration urged that the special income tax rebates paid in 2001 be spent by taxpayers).

Notably, personal debt is at record high levels, and the personal savings rate is near the record low.(18)

Immediate cash needs have a greater significance for low wage workers. There is a high correlation between low earnings and low retirement savings.(19)

Health Insurance Has Higher Priority - Health insurance coverage is more important to workers than retirement savings. The need for medical care by an employee or family member is a daily risk. Moreover, as health insurance coverage has become more costly for employees (premiums, deductibles, co-payments), less of the employee's total compensation is available for pension plan contributions.(20)

Lack of Information / Knowledge - We may be drowning in information, and starving for knowledge about the whys, whats, and hows of pension plans and retirement savings in general among employees. There is no lack of general information on pension plans and retirement savings through the Labor Department's publications and website, the retirement savings campaign of the American Savings Education Council and EBRI, and countless publications and web sites of nonprofit organizations and product marketers. However, the volume and complexity of the information can be overwhelming and frustrating. Language and cultural barriers also impede the conversion of information into understanding and knowledge.(21)

A consistent theme among the testimony and other submissions received was that employees want and need more individualized information and advice. Individuals want advice on what is best for them in their particular circumstances, not general information that might or might not be relevant to them.(22)  In traditional defined benefit plans most of the work was done for the participants by plan professionals. Under salary deferral and self-directed investment plans, responsibility has been shifted to the individuals. They are laymen who often feel ill-equipped to make such financial decisions.

Inertia and Fear - Some employees simply do not get around to joining the plan if they are not automatically covered.(23)  Joining requires learning about the plan and making choices, such as investment choices, about which individuals may feel uncomfortable. Some employees fear that their contributions would be lost to bad investments or misconduct, or that they will not have access to the money in their plans in the event of a personal financial emergency. Recent declines in the stock markets have discouraged participation; the flip-side of the exuberance for participation and contributions experienced when the stock markets were soaring.

Work Patterns - Employees who work only part-time for an employer, or who are seasonal or temporary employees may not be eligible to participate in the employer's pension plan. To the extent that they are eligible, they may choose not to participate because they have no sense of connection or long-term commitment to the employer. They may not expect to vest in employer-funded benefits and may not want to leave their money in a plan of a temporary employer.

Pension Coverage is Unnecessary or Futile - Some employees erroneously believe that a pension plan and retirement savings are unnecessary because Social Security or some other governmental program will provide retirement income, health care and long-term care. Some employees believe that they will be working until death and will never enjoy any retirement savings. Some employees have the sense that they could never save enough to provide much retirement income.

No Employer Match Incentive - Employees who participate in 401(k) plans to which no employer contributions are made for them may see no benefit in putting only their own money into the plan.(24)  The lack of an employer contribution may signal a lack of employer commitment to the plan and to the employees.

No Tax Incentive - Many employees do not pay significant federal income tax and would not realize much of an immediate tax benefit from contributing to a 401(k) plan.(25)  For low wage workers, 401(k) plan contributions are discouraged by the treatment of salary deferrals as income for purposes of government programs (e.g. the Earned Income Tax Credit income limits before the 2001 tax law).


What More Can The Federal Government Do To Expand Employment-Based Pension Coverage And Participation?

More, Individualized Education - Education of employees and workers about pension plans and other retirement savings vehicles remains a key in this struggle to expand coverage and participation. Generalized educational materials are helpful. However, individualized education and advice for employers and employees is the most effective means for encouraging plan sponsorship and participation. Employers want to know how a pension plan generally and particular types of plans will affect their specific business and their workforce. Employees want to know how participation would affect their circumstances; they want advice on how much they should defer and how they should invest their accounts in 401(k) type plans. Employees need to be encouraged to look for employment that offers pension plan coverage, to demand that their employers offer retirement savings plans, and to let employers know that they do value pension plans as a benefit of employment.

Encourage the Sponsorship of Defined Benefit Plans - Traditional defined benefit plans feature automatic coverage and participation for employees; employees do not have to affirmatively elect to participate. Moreover, such plans do not require investment direction by the participants, and employees do not directly bear the investment risk. Such plans typically pay benefits in the form of an annuity that cannot be outlived, and in the form of a joint and survivor annuity for married pensioners.

Defined benefit plans have fallen out of favor with employers for a variety of reasons, including funding standards that produce unpredictable fluctuations in contribution requirements, the complexity and cost of administration, and restrictions that prevent employers from designing plans to fit the needs of their workforce. To reverse this downward trend, the regulatory scheme for defined benefit plans should be re-examined and modified to make these types of plans more attractive to employers while preserving requirements that are truly needed to protect the interests of participants and beneficiaries. For example, allowing pre-tax employee contributions / salary deferrals to a defined benefit plan for supplemental benefits under the plan would make these plans more attractive to employees and employers.

Encourage Multiemployer Plans - In the 1980 amendments to ERISA, Congress declared that national retirement policy should promote the maintenance and expansion of labor-management multiemployer pension plans. Such plans typically provide automatic, portable pension coverage for all workers employed in a bargaining unit. They are particularly valuable in industries characterized by mobile employment patterns and small employers where single-employer plans are virtually non-existent. They require of employers little more than payment of periodic, collectively bargained contributions. Employees, through their union, make a collective decision to devote a portion of their compensation to retirement savings.

Many features of current law accommodate the special character of multiemployer plans. Policymakers should continue to be mindful of the beneficial role and special character of these plans in the development and implementation of policy.

Multiple employer pension plans (as legally distinct from joint labor-management multiemployer plans) may provide opportunities for increased coverage and participation in settings where the employees are not union-represented but have mobile employment patterns or where multiple employers want the economies of scale offered by a pooled arrangement. However, particular care may be required to protect multiple employer plans from entrepreneurial misconduct of the kind associated with some notorious "multiple employer welfare arrangements" under ERISA. Sponsorship by established professional or trade associations or other affinity groups may provide this protection.

Promote Automatic Enrollment / Negative Election Plans In Conjunction With Advance Commitment Programs Such As SMarT - 401(k) type plans typically require an employee to make an affirmative election in order to participate. A number of such plans are automatically enrolling new employees and requiring an employee who does not wish to participate to elect out of participation. Preliminary studies suggest that such an automatic enrollment-negative election approach increases participation by employees in their employers' 401(k) plans. However, there is insufficient evidence from early studies that such an approach increases aggregate retirement savings, and there is evidence that it can adversely impact aggregate savings by producing lower average deferral rates. Negative elections typically provide for a default investment that has the lowest risk/return characteristics. Employees tend not to transfer their account balances from these default investments to other investments that will produce a higher return over time. Further study will be required to assess the effect of the automatic enrollment/negative election approach by itself.

The Internal Revenue Service has acted to clarify the lawfulness of automatic enrollment/negative election provisions in 401(k) type plans. However, the legality of these provisions under State laws regulating deductions from wages remains an issue for some employers. Resolution of this issue at the Federal or State level would further encourage the inclusion of automatic enrollment/negative election provisions in plan designs.

There is evidence that the use of an automatic enrollment/negative election approach in combination with an advance commitment program, such as the "Save More Tomorrow" (SMarT) program studied and advocated by Professor Shlomo Benartzi and Richard Thaler, does increase both plan participation and retirement savings rates. The SMarT program, based on behavioral economics principles, features a pre-commitment by employees to contribute more to their employer's pension plan in the future when they receive salary increases. Employees tend not to miss the contribution when it serves only to reduce a salary increase and not current earnings.

The use of automatic enrollment/negative election and SMART techniques could be encouraged through the granting of tax incentives for the affected plan or for another plan sponsored by the employer.

Simplify the Regulation of Plans - The Internal Revenue Code's regulatory scheme for pension and other retirement savings plans, although well-intended, is discouragingly complex. Even employee benefits professionals have a difficult time comprehending some statutory and administrative rules, and have a more difficult time keeping up with the continuous changes in the law, regulations and rulings. Unnecessary distinctions among various types of plans need to be eliminated. A proliferation of new types of tax-favored retirement plans could add to, not reduce, the confusion. Continuous changes in law and regulations perpetuate complexity.

The Treasury/IRS has made significant progress towards simplification of substantive and procedural regulations. But, further simplification of the law as well as agency regulations could reduce the costs of plan establishment and administration, and make it easier for plan promoters to market plans to small employers.

Simplification should not mean abandoning the policy of requiring nondiscriminatory pension coverage, participation and benefits that is necessary to ensure pension adequacy. It means only finding simpler ways to provide that protection for employees.

Take a Constructive Approach to Enforcement - Truly effective enforcement of statutory and regulatory rules in the context of a voluntary system requires prudent, balanced judgment so as to protect the rights of plan participants without unnecessarily discouraging plan sponsorship. An enforcement approach that promotes and aids voluntary compliance can encourage plan sponsorship. A perception that enforcement is unnecessarily intrusive or excessive may deter plan sponsorship.

The IRS has taken important steps to simplify and refocus its enforcement programs on encouraging voluntary compliance. The Labor Department, too, has made significant efforts in this direction. Notably, Assistant Secretary Ann Combs announced to the Advisory Council that the Administration intends to concentrate on promoting voluntary compliance as an enforcement strategy in recognition that the vast majority of plan sponsors want to comply with the law.

Promote Employer Responsibility As A Consumer & Regulator - The Federal Government could influence employers to establish and maintain plans by promoting the concept that employers have a social responsibility to provide pension coverage for their employees. Moreover, to the extent that an employer sponsors a 401(k) type plan, this social responsibility includes offering matching contributions. Evidence indicates that the availability of matching contributions results in greater participation and savings.

The Federal Government could leverage its roles as a consumer of goods and services and as a regulator to promote plan sponsorship, participation and benefit adequacy. Employers that sponsor employee pension plans, sponsor defined benefit plans, offer matching contributions, cover part-time employees, or take other beneficial actions could be given credit for purposes of Federal Government programs: for example, given a preference for government contracts; granted credit toward government approval (e.g. business merger, license); or given waiver from some regulatory requirement. The use of such programmatic incentives should be studied as soon as possible.

Target Tax Incentives - The current extent of plan sponsorship and participation is largely attributable to tax incentives. Additional tax incentives should be targeted to encourage specific conduct, rather than to simply enhance the tax benefits of current plan participants: for example, higher deferral limits for highly compensated employees of employers that make matching contributions to 401(k) type plans; tax credits for employers that extend plan coverage to part-time employees.

The Economic Growth and Tax Relief Reconciliation Act of 2001 attempts to promote plan participation by providing for low-income individuals a non-refundable tax credit of up to $2,000 for contributions to an IRA or 401(k) plan. There are questions about the extent to which this tax credit will actually provide an effective incentive for low income savers given the fact that the credit is not refundable and that it is available only if the employee makes a cash contribution. The effect remains to be seen.

Avoid Undermining Qualified Plans - Policymakers must be mindful of the tax treatment of IRAs and non-qualified deferred compensation arrangements relative to the tax treatment of qualified plans. A core theory of plan qualification is that employers will offer plan coverage to non-highly compensated employees in order to gain tax benefits for highly compensated employees. This "trickle down" theory will be undermined if employers, particularly small employers, can obtain comparable tax benefits for themselves without covering their employees through use of IRAs and tax-sheltered financing vehicles. There is concern that the increase in the IRA limit enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 may be approaching the point where an employer could find an IRA more attractive than a qualified plan on this basis alone.

Plan Coverage Should Not Adversely Affect Government Benefits - Salary deferrals under a 401(k) type plan should not be counted as income for purposes of income-based government benefits or subsidies. Counting salary deferrals as income for such purposes discourages plan participation and retirement savings. We note that the Economic Growth and Tax Relief Reconciliation Act of 2001 corrects this problem with respect to the Earned Income Tax Credit income rules. Salary deferrals should remain in the FICA tax base so as not to undermine an employee's Social Security benefit.

Supplemental Social Security Program - (a) Voluntary Program: Pension coverage and participation for the uncovered 50% of the workforce could be provided by creating a supplemental Social Security program to which an employer could contribute for its employees, including part-time, seasonal and temporary employees. The additional contributions would be used to enhance the employee's Social Security benefits (including disability and survivors benefits). Social Security's indexed defined benefits will remain a critical component of most Americans' retirement income. Those benefits would be increased to reflect any supplemental contributions made for an individual.

This approach offers many advantages. First, the program would be relatively simple and involve de minimis regulation. Employers and employees are already familiar with the Social Security system. Employers and employees already contribute in the form of payroll taxes to the system for the basic benefits. There would be relatively little need for marketing. Second, the Social Security Administration would be responsible for all administration, relieving employers of the cost of administration and regulatory compliance. In essence, the only cost to the employer would be the contributions. Third, coverage and participation would be automatic, so no employee would have to affirmatively elect to participate. Fourth, benefits would be immediately vested and fully portable. Fifth, benefits would be payable as a life annuity that could not be outlived. Sixth, generally there would be no risk of loss of benefits due to plan or employer termination, to investment experience, or to administrative and management fees.

The attractiveness of this program could be enhanced by additional incentives such as tax credits for contributions, matching contributions by the Federal Government, or tax-free distributions.

We recognize that such a program could increase the cost of administering Social Security. But, we expect that this cost increase would be only incremental.

(b) Play-or-Pay Approach: While the voluntary program outlined above would cause an expansion of pension coverage and participation, the policy objective of near universal coverage and participation will not be accomplished without a mandate for employers. Under a "play-or-pay" approach, a private sector employer would be required to contribute for each employee an amount equal to at least 5% of the employee's compensation to either an employer-sponsored pension plan (defined benefit or defined contribution) or to the supplemental Social Security program. The choice would be the employer's, subject to any collective bargaining obligations or legal constraints on the employer. We believe that this approach deserves serious study.

(c) Details: Needless to say, the creation of a supplemental Social Security program would require consideration of an array of political and practical issues that are beyond the jurisdiction and competence of the Working Group. Such issues would include whether the Social Security Administration has the resources and capability to administer a supplemental program, how to prevent discrimination in employer contributions, how to enforce the employer's contribution obligations, and how to protect the supplemental contributions from being used to fund basic benefits, as well as how to design any additional tax incentives. Most importantly, the program should be designed so as not undermine employer-sponsored, qualified plans.

Interagency Task Force - The Working Group is mindful that most of the actions that we believe would significantly expand plan sponsorship and participation lie within the jurisdictions of agencies other than the Department of Labor, such as the Treasury Department/IRS and the Social Security Administration. We recommend that the Secretary of Labor use her influence as a member of the President's Cabinet and as the principal administrator of ERISA to encourage and persuade the Administration and Congress to take these actions as soon as possible. We further recommend that the Secretary urge the Administration to convene an interagency task force to develop a coordinated, comprehensive program for expanding plan sponsorship and participation, including implementation of a supplemental Social Security program.

Summary of Testimony Received

April 9, 2001

Testimony of Richard Hinz

Mr. Hinz provided a statistical overview of the current state of private sector, employment-based pension coverage and participation in the United States based on the Contingent Work Supplement to the February 1999 Current Population Survey and other sources. He also discussed how various employer and worker attributes correlate with pension coverage, and proposed an approach to evaluating various factors. He also described the complexity of supply and demand interactions in pension coverage. He made the following specific points:

The path to a secure retirement has many steps; the employer must sponsor a pension plan, the employee must be eligible for participation, the employee must participate, the employee must make any required contributions, the employee must invest wisely in a self-directed plan, the employee must rollover his account upon a change in job, and the employee must convert his pension to retirement income upon retirement.

About 58% of private sector workers in current jobs work at firms that sponsor a pension plan of some kind. About 30% work at firms that do not sponsor a plan, and 12% do not know whether the firm has a plan.

Of workers at firms that sponsor a plan, 44% are enrolled in the plan, 4% choose not to participate, and 9% report that they are ineligible.

In firms that sponsor 401(k) plans, about two-thirds of employees who are offered participation choose to participate.

Interpreting coverage and participation data is tricky because of the range of individual circumstances of workers, including coverage under multiple types of plans, pensioners who return to work and lack coverage at the new job, and some workers do not understand a 401(k) plan to be a pension plan.

100% coverage and participation is unlikely.

About 43 million of workers have pension coverage, and 55 million are not covered. This represents a "fairly formidable coverage issue."

From 1979 to 1999, the percentage of the workforce employed by firms with pension plans has remained within a couple of percentage points. In 1979, 54% of workers were employed by a firm with a plan (of which 11% did not participate in the plan), and in 1999, 58% were employed by a firm with a plan (of which 14% did not participate in the plan).

"We get pension simplification, pension complication, tax reform, high marginal rates, low marginal rates, and one thing stays constant, and that is probably the vexing problem. All of the interventions that have been tried and all of the external forces that have influenced us over the last 20 years, it hasn't budged the pension coverage rate more than a percentage or two."

Coverage might be better than the data show because some workers when asked if their employer has a pension plan answer no because they do not understand a 401(k) plan to be a pension plan.

During 1984-97, the total number of private sector plans remained steady at about 700,000. But, the composition of this universe of plans has changed. The number of defined benefit plans decreased dramatically, the number of 401(k) plans increased, and the number of non-401(k) defined contribution plans remained roughly the same.

The number of active plan participants substantially increased during 1984-97, but this increase has been in proportion to the growth in the workforce, leaving the coverage rate unchanged. This growth has been in DC plans.

During 1984-97, the number of workers covered by DC plans only increased substantially, the number covered by DB plans only declined, and the number covered by both DC and DB plans remained stable.

Based on the 1999 survey, 64% of full-time workers were employed at firms with pension plans, and of those 37% were participants. 51% of part-time workers were employed at firms with plans, and only 14% of those were participants. Part-time workers are less likely to be employed at firms sponsoring plans and were less likely to become participants in their employers' plans. However, full-time and part-time workers with similar earnings have similar pension coverage rates.

Regarding gender, 60% of men and 57% of women were employed at firms that sponsor plans. Of those, 47% of men and 40% of women were participants in the plans. Male pension coverage has been declining as a share of the workforce, and female coverage has been increasing. Young males as a group tend not to participate. Traditionally male industries that were the core of pension coverage in past decades have been in decline. The higher the earnings level, the lower the coverage and participation rate differences by gender.

Regarding ethnicity, 40% of Hispanic workers are employed by firms with pension plans of which 27% participate). 58% of Black, Non-Hispanic workers are employed at firms with pension plans (of which 41% participate). 63% of White, Non-Hispanic workers are employed at firms with pension plans (of which 47% participate). Even at higher earnings levels, there were significant differences in coverage and participation rates among various ethnic groups which could indicate cultural differences.

Regarding union representation, "the most powerful explanatory variable is collective bargaining status." 81% of workers covered by a union contract were employed by firms with a pension plan (of which 70% participated in the plans). 56% of workers not covered by a union contract were employed by firms with a pension plan (of which 41% participated). Even at various earning levels, workers covered by a union contract have higher pension coverage rates than workers who were not covered by a union contract.

Regarding employer size, the March 2000 Current Population Survey shows the following rates of plan sponsorship and participation by number of employees: under 10 (20% coverage, 15% participation), 10-24 (32% coverage, 24% participation), 25-99 (48% coverage, 36% participation), 100-499 (61% coverage, 46% participation), 500-999 (68% coverage, 54% participation), 1,000 or more (74% coverage, 57% participation). There is a significant association between size of firm and coverage. Participation rates tend to be about the same.

The size of the firm is a significant factor independent of earnings levels of the workers. The larger the firm, the more likely pension coverage and participation at all earnings levels.

There are significant differences in coverage rates among industries, although there are cross-cutting factors such as union representation, prevalence of traditional defined benefit plans in which coverage and participation are not elective, size and earnings. In commercial, utilities, manufacturing, finance, and mining, coverage rates are relatively high. In agriculture, construction, and retail, the coverage and participation rates are relatively low.

Regarding age, coverage and participation are relatively low at younger ages (40% coverage, 14% participation at under age 25), peak in middle life (55% coverage, 39% participation at ages 25-29; 66% coverage, 56% participation at ages 45-49), and fall off at older ages (59% coverage, 50% participation at ages 60-64).

There is a high correlation between education level and plan coverage and participation. 31% of workers with less than high school education were employed at firms with a pension plan, and of those 16% participated. Of college graduates, 74% were employed at firms with a pension plan and 62% participated.

There is a high correlation between earnings and pension coverage and participation.  At the lowest end of the earnings range, 30% of workers were employed at firms with a pension plan, and of those only 6% participated in the plan. At the highest end of the earnings range, 82% of workers were employed at firms with a pension plan, and of those 76% participated.

Conventional levers for pension coverage interventions include raising benefit limits, relaxing nondiscrimination rules, subsidizing employer administrative costs, tax credits for lower income workers, limiting eligibility exclusions, broadening the range of tax qualified plans, and increasing education and outreach.

The central question is whether the lack of pension coverage and participation is a demand problem or a supply problem: is it that workers do not demand plans, or that employers do want to sponsor plans? This is a difficult question, and the law is littered with failed attempts to increase coverage and participation based on oversimplified assumptions about the cause of the problem.

Workers who decline an opportunity to participate in their employer's plan have similar characteristics to workers in firms that do not sponsor plans.  This is simple evidence of a worker demand problem.

PWBA has prepared a regression model to estimate what would happen to participation (take up rates) if all employers who do not sponsor a plan were to sponsor a 401(k) plan and offer the plan to their employees. Preliminary estimates are that the best case would be that 47.4% of the currently non-covered workers would elect to participate in their employer's plan. In contrast, 74.1% of workers whose employer offers them pension coverage now do participate. This suggests that even if employers sponsor plans, worker behavior must be changed to increase participation rates.

May 3, 2001

Testimony of Cindy Hounsell

Ms. Hounsell made the following points in her testimony concerning the pension coverage and participation issues affecting women:

One-size-fits-all information about retirement savings will not be as effective as personalized counseling or information; information that is tailored to the person's particular circumstances; small meetings and one-on-one sessions. Many women simply do not have time to read all of the information that is out there. And, much of the information is complex.

Women need to be convinced to take a long-term view of their finances. Once this attitude shift has occurred, women need to know that they have to do something to plan for retirement, or else they're going to have to work until they drop. From this perspective, women can more easily realize that how much one is able to save for retirement is directly related to how much one works and how much one earns. And women tend to lose out on both those fronts.

Increasing pension coverage for women is more than just persuading them to save more. It's a matter of educating women that a pension, or some other retirement vehicle, is a critical component of their total compensation from work. So when comparing compensation packages, women need to evaluate the whole compensation package and not just the monthly paycheck.

The education needed is not merely that of explanation or explication. The need for pension coverage must be shown to women in a relevant and gripping manner. It is not enough that women have access to pension and retirement information via the internet or at work. The basics of how best to gear up for retirement have to be driven home until women are actually signing up for retirement savings vehicles.

The fact that women remain so unaware of the need to save and how to better prepare themselves for retirement is all the more critical given the shift from defined benefit to defined contribution plans. DC plans shift much of the responsibility of retirement from the employer to the employee.

Women cannot wait to happen upon a financial planner; by then, it is too late to effectively deal with the issue of a decent retirement. Employers and government must reach out to women; commercial promoters ignore them because they tend to be low-income.

Testimony of Ed Ferrigno

Mr. Ferrigno made the following points in his verbal and written presentations about expanding pension coverage and participation from the perspective of promoters of DC plans:

The private employer-provided retirement system has overwhelmingly succeeded in providing benefits to its target population--full-time workers age 21 and older, who have completed a minimum eligibility period of up to one year. Pension coverage for the target group who work for medium-to-large firms is approaching 100%.

Retirement plans, once established, tend to benefit all workers: 92% of workers earning less than $60,000, 85% of workers earning less than $40,000, and 68% of workers earning less than $20,000 participated in plans when offered by their employers. Based on a Fidelity study of 1999 data, the average participation rate for 401(k) plans in existence for at least two years was 75%. The participation rate for 401(k) plans below 50 employees was 84%.

Small business is the last major area where pension coverage is lacking, particularly employers of fewer than 50 employees. According to the CRS reports, participation in small firms increased from 1994 to 1996, and that tend has likely continued. But, more needs to be done. A major reason for small businesses not establishing qualified retirement plans for their employees is their belief that they are unfairly targeted by regulation.

Small business could be encouraged to sponsor plans by government action that would: (1) provide tax credits for small businesses establishing new retirement plans; (2) provide a safe harbor under the nondiscrimination rules for automatic enrollment plans that meet certain criteria; (3) maintain IRA/401(k) proportionality so that it is not more economically efficient to use an IRA instead of a qualified plan; (4) maintain 404(c) protection even when the plan allows the employee to delegate the asset allocation decision to the plan sponsor; (5) amend the Earned Income Tax Credit to exclude elective deferrals from the income limits; (6) repeal the imposition of the FICA tax on elective deferrals that was imposed in 1983; (7) repeal top heavy rules; (8) eliminate user fees; (9) increase limits on benefits and contributions; and (10) increase the limit on includible compensation. Some of these concerns may be addressed by the pending tax legislation.

Lower income workers are unlikely to save for retirement except in employer plans. Tax credits for lower income workers would encourage participation.

Automatic enrollment programs have been shown to increase participation rates for lower income workers. They should be encouraged through nondiscrimination rule relief.

Testimony of Brian Graff

Mr. Graff made the following points in his testimony:

Nonqualified retirement plans are on the rise and this bodes ill for the retirement system. There is a trend of executives to utilizing Nonqualified plans, which makes them less interested in qualified plans with adverse effects on the retirement plans for the rank-and-file workers. Consultants are promoting this conversion as a way for small businesses to avoid costly government regulation of qualified plans. A further reduction in the capital gains rates would make nonqualified plans even more attractive.

There is not a sufficient connection between tax policy and retirement policy. For example, annuity vehicles should be promoted through favorable tax treatment that is only available through the qualified plan system.

The trend of employers shifting from DB plans to 401(k) plans is not helpful, particularly when the employer does not contribute.

June 11, 2001

Testimony of Shlomo Benartzi, Ph.D.

Dr. Benartzi made a presentation about the Save More Tomorrow (SMarT) plan developed by him and Richard Thaler of the University of Chicago to promote employee retirement savings through use of behavioral economics. He made the following points in his verbal and written presentations:

There are three problems with 401(k) plans: (1) not enough people participate; (2) participants do not save enough; and (3) participants do not invest wisely.

There is evidence that automatic enrollment plans do increase participation in 401(k) plans. But, automatic enrollment reduces aggregate savings. Employees generally do not elect out of a plan into which they have been automatically enrolled, and they tend not to elect out of the default savings rate set by the automatic enrollment program and not to elect out of the conservative, default investment.

Providers are concerned that automatic enrollment programs produce lots of small accounts that are costly to administer.

The psychology of the SMarT Plan is that: people want to save more but lack self-control; self-control restrictions are easier to accept if they take effect in the future; people are very sensitive to perceived losses in their welfare and reductions in their paychecks; and people are adverse to taking action (inertia).

The features of the SMarT plan are: (1) employees are automatically enrolled into the plan (negative election); (2) employees pre-commit to higher contribution rates in the future; and (3) employee contribution rates are increased when the employee's salary is being increased. Through automatic enrollment participation rates are increased and through automatic contribution rate increases synchronized with salary increases the retirement savings are increased.

Implementation of the SMarT Plan (without automatic enrollment) at one company increased participation in the firm's 401(k) plan from 64% to 81% and significantly increased savings rates.

Employees may decline to participate in a plan because they do not speak English and cannot read the material about the plan. Peer opinion leaders on the job can also influence whether employees elect to participate.

Testimony of Michael A. Calabrese

Mr. Calabrese made the following points in his verbal and written presentations concerning his proposal for using voluntary, citizen-based retirement savings accounts to increase pension coverage:

During the best of times, a majority (over 70 million) of working adults do not have an employment-based pension plan.

Federal retirement policy should be recast to be citizen-based rather than employer-based, and to use matching, refundable tax credits rather than tax deductions.

Five important policy goals would be advanced by citizen-based matching accounts: (1) improving individual retirement security; (2) increasing national savings and investment; (3) achieving complete career account portability; (4) transferring the social benefit burden from employers to society, particularly for low-income workers; and (5) reducing inequality in both benefit levels and in saving incentives.

Among Americans 65 and older, 60% rely on Social Security for a majority of their income. Forty percent rely on it for 90% of their income. Even the middle quintile relies on it for 80% of their income. "Baby Boomers" will be as dependent on Social Security as their parents. According to a "MINT" study commissioned by the GSA, projections of pension income over the next 30 years indicate that it will remain essentially the same as today based on today's coverage rates and growth in the economy.

Pension coverage in the private sector peaked in the 1970s and has been declining ever since. Private sector pension coverage is 2-5% below 1979 levels. From 48% in 1979, coverage fell to 40% in 1995 (March 1995 CPS) and rebounded to 43% in 1998. The drop-off has been more severe for men than women. In short, 57% of all private sector workers lack pension coverage. According to a GAO study in 2000, 49% of full-time workers lack pension coverage.

IRAs are not compensating for this lack of employer-plan coverage. Only 4% of Americans made an IRA contribution in 1996.

According to a GAO study, 85% of working adults who lacked coverage have one or more of the following four characteristics: low income, young, part-time employment, or employment by a small firm (under 100).

Decline in "old economy" industries has caused some of the decline in coverage. Coverage, as well as employment, shares have fallen in every goods producing industry as well as in transportation, communications, and utilities. Coverage rates, and employment share, have increased in service producing industries. Changes in relative size of employer is a major factor.

The entire decline in pension coverage since 1979 has occurred among blue collar and service occupations. Coverage for managerial, professional and technical occupations has increased.

Among workers under 30, coverage has fallen dramatically: 43% in 1979, to 30%. Coverage for workers between 30 and 44 has fallen from 56% to 51%.

A factor in the decline of coverage is the shift from DB plans to DC plans. Workers have to elect to join a 401(k) plan. A PWBA study opined that a 10% decline in average participation rates was attributable to the shift to DC plans.

Personal savings rates are at historic lows, and debt is at an historic high.

Portability and immediate vesting of pensions are a better fit with new economy labor trends. Labor mobility is up. Average job tenure is down. Nearly one-third of the workforce is in "non-standard" jobs: part-time, temporary, contract worker, or self-employed. This "free agency" workforce makes traditional pension coverage less adequate, especially for working mothers.

The current system for encouraging employees to sponsor plans is a public-private welfare system. About $85 billion in tax expenditures and subsidies flow from the federal government to big firms that sponsor plans, but lower income workers and small employers are unable to obtain these incentives. Majority of small employers (under 500 employees) do not want the burden of sponsoring plans.

Employer contributions to plans fell by 3% a year during the 1990s. Thus the shift from DB plans to DC plans in part.

There is a widening inequality in benefit levels and savings incentives between higher and lower income workers. The ratio of the value of pension contributions between the highest and lowest paid one third of jobs had risen to 6 to 1 as of 1999. More benefit compensation is flowing to the top 20% of jobs. In the lowest paid jobs, only 9% DB plans as compared to 20% in 1979.

Two-thirds of the tax expenditures for pensions flow to households with more than $100,000 in income. Tax deductions for pensions favor those in the highest tax brackets and provide little or no benefit for the bottom third of workers who don't pay income taxes. The employers can pass little in the form of tax benefits on to low income workers.

System should be restructured to provide voluntary citizen-based retirement savings accounts on top of Social Security. Accounts would be available to all workers. Deductions would be replaced by refundable tax credits. Contributions would not be taxable upon withdrawal. Matching tax credits would apply to contributions from any source: employer or employee.

Employers would have an incentive to provide pension contributions for low income workers. There would be no need for the anti-discrimination requirements. There would be complete career portability. If an employer does not sponsor a plan, an employee could set up his own account and have the employer deduct contributions from payroll and send them along with FICA payments. The SSA or the Federal Thrift Savings Plan could manage small accounts.

More conventional, incremental reforms to the current system that would increase pension participation include: encourage payroll deduction IRAs by requiring employers to forward deductions at employees' requests; eliminate distinctions among different kinds of DC plans; require automatic plan enrollment; and, shorten vesting periods to one year.

Testimony of Teresa Turyn and Ruth Helman

Ms. Turyn and Ms. Helman made a joint presentation on the 2001 Small Employer Retirement Survey conducted by EBRI and Matthew Greenwald & Associates. They made the following points in their verbal and written presentations:

The survey is based on interviews with 601 employers of between 5 and 100 employees; 302 of which sponsor pension plans, and 299 of which do not.

90% of plans sponsored by surveyed employers were DC plans; 5% had only a DB plan; and 5% had both.

A majority of the DC plans were 401(k) plans (58%); 22% offered SIMPLE plans; 22% offered profit sharing plans; 13% offered SEP plans.

Major and minor reasons for offering plans to employees included the following: positive effect on employee attitude and performance (61%/25%); competitive advantage in recruitment/retention (47%/33%); employer obligation to provide retirement plan (35%/32%); tax advantages for employees (34%/38%); tax deferred retirement savings for owner (34%/24%); employee demand or expectations (24%/39%); and availability of employer tax deduction (22%/35%).

The most important reason for offering a plan was the following for surveyed employers: competitive advantage in recruitment/retention (25%); positive effect on employee attitude and performance (19%); employers obligated to provide plan (16%); tax advantages for employees (9%); tax-deferred retirement savings for owner (7%); tax advantages for key executives (6%); employee demand/expectation (4%); and availability of employer tax deduction (4%).

42% of surveyed employers offered retirement savings education on an ongoing basis; down from 54% in 2000. The forms of education included: employee benefit statements (89%); brochures (79%); individual access to financial planner (71%); enrollment meetings (67%); newsletters (64%); and on-line services (54%).

Major and minor reasons given by surveyed employers for not sponsoring a plan included: revenue too uncertain to commit (48%/23%); required company contributions too expensive (46%/20%); employees prefer wages and/or other benefits (43%/20%); costs too much to set up and administer a plan (34%/22%); large portion of workers are seasonal, part-time or high turnover (32%/19%); too many government regulations (22%/25%); business is too new (20%/12%); benefits for owner too small (16%/26%); being held liable for investment decisions of employees (12%/21%); don't know where to go for information about starting a plan (9%/17%).

The most important reasons for not sponsoring a plan were: employees prefer wages/other benefits (19%); revenue is too uncertain (18%); large portion of workers are seasonal, part-time, or high turnover (15%); costs too much to set-up and administer a plan (12%); required company contributions are too expensive (10%); business is too new (6%); too many government regulations (4%); don't know where to go for information (1%); benefits for owner too small (1%); and being held liable for employee investment decisions (less than 0.5%).

Despite the DOL's website and other information that is publicly available, there is still a substantial lack of familiarity among employers about SIMPLE plans, SEPs, DB plans, and other types of plans.

Based on answers to true-or-false questions about legal rules governing various types of plans, there is substantial misunderstanding among plan sponsors and non-plan sponsors alike.

Employers not sponsoring plans tended to employ few workers. Employers with higher gross revenues tended to sponsor plans.

Employers sponsoring plans were slightly more likely to be in business longer, to be in professional services, and to be non-family owned.

Workers of non-sponsors are more likely to be younger, shorter-tenured, lower paid, and less educated.

Among plan sponsors, the plan had a major or minor impact on their ability to hire and retain good employees for 53% and 38% respectively. Among non-sponsors, only 8% considered a plan as having a major impact on whether the firm could hire and retain good employees. Among plan sponsors, 34% felt that the plan had a major impact on employee attitude and performance. Only 6% of non-sponsors felt that a plan would have a major impact on employee attitude and performance.

The following factors would make it much more likely that a non-sponsor would sponsor a plan: increase in profits (44%); plan with low administration costs and no employer contributions required (34%); business tax credits for starting plan (23%); plan tailored to unique needs of business (22%); plan with reduced administrative requirements (18%); easy to understand information (16%); and demand from employees (15%). For 10% of non-sponsors, nothing would make sponsorship likely.

69% of employers who do not sponsor a retirement plan do offer a medical plan. 94% of employers who have a retirement plan also offer medical insurance.

July 17, 2001

Testimony of Sylvester Schieber, Ph.D.

Mr. Schieber made the following points in his verbal and written presentations:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Testimony of David Blitzstein

Mr. Blitzstein made the following points in his verbal testimony concerning the important role of multiemployer plans in pension coverage and participation:

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

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

DC plans should be supplements to DB plans.

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

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

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

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

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

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

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

Testimony of Alicia Munnell

Ms. Munnell, formerly a member of the President's Council of Economic Advisors, an Assistant Secretary of the Treasury for Economic Policy, and former Senior Vice President and Director of Research at the Federal Reserve Bank in Boston, made the following points in her verbal and written presentations:

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

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

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

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

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

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

Higher employer provided pensions would result in lower wages.

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

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

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

Education is helpful in getting workers to participate.

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

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

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

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

Testimony of Ron Gebhardtsbauer

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 website 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

Ms. Rappaport made the following points in her verbal and written presentations on the challenges of the post-retirement period which she illustrated through the "Story of Joan":

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

Average periods of widowhood are long.

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

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

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

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

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

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

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

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

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

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

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

Family structure is a very important source of security.

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

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

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

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

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

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

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

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

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

Testimony of Teresa Ghilarducci

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

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

Multiemployer plans tend to cover small employers.

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

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

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

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

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

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

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

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

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

Testimony of Diane Oakley and Richard Hiller

Ms. Oakley and Mr. Hiller made the following points in their verbal presentation on the retirement planning process for pre-retirees:

Part of TIAA-CREF's charter mission is education about retirement. It sponsors retirement seminars and seminars on investing for women. Information is provided also through booklets, one-on-one counseling, software, and websites. 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

Mr. Purcell made the following points in his testimony concerning pension coverage and participation in addition to submitting several papers on the subject authored by him for the CRS:

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

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

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

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

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

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

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

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

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

Direct government subsidies for retirement accounts is unlikely.

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

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

Additional Information Sources

Actual Transcripts/Executive Summaries for the Council's full meetings and working group sessions are available at a cost through the Department of Labor's contracted court reporting service, which is Neal R. Gross and Co., Inc. 1323 Rhode Island Avenue, NW, Washington, DC 20005-3701 at (202) 234-4433 or

April 9, 2001: Working Group on Increasing Coverage, Participation and Savings

  1. Agenda
  2. Official Transcript
  3. Strawman outline for group's study for the year
  4. Written Statement by Dallas L. Salisbury, President and CEO, Employee Benefit Research Institute on Increasing Pension Coverage.
  5. Series of Slides used in Oral Presentation by Richard Hinz, Director of Policy and Research, Pension and Welfare Benefits Administration, April 9, 2001.
  6. EBRI Womens Retirement Confidence Survey - 2000, February 2001 Notes Article
  7. EBRI Retirement Plan Participation from the January 2001 Notes article on Retirement Plan Participation: Full-time, Full-year Workers Ages 18-64.
  8. Small Employer Retirement Survey (SERS), sponsored by EBRI, the American Savings Council and Matthew Greenwald & Associates, Inc.
  9. SMALL Plans New Penchant for Pensions by Jinny St. Goar, February 2001 issue of Plan Sponsor Magazine.
  10. Written Statement of Stuart Sirkin, Pension Benefit Guaranty Corporation - Summary of Comments by the PBGC Defined Benefit Plan Working Group on July 14, 1998.

May 3, 2001: Working Group on Increasing Coverage, Participation and Savings

  1. Agenda
  2. Official Transcript
  3. Revised Project/Request for Input for Working Groups Course of Study and listing of potential additional sources of information for discussion.
  4. CitiStreet Launches Internet-Based 401(k)Service, April 24, 2001,
  5. Written Testimony of Edward Ferrigno, vice president of Washington affairs, the Profit Sharing Council of America as well as a release on the PSCA's Auto Enrollment 2001 Study.
  6. Packet of promotional materials from witness Cindy Hounsell, executive director of WISER, the Womens Institute for a Secure Retirement.
  7. Participation in Retirement Plans: A Comparison of the Self-Employed and Wage and Salary Workers by Sharon A. Devaney and Yi-Wen Chien in the Winter 2000 issue of Compensation and Working Conditions, Bureau of Labor Statistics, U.S. Department of Labor.
  8. Series from on retirement issues, authored by Greg Hanna, March 28, 2001 and another article by Hanna entitled Are You Planning?.
  9. Executive Summary - Baby Boomers Envision Their Retirement: An AARP Segmentation Analysis.
  10. March 2001 Forum from Aon Consulting regarding the Aon Consulting/Georgia State Replacement Ratio Study entitled Benchmarking Retirement Income Needs.
  11. Characteristics of Persons in the Labor Force Without Pension Coverage by the General Accounting Office, GAO/HEHS-00-131, dated August 2000. and Top-Heavy rules for Owner-Dominated Plans, GAO/HEHS-00-141, dated August 2000.
  12. SIPP 1996 Wave 7 Topical Module CAPI Specifications - Retirement Expectations and Pension Plan Coverage Topical Module from the U.S. Census Bureau (showing the kinds of questions posed to American workers).
  13. Institute Releases Ad Hoc Survey on Simple IRAs as of December 31, 2000, Mutual Fund Connection, Investment Company Institute.
  14. Boom Time for Gen X? Older than you think, and smarter, too, they are making, savings and figuring out money by Dan Zevin, U.S. News online, July 10, 2000.
  15. Meeting the Investing Needs of All Plan Participants by Marianne Leedy, DFP, CRC, Vice President, the Scarborough Group.
  16. GenX preps for retirement: young investors upbeat on finances, but realize bull market won't last by staff writer, Jennifer Karchmer, February 29, 2000, CNNfin, the financial network.

June 11, 2001: Working Group on Increasing Coverage, Participation and Savings

  1. Agenda
  2. Official Transcript
  3. Summaries of witnesses appearing in May
  4. Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving by Richard H. Thaler and Shlomo Benartzi, April, 2001. Also provided overheads
  5. EBRI Finds Retirement Confidence, Preparation Vary Among Ethnic Groups from Plan Sponsor, May 9, 2001, plus EBRI's President on the Evolution of the Sponsor's Role. May 10, 2001
  6. Fewer Americans Are Saving for Retirement as Falling Market Takes Toll on Attitudes, Glenn Ruffenach, Wall Street Journal, January, 1999.
  7. Packet from the Employee Benefit Research Institute focusing on the Small Employer Retirement Survey and overheads used during the presentation by Teresa Turyn, EBRI, and Ruth Helman from Mathew Greenwald Research Associates.
  8. Testimony of Michael A. Calabrese, Director of the Public Assets Program, New America Foundation and copies of his overhead slides.
  9. Bridging the Cultural Divide: Part One: Speaking Your Employee's Language, May 31, 2001, and Part Two: Know Your Employees, June 1, 2001, Plan Sponsor Magazine.
  10. Retirement Saving - We're Still Behind the Curve, by Scott Burns, June 5, 2001, Dallas Morning News

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

  1. Agenda
  2. Official Transcript
  3. 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.
  4. Written Statement of Ron Gebhardtsbauer, Senior Pension Fellow, American Academy of Actuaries, including Criteria for Retirement Plan Legislation and Regulation.
  5. Written Statement of Alicia H. Munnell, Peter F. Drucker Professor of Management Sciences, Boston College Carroll School of Management.
  6. 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.
  7. 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.
  8. Copies of slides used in the testimony of Richard A. Hiller and Diane Oakley, TIAA-CREF, as well as the organization's AYour Retirement Income Planning Kit, and Saving for Retirement: The Importance of Planning by Professor Annamaria Lusardi of Dartmouth College for TIAA-CREF's Research Dialogue.
  9. 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.
  10. 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.
  11. Automatic enrollment survey and reader verbatims, Plan, July 11, 2001.
  12. Time May Not Be on Automatically Enrolled Employees' Side: Hewitt Study Shows Automatic Enrollment in 401k Plans Works Against Some Employees, Helps Others, Business Wire, July 10, 2001.

September 11, 2001: Working Group on Increasing Coverage, Participation and Savings

  1. Agenda
  2. Official Transcript
  3. Outline of Draft Report

October 15, 2001: Working Group on Increasing Coverage, Participation and Savings

  1. Agenda
  2. Official Transcript
  3. Outline of Approaches to Expanding Coverage, Participation & Benefits by James Ray as well as a bullet point piece by Patrick McTeague on a new approach to expanding coverage.
  4. Abstract dated October 5, 2001 on Pension Sponsorship and Participation: Summary of Recent Trends from the Congressional Research Service.
  5. Cash Flow: Help for Those of Modest Means, Low Income Tax Credit Is a Winner, but It's Complicated@ story from the Sunday, Oct. 14, 2001 Washington Post by Albert B. Crenshaw.

Advisory Council Members

  1. James S. Ray, Chair
  2. Judith F. Mazo, Vice Chair
  3. Evelyn F. Adams
  4. Shlomo Benartzi
  5. Janie Greenwood Harris
  6. Catherine L. Heron
  7. Timothy J. Mahota
  8. Patrick N. McTeague
  9. Robert P. Patrician
  10. Norman Stein
  11. Ronnie Susan Thierman
  12. Michael J. Stapley, Chair of Advisory Council
  13. Rebecca Miller, Vice Chair of Advisory Council


  1. See testimonies of Richard Hinz, Michael Calabrese, Sylvester Scheiber, Alicia Munnell, Ron Gebhardtsbauer, and Patrick Purcell summarized in part VI of this Report. .
  2. Id.
  3. See the Report of the Working Group On The Merits Of Defined Contribution Vs. Defined Benefit Plans of the 1997 ERISA Advisory Council (available on the DOL-PWBA web site).
  4. The plan sponsorship and participation rates by size of firm (number of employees) were as follows: under 10 employees (20% coverage, 15% participation), 10-24 employees (32% coverage, 24% participation), 25-99 employees (48% coverage, 36% participation), 100-499 employees (61% coverage, 46% participation), 500-999 employees (68% coverage, 54% participation), 1,000 or more employees (74% coverage, 57% participation). See also testimonies of Ed Ferrigno, Michael Calabrese, Ron Gebhardtsbauer, Alicia Munnell, and Patrick Purcell.
  5. The SERS defined a small employer as one that employs between 5 and 100 full-time employees.
  6. See testimonies of Richard Hinz, Teresa Turyn, Sylvester Scheiber, and Michael Calabrese in part VI of this Report.
  7. Id. See also testimonies of Shlomo Benartzi and Teresa Ghilarducci in part VI of this Report.
  8. According to Richard Hinz, "the most powerful explanatory variable [for pension coverage and participation] is collective bargaining status." 81% of workers covered by a union contract were employed by firms with a pension plan (of which 70% participated in the plans). In contrast, 56% of workers not covered by a union contract were employed by firms with a pension plan (of which 41% participated). Even at various earning levels, workers covered by a union contract have higher pension coverage rates than workers who were not covered by a union contract. See also testimonies of Sylvester Scheiber, Teresa Ghilarducci and David Blitzstein.
  9. See testimony of Teresa Ghilarducci and of David Blitzstein in part VI of this Report.
  10. See testimonies of Sylvester J. Scheiber and Ron Gebhardtsbauer in part VI of this Report.
  11. Id. The compound annual growth rate in per capita administrative costs for defined benefit plans by plan size was as follows: 15 employees-8.03%, 75 employees-6.26%, 500 employees-6.46%, and 10,000 employees-7.43%. The growth rate for defined contribution plans was as follows: 15 employees-5.05%, 10,000 employees-4.42%. The 1996 per capita cost for a DB plan with 15 employees was $619.93 versus $173.62 for a DB plan with 500 employees. The 1996 per capital cost for a DC plan with 15 employees was $287.20 versus $49.19 for a plan with 10,000 employees.
  12. See Summary Of Comments On Defined Benefit Plans Received By The PBGC Defined Benefit Working Group, July 14, 1998, citing Hay Group study.
  13. Id.
  14. This concern was a substantial motivation for provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 that increased various benefit and contribution limits and made other improvements in the tax incentives for qualified plans.
  15. See testimonies of Brian Graff, Ed Ferrigno, and Gebhardtsbauer in part VI of this report.
  16. See also testimony of Ron Gebhardtsbauer in part VI of this Report
  17. See testimonies of Richard Hinz, Cindy Hounsell, Michael Calabrese, Sylvester Scheiber, Alicia Munnell, Ron Gebhardtsbauer, Anna Rappaport, and Patrick Purcell in part VI of this Report.
  18. See testimonies of Michael Calabrese, Sylvester Scheiber, Alicia Munnell, and Patrick Purcell.
  19. See testimonies of Richard Hinz, Michael Calabrese, Sylvester Scheiber, Ron Gebhardtsbauer, and Patrick Purcell.
  20. See testimonies of Teresa Turyn and Richard Hinz in part VI of this Report.
  21. See, for example, testimonies of Cindy Hounsell, Shlomo Benartzi, Sylvester Scheiber, Alicia Munnell, Anna Rappaport, and Diane Oakley in part VI of this Report.
  22. Id.
  23. See, for example, the testimonies of Cindy Housell, Shlomo Benartzi, and Alicia Munnell concerning the role of human inertia.
  24. See testimonies of Sylvester Scheiber, Shlomo Benartzi, Alicia Munnell, and Ron Gebhardtsbauer concerning the incentive provided by an employer match in part VI of this Report.
  25. See testimonies of Ed Ferrigno, Michael Calabrese, Sylvester Scheiber, and Alicia Munnell in part VI of this Report.