Senate Finance Committee Hearing on the Challenges of the Retirement System
Senate Finance Committee
“Challenges in the Retirement System”
Tuesday, May 14, 2019
Key Topics and Takeaways
- Open MEPs: Tibbetts noted that 58 percent of employees working for small employers do not have access to retirement plans, and what small employers talk about most is the burden of setting up a plan. She said that joining an open MEP “significantly” reduces their administrative burden. Tibbetts also noted that RESA includes a small employer tax credit to offset some administrative costs, as well as a credit for plans with automatic enrollment. Dudley added that open MEPs are “critical” for the evolving economy, and can be easily adapted to help gig economy workers and part-time employees.
- Reducing Plan Leakage: Dudley said that plan leakage continues to be a concern and most often happens when a person leaves a job before repaying a loan on their plan. Dudley expressed support for the provisions in RESA that limit the use of credit cards for plan loans, and noted that companies are looking for ways to educate employees about the impact of loans.
- Auto-IRAs: Ruff said it is important for it to be easy for individuals to enter an IRA, have investments protected by fiduciary standards, support portability, provide individuals the ability to opt-out, as well as educate them on their specific type of plan and what to do if they move elsewhere. Ruff added it is important to incorporate life expectancy in the discussion and to have people save early.
- Joni Tibbetts, Vice President of Product Management, Retirement & Income Solutions, The Principal Financial Group
- The Honorable Tobias Read, Treasurer, State of Oregon
- Joan Ruff, Board Chair, AARP
- Lynn D. Dudley, Senior Vice President, Global Retirement & Compensation Policy, American Benefits Council
Chairman Chuck Grassley (R-Iowa), Senate Finance Committee
In his opening statement, Grassley said that the Retirement Enhancement and Savings Act (RESA) is a package of “important reforms” to the retirement system, and passage of the bill remains a top priority. He said a centerpiece of the legislation is the expansion of open multiple-employers plans (open MEPs) and other “common sense” changes that would make it “more feasible” for businesses to offer retirement plans. Grassley said he hopes the House will send their version to the Senate soon, and that he will continue working to reconcile the differences between the two bills. Grassley added that there is still more work to be done to improve coverage in the existing system, encourage more people to save, and ensure retirees can enjoy a financially sound retirement.
Ranking Member Ron Wyden (D-Ore.), Senate Finance Committee
In his opening statement, Wyden echoed Grassley’s comments on RESA, saying that the committee can play a leading role in making it easier for small employers to offer retirement plans. Wyden said it is “absurd” to stop someone from saving because they have crossed an “arbitrary” age limit, saying that many people want to continue saving and should have the opportunity to do so, noting that RESA addresses this issue. Wyden noted that Social Security is not currently able to pay full benefits past 2035, and Congress needs to act to address this, as well as multi-employer pensions, in addition to other retirement security ideas.
Joni Tibbetts, Vice President of Product Management, Retirement & Income Solutions, The Principal Financial Group
In her testimony, Tibbetts said that Principal cares about understanding the needs of their clients and utilizes innovative solutions to better connect and engage with them, including online enrollment and other tools to drive outcomes. Tibbetts said that in many aspects, the defined contribution system has been a “great achievement,” but the system needs to keep up with changes in innovation, technology, the workforce, and consumer needs. Tibbetts said the system should offer a range of retirement solutions that are competitive in the marketplace, as well as sensitive to the challenges faced by small employers, calling RESA a “tremendous” first step. Tibbetts noted three important provisions in RESA, explaining that expanding coverage via small employer tax credits and expanding open MEPs, the inclusion of lifetime income provisions, and eliminating the auto escalation cap are critical to enhancing retirement savings.
The Honorable Tobias Read, Treasurer, State of Oregon
In his testimony, Read explained the Oregon Saves program, the first state-based auto individual retirement account (IRA) program, saying his office is focused on promoting the financial security of all Oregonians. Read said studies show people are 15 times more likely to save if they have access to a plan in the workplace, and Oregon Saves works to expand savings options to more workers at every income level. He said that most participants in the program are first time savers, and this public-private partnership is giving people the opportunity to save via a payroll deduction into their own IRA account. Read noted that employers of any size can enroll at any time, and the program is also open to the self-employed. He noted that empowering individuals to save is critical, and the program is increasing the long-term financial stability of thousands of Oregonians.
Joan Ruff, Board Chair, AARP
In her testimony, Ruff explained that diminishing pensions, inadequate retirement savings, longer life expectancies, and higher healthcare costs endanger the possibility of a secure retirement for millions of Americans who are increasingly dependent solely on Social Security. Ruff said the first goal of retirement security enhancement should be providing a workplace plan to the 51 million Americans without access to one, noting that workers are 15 times more likely to save if they can do so through their workplace. Ruff said that AARP supports a number of retirement proposals, including automatic IRAs, extending coverage to part-time workers, improving the savers’ tax credit, preserving existing fiduciary obligation protections, efforts to prevent lump sum cashouts, maintaining default paper delivery of retirement plan disclosures, and finding a fair solution for millions of workers and retirees who count on multi-employer pensions for their retirement security.
Lynn D. Dudley, Senior Vice President, Global Retirement & Compensation Policy, American Benefits Council
In her testimony, Dudley said the qualified employer-sponsored retirement system is strong and has many features that make it valuable, and without it, many people would have far less retirement security. Dudley explained, however, that improvement can be made, expressing support for RESA. Dudley pointed to two specific provisions, nondiscrimination testing reform and the expansion of open MEPs, as important steps forward. Dudley also said that S. 1431, the Retirement Security Savings Act, would further expand the retirement system, applauding Congress’s continued commitment to the issue.
Question and Answer
Sen. Steve Daines (R-Mont.) and Grassley asked how RESA, specifically open MEPs, will improve plan access for small employers. Tibbetts replied that 58 percent of employees working for small employers do not have access to retirement plans, and what small employers talk about most is the burden of setting up a plan. She said that joining an open MEP “significantly” reduces their administrative burden. Tibbetts also noted that RESA includes a small employer tax credit to offset some administrative costs, as well as a credit for plans with automatic enrollment. Dudley added that open MEPs are “critical” for the evolving economy, and can be easily adapted to help gig economy workers and part-time employees.
Sens. Rob Portman (R-Ohio) and Grassley asked why it is important to bring part-time employees into the retirement system, the potential burdens and compliance costs, and alternatives to consider to expand coverage. Dudley explained that while some plan sponsors have had administrative concerns in the past about bringing part-time employees into the system, they are now comfortable with the proposal, especially for part-time workers that have been employed consistently for a long period of time. Ruff added that there are about 27 million part-time workers that could benefit from such proposals.
State Retirement Plans
Wyden asked about areas for partnership between the federal government and state-based programs. Read said he is “very excited” to play a role of laboratory of democracy and share lessons from Oregon Saves to help make employer saving simple and straightforward. He said continuing to partner with the federal government makes it possible for states who have taken the first steps to continue to pursue the solutions that make the most sense. Read recommended reducing the minimum age for IRAs to 16 to build the habit of saving at the beginning of an individual’s career.
Sen. Mike Enzi (R-Wyo.) asked about the Oregon Saves program, particularly regarding advising clients to invest in Social Security versus their own funds, opt-out provisions and employer matching. Tibbets said there are a lot of innovative tools for saving that show individuals how much will be replaced by Social Security, spouse income, retirement income, and other sources, to help them make better decisions for retirement. She added that the wellness scores show how well an individual is doing to replace those sources of income. Read said Oregon Saves is set up as an opt-out system and that unless told “otherwise,” employers save five percent of employee investment in an IRA. He said three out of four employees stay in the program, with the average withholding rate at about 5.5 percent, and that the program includes an automatic escalation provision feature increasing contributions by one percent each year up to 10 percent. Dudley said the American Benefits Council has a state law project which has worked with Oregon and other states to address all the issues that might come up so plans can operate side by side, both federally qualified and state-run plans.
Sen. James Lankford (R-Okla.) asked Read to provide examples for areas to further encourage state innovation. Read said Oregon fit their system into the IRA program due to federal restrictions, adding that the college savings program reforms provide much experience to learn from. He said he would like to see a scenario for employer matching to be allowed in an IRA program, and that synchronization and reduction for barriers to entry across the country would be beneficial.
Sen. Sheldon Whitehouse (D-R.I.) asked how Congress should handle state programs like Oregon Saves when focusing on a federal program. Read expressed positive feedback about the program’s progress, stating that states should have the flexibility to work around a federal program.
Whitehouse further asked about the progress of the Oregon Saves program and community feedback. Read said in less than two years, the program has accumulated over 19 million dollars in savings, creating about 35,000 new accounts, and growing roughly 2.2 million dollars in savings per month. He said the small business employer has to do very little, with essentially only the responsibility to provide employee information for a census and facilitate the withholdings. Read said a lot of small employers like the program, which has led to them being able to hire and retain career employees.
Reducing Plan Leakage
Enzi asked for recommendations to reduce plan leakage. Dudley said that it continues to be a concern and most often happens when a person leaves a job before repaying a loan on their plan. Dudley expressed support for the provisions in RESA that limit the use of credit cards for plan loans, and noted that companies are looking for ways to educate employees about the impact of loans.
Other Savings Vehicles
Sen. Mark Warner (D-Va.) asked about universal savings accounts and whether they could serve as a fallback for those who have no savings. Ruff said retirement security starts early and that universal savings accounts are one option that should be explored. Dudley said all types of savings are a good thing, echoing that saving needs to start early.
Whitehouse asked Ruff to describe key features of the Automatic IRA Act. She said it is important for it to be easy for individuals to enter an IRA, have investments protected by fiduciary standards, support portability, provide individuals the ability to opt-out, as well as educate them on their specific type of plan and what to do if they move elsewhere. Ruff added it is important to incorporate life expectancy in the discussion and to have people save early.
Sen. Tom Carper (D-Del.) asked how Congress can make it easier for states to set up auto-IRA programs. Dudley explained that the uniformity of the federal law allows employers with qualified plans who operate in multiple states to do so and treat everyone equally, saying she wants systems to coexist comfortably. Read said it is important to focus on making it as easy as possible for workers and employees, as well as allowing states to innovate and do what works for their residents, noting that a Form 5500 database would allow states to more easily exempt an employer who provides a plan on their own.
Automatic Enrollment, Automatic Escalation, and Portability
Sens. Maggie Hassan (D-N.H), Brown and Lankford asked about solutions to address portability, automatic enrollment, and automatic escalation. Read said Oregon Saves has provided employees a tool to take their retirement savings from job to job, and that a national program with automatic enrollment could be successful and should be considered with the appropriate provisions for states already working on this issue. Dudley said portability is an important provision to use to educate how to track benefits, and said employees should be able to automatically roll their benefits forward to their next employer. She said this is something the private sector is working on and she also supports developing a database to track benefits. Ruff said she supports the Retirement Savings Lost and Found Act, which addresses the issue of finding lost retirement savings accounts. Tibbetts said her firm has done studies on factors that have influence on a person’s retirement income, which focuses on three areas: 1) savings rates; 2) individual investment; and 3) allocations. Tibbetts added that it is important to educate individuals to not opt-out in short-term employment.
Carper discussed auto enrollment and escalation and asked what other tools can help people save. Dudley stated that auto enrollment should be revisited every few years to “sweep people in,” especially for small employers.
Lankford asked how auto enrollment and opting out works, to which Dudley replied that the employee would be automatically enrolled with default investments but that they would be able to opt out or modify their investment percentage. She continued that if the employee opts out, they are flagged in the system and will automatically be re-enrolled later. When asked when they should be re-enrolled, Dudley explained that it should happen at least every few years, noting the administrative issues of re-enrollment. Tibbetts echoed Dudley’s recommendation of revisiting opt-outs every three years, adding that a default enrollment rate of three or six percent does not lead to a different in opt-out rates, and neither does income level.
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