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Promoting Electrotechnology Careers and Public Policy |
before the
by
on behalf of
Good Morning, Mr. Chairman and members of the Labor and Human Resources Committee Subcommittee. I am Michael Garretson from Milwaukee, Oregon. I am testifying here today as the Chairman of the Engineering Employment Benefits Committee of the Institute of Electrical and Electronics Engineers - United States of America (IEEE-USA), one of the world's largest professional societies. I hold degrees in electrical engineering from Rose-Hulman Institute of Technology and have worked as an engineer for nine years with a growing nationwide testing company.
The views expressed in my testimony are those of IEEE-USA and are not those of my employer.
On behalf of the professional society that I represent, I want to thank the Chair and the members of the Committee for holding public hearings on such critically important issues as the current availability of pensions to American workers, incentives for and obstacles to expansion of the nation=s voluntary private pension system, especially among small businesses, and the need to improve pension portability.
I also want to acknowledge IEEE-USA's appreciation (and that of the entire engineering community) for the Chairman's continuing efforts to promote pension portability. Since his service as an at-large member of the House of Representatives beginning in 1975, Senator Jeffords has been a leading Congressional proponent and frequent sponsor of legislation to improve the portability of pension benefits when workers change jobs.
The Institute of Electrical and Electronics Engineers is a transnational technical and professional society whose membership currently includes more than 320,000 electrical, electronics and computer engineers in 147 countries throughout the world. IEEE-USA promotes the technology policy and professional careers interests of the 219,000 IEEE members who live and work in the United States.
Of IEEE's employed U.S. members, nearly 70 percent work for private businesses; 10 percent work for Federal, state or local government agencies; 10 percent are deans, professors or instructors at post-secondary educational institutions or work for non-profit research centers. The remainder are self-employed professionals who provide engineering consulting services to public and private sector organizations.
Of those in the private sector, 80 percent are employed by mid-sized and large companies. Twenty percent work for small businesses, up significantly from less than 10 percent in 1989.
Although most of our members work for employers that offer tax-qualified pension plans and other retirement savings programs, long-standing concerns about problems that limit the effectiveness of the nation's voluntary private pension system and the extent to which it discriminates against mobile workers have prompted IEEE-USA to take an active part in legislative efforts to improve the system since the enactment of ERISA in 1974.
Over the years IEEE-USA has worked in concert with 17 other engineering organizations under the auspices of the American Association of Engineering Societies in support of major pension reform and retirement saving proposals. More recently, we have spearheaded efforts to organize a broad-based pension portability coalition to educate the members of participating organizations, Congress and the public about needed and proposed improvements in the portability of pension benefits for mid-career workers. Key portability features that have been identified by the Coalition include pension benefit transferability, benefit value protection and retirement asset preservation.
An explanation of each of these features is contained in the Coalitions vision, mission and goals, a copy of which is included as an attachment to our statement.
Pension problems that remain unresolved include:
limited coverage, particularly among small businesses;
eligibility and vesting standards that penalize mobile workers;
impediments to the portability of benefits, especially from defined benefit plans;
the propensity of plan participants to spend rather than save pre-retirement distributions;
the absence of minimum contribution requirements needed to ensure that retirees receive adequate benefits; and
complex rules and regulations that make it too costly for many employers - especially small employers - to establish and administer pension plans for their employees.
Because employer-sponsored pensions are such an important supplement to Social Security benefits and personal savings - especially for lower and middle income Americans - these problems must be fixed before the baby-boom generation begins to retire early in the next century. And because employer-sponsored pensions are such an important source of the savings needed for productive investment in the nation's economy, expanded coverage will also help to improve America's technological competitiveness and thus, its living standards.
Fortunately, legislation has been introduced in both houses of Congress that we think will help to expand pension coverage in the rapidly growing, small business sector and, at the same time, offer promising solutions to the vesting, portability, retirement asset preservation, minimum benefits standards and administrative complexity problems that are the subject of these hearings.
Among the most innovative of these proposals are the SAFE Plan Act, The SMART proposal in the Clinton Administration's 1998 Pension Reform Package and the Pension ProSave Act.
The purpose of the SAFE Plan Act -- as introduced last year by Representatives Nancy Johnson (R-CT), Earl Pomeroy (D-ND) and Harris Fawell (R-IL) and included in two important pension reform proposals in the Senate ( the Retirement Income and Savings Act - S. 883 and the Retirement Security for the 21st Century Act - S. 889) -- is to encourage small businesses to establish simple, secure pension plans for their employees.
SAFE incorporates some of the best features from defined contribution pension plans like the highly respected TIAA-CREF and from more traditional defined benefit plans. The result is a prototype defined benefit plan that, unlike most others, is fully portable. Here's how it works:
A qualifying employer (with up to 100 employees) can establish a plan in the form of an annuity or as a trust. All employees who received at least $5,000 in compensation from the employer during any two, consecutive preceding years and at least $5,000 in the current year are eligible to participate. The employer can contribute an amount equal to 1%, 2% or 3% of each eligible employee's compensation to the annuity or the trust. And once these contributions have been made, each employee=s benefit is fully and immediately vested.
The SAFE proposal facilitates pension portability (benefit transferability) by permitting terminating plan participants to: 1) use the assets held in a SAFE trust to purchase a SAFE annuity that will pay the promised benefit at retirement; 2) to make direct trustee to trustee transfers to a subsequent employer=s plan; or to transfer the present value of their SAFE assets into rollover IRAs.
SAFE protects the real value (purchasing power) of earned benefits by funding employer and employee contributions based on present year salaries and by providing an opportunity for an enhanced benefit if the SAFE annuity or trust earns more than 5% in any given year.
SAFE also ensures preservation of benefits for use in retirement by providing for direct transfers of SAFE assets to an annuity or to rollover IRAs should participants change or lose their jobs.
In addition, the SAFE proposal includes provisions permitting the accumulation of up to ten years of past service credits and simplified reporting and administrative requirements that should make it a particularly attractive benefit option for many small businesses.
In the Fiscal Year 1999 Budget, the Clinton Administration has proposed some small business pension reforms. In addition to a modest start-up tax credit designed to expand coverage by encouraging small businesses to establish some form of pension plan (a Simple IRA, Simple 401(k) or Simplified Employee Pension) and a new salary-reduction IRA, the President's 1998 Pension Package, also includes a new protype defined benefit plan for small employers. With a few important exceptions, the President's new Secure Money Annuity or Retirement Trust (SMART) plan closely resembles the SAFE Plan.
Like SAFE, the SMART plan will permit small businesses (with up to 100 employees) to set up a new, simplified tax-favored retirement account that combines the best features of defined benefit and defined contribution plans. Like SAFE, the Presidents Plan also offers annuity and trust investment options. SMART also allows employer contributions ranging from 1% to 3% of each employee's compensation; provides for full and immediate vesting of benefits; guarantees a fully funded minimum defined benefit with the possibility of a greater benefit if investment returns exceed 5%; facilitates portability and retirement asset preservation and simplifies plan administration and reporting requirements.
In addition, the minimum benefit under the SMART trust option would be guaranteed by the Pension Benefit Guaranty Corporation, subject to payment by plan sponsors of a reduced premium. This PBGC insurance feature should enhance the attractiveness of SMART to some employers, provided required premiums are set and kept at low single digit levels.
Unlike SAFE, the President=s proposal does not provide for past service credits. We think that this omission is likely to make SMART less attractive than SAFE to many small business owners.
As a membership organization representing an increasing number of individuals who own or work for small businesses that provide professional engineering services, IEEE-USA is very concerned about provisions in the President's Pension Package that would specifically exclude such businesses from eligibility to participate in a SMART plan. In dynamic and rapidly changing American labor markets, especially in the high technology sector, more and more professionals of all kinds are establishing small businesses or providing professional services as the employees of small businesses. To us, it makes no sense for the Administration to propose a pension coverage expansion proposal that will prevent a growing part of the small business community from participating.
In our opinion, the proper way to address concerns about adverse distributional effects, revenue losses and/or potential abuses, is to establish a cap on the compensation that is taken into account for benefits purposes -- not by excluding certain classes or groups of workers based solely on the way they are organized or the nature of the services they provide.
In this regard, the SAFE proposal limits the maximum compensation to be taken into account in determining tax-favored benefits at $160,000. The SMART plan sets a limit of $100,000.
Although very few of our members would be adversely affected by the lower compensation limit, we are concerned that a $100,000 unindexed cap may be a deterrent to participation by many small business owners, thereby unnecessarily limiting the effectiveness of SMART as an incentive for expanding pension coverage for their employees.
The purpose of the Pension ProSave Act, as introduced by Senators Bingaman, Bond, D'Amato, Jeffords and Mack in 1997, is to improve retirement security by establishing a supplementary defined contribution system that will encourage more employers to contribute to pension plans, facilitate portability, help to preserve pension savings for use in retirement and simplify complex administrative requirements.
ProSave will offer additional tax incentives to employers who make first dollar contributions of at least 1 percent of salary up to an annual maximum of $6,000 for all of their employees. Eligible employees will be able to match employer contributions on a dollar for dollar basis up to an annual additional maximum of $6,000. Such contributions can be made to an existing pension plan or to individual ProSave accounts held in a centralized portability clearinghouse.
This clearinghouse will take the form of a not-for-profit corporation in the Executive Branch that can accept contributions to and make distributions from individual ProSave accounts. The investment of account balances will be professionally administered by private sector money managers, subject to policies and standards established by a 15 member board of trustees.
All employees who are over 21 and have at least 6 months of service will be eligible to participate. Employer and employee contributions will be fully and immediately vested.
ProSave will facilitate pension portability by permitting participants to transfer their earned benefits to an IRA or to the pension portability clearinghouse when they change jobs. It will support benefit value protection by pegging the value of earned benefits to the rates of return from the family of funds in which employer and employee contributions are invested. And it will promote asset preservation by permitting participants to borrow against their own (but not their employers') contributions, subject to repayment requirements for certain limited purposes.
While IEEE-USA supports the intent of the Pension ProSave Act (to encourage more employers to establish more generous, more portable and more secure retirement savings arrangements for their employees), we question the practical need for some of its key features.
One problem facing the sponsors and supporters of ProSave is how to justify the need for an additional defined contribution option, given the growing popularity of the SIMPLE 401(k) and Simple IRA options enacted as part of the Small Business Job Protection Act in 1996.
Another concern is the rather limited range of investment options that will be available to ProSave sponsors and participants. Given the ready availability of a wide range of secure, professionally managed investment options in IRA, 401(k) and 403(b) forms, six investment options may be unnecessarily limiting.
A related question is whether a centralized clearinghouse is required to provide the income security, investment management expertise and simplified plan administration features that are intended to add to ProSave's attractiveness. With the continuing growth of individual account plan options as well as SEP-IRAs and other retirement savings and investment vehicles that require the production of individualized benefit statements and tax reports, the financial services industry has developed the infrastructure needed to perform the record-keeping and accounting functions required to make ProSave work. We are also concerned that the notion of a centralized bureaucracy subject to Federal oversight will be a red flag that opponents will use to torpedo the ProSave concept.
For additional perspectives on ProSave, I call your attention to the attached remarks prepared by Thomas C. Woodruff, the former Executive Director of President Jimmy Carter's Commission on Pension Policy, and ask that they be included in the record of these hearings.
Another portability improvement proposal that deserves the attention of the Committee on Labor and Human Resources is the Retirement Account Portability Act to be introduced in the House by Representative Earl Pomeroy (D-ND) and 13 cosponsors later this week.
This bill, which includes defined contribution portability improvement provisions from S. 883 and S. 889, is intended to remove many of the existing administrative and regulatory barriers that currently impede the transferability of earned benefits from one defined contribution plan to another when workers change jobs. This legislation will eliminate much of the red tape that discourages companies from allowing employees to roll benefits earned at prior employers over into their new employers' plans. By knocking down barriers to portability in current law, the question of whether a rollover happens will no longer be dictated by government through the tax code, but will be a matter of choice that will be left up to employers and employees.
In conclusion, IEEE-USA urges the Committee to favorably report the Secure Assets for Employees (SAFE) Plan Act (including appropriate spousal protection provisions), either as part of an amended ProSave proposal or as a free-standing bill, so that this important legislation can be moved forward expeditiously for a vote in the House and the Senate.
IEEE-USA and other organizations in the American Association of Engineering Societies and the Pension Portability Coalition will do our part to enlist additional cosponsors and build the grass roots support that will be needed to enact coverage expansion and portability improvement legislation that includes the best features of the SAFE and ProSave proposals in the 105th Congress.
Thank you for your attention. I'll be pleased to answer any questions that you may have.
Attachments
Pension Portability Coalition Vision, Mission and Goals
Additional remarks of Thomas C. Woodruff
The Institute of Electrical and Electronics Engineers - United States of America
1828 L Street, N.W., Suite 1202, Washington, DC 20036-5104
Office: (202) 785-0017 * Fax: (202) 785-0835 * E-mail: ieeeusa@ieee.org * Web: http://www.ieeeusa.org
Pension Portability Coalition - Vision, Mission and Goals
February 1998
The Pension Portability Coalition envisions that by the Year 2000, portability will be a reality. Pension portability means:
Pension Benefit Transferability
The ability to transfer pension assets or service credits from one plan to another
Benefit Value Protection
To minimize the impact of inflation on the purchasing power of pension benefits
Retirement Asset Preservation
To encourage individuals to save rather than spend pre-retirement pension distributions
In order to increase the productivity and retirement income security of American workers, the mission of the Pension Portability Coalition is to Support Enactment of Pension Portability Improvement Legislation.
To educate the members of participating organizations about needed and proposed improvements in pension portability,
To identify and evaluate pension portability improvement options, including legislative and non-legislative alternatives, and
To inform concerned organizations, through Congressional, industry and public relations, of its evaluations in order to influence and provide a focus for improvements in pension portability .
before the
Woodruff Consulting, LLC
119 Old Saugatuck Road
Norwalk, CT 06855
(203) 838-8181
My name is Thomas Woodruff. For the past twenty-four years, I have worked in the private sector, the federal government, and academia writing, teaching, and consulting on personal finance and retirement planning issues. From 1978 to 1981, I was the Executive Director of the President's Commission on Pension Policy. That Commission found serious gaps in pension plan participation in the U.S. workforce, particularly those working for small businesses, and called for sweeping changes in our public policy toward our public and private pension systems. After working as a Visiting Professor at Cornell University, I directed a foundation-sponsored blue-ribbon panel called the Commission on College Retirement. The Commission on College Retirement's work lead to an overhaul of TIAA-CREF, the nation's largest network of portable pension plans. In my current capacity as a small business owner, I write extensively about personal finance and retirement planning issues, and provide consulting services to financial services companies and membership organizations such as the Institute of Electrical and Electronic Engineers—United States of America (IEEE-USA).
I would like to say that I concur with the testimony delivered today by the IEEE-USA. I would like to expand on a few points made in that testimony.
First, I will comment on the central clearinghouse for ProSave plans and then I will discuss incorporating SAFE Plans into the ProSave legislation.
At first glance, the idea of creating a central place where employers, particularly small employers, can send pension contributions for investment on behalf of their employees seems compelling. Under such an arrangement, employers would not have to worry about plan administration or about the investment of the funds.
In 1981, the President's Commission on Pension Policy had a similar idea when it proposed that a Minimum Universal Pension System (MUPS). Here is an excerpt from the Commission's final report to Congress and the President, issued in February, 1981:
"Employers should be encouraged to maintain the accumulated funds in pension trusts or in arrangements with insurance companies and other financial institutions. However, those employers who do not wish to administer an employee pension plan could send their contributions to the portability clearinghouse within the Social Security Administration. These funds would be transferred to a central MUPS portability fund which would be established to invest the funds in the economy. The fund should be administered by an independent Board of Trustees appointed by the President." (Coming of Age: Toward a National Retirement Income Policy, President's Commission of Pension Policy, February 26, 1981)
A lot has changed since 1981. The use of IRAs, 401(k) plans, SEP-IRAs, and 403(b) retirement savings plans has exploded. Individuals, employers, and financial service companies are now accustomed to account statements, investment choices, record-keeping, and reporting essential to keeping these plans going. Technological innovation has also made a huge difference. In 1981, the IBM personal computer had not yet hit the market. Today, we can access our accounts to reallocate funds or verify account balances by dialing into toll-free 800 numbers and by logging onto the Internet via our home computers.
In addition, today, individuals have access to professional fund managers at mutual fund and other financial services companies directly as well as through employer-sponsored plans. While I believe that a clear role exists for rule-setting, oversight, investor education, and enforcement of securities laws at the federal level, the idea of limiting investment choice to a few funds selected by a central body seems unnecessary and unwise. Individuals and employers do not need a central organization to assist them in gaining access to professional fund managers.
I do believe that there is a clear need for a federal body, however, to monitor federal retirement income policy as we approach the retirement of the baby boom generation. Our pension and retirement-related laws remain a patchwork quilt of rules and regulations that sometimes have unintended consequences. One model for such a federal body is the Social Security Advisory Council. The Social Security system has been served well by the Social Security Advisory Council, a group that renews is membership and issues new reports on broad policy issues every four years or so . Each new Council brings with it new people and new ideas and draws on resources from various federal agencies without creating a large, permanent, bureaucracy.
For ProSave, creating a Retirement Income Policy Board, modeled on the Social Security Advisory Council's structure, with an ongoing mission to periodically issue reports to Congress and the President on retirement income security issues would be a significant contribution.
In its final report to Congress and the President in 1981, the President's Commission on Pension Policy concluded: " The most serious problem facing our retirement system today is the lack of pension coverage among private sector workers." The Commission also said that the "lack of pension plan offerings in small businesses is a major reason why pension plan growth is expected to continue to stagnate."
Among other reasons, the Commission cited the administrative expenses of actuarial, accounting, insurance and investment services necessary to operate small plans, particularly defined benefit pension plans, as a problem that needed to be solved. In addition, the Commission found that eligibility and vesting requirements in traditional defined benefit plans are just not well suited for small businesses due to employee turnover as well as the uncertain life expectancy of many of these enterprises.
Unfortunately, in the seventeen years since the President's Commission on Pension Policy issued its report, the low level of pension plan participation among employees of small businesses has remained virtually stagnant.
The SAFE Plan Act goes a long way toward addressing the administrative and plan design problems faced by small business pension plans. While I would not expect that passage of the SAFE Plan Act either as part of ProSave or as a stand-alone bill would lead to pension plan coverage among small businesses to approach the levels found in large businesses today, enactment of the SAFE Plan Act would help remove a few unnecessary barriers to pension plan formation and maintenance.
Among the most important problems that we face in designing pension plans is how to retain the purchasing power of pension benefits as they are earned during the working years and when they are received during retirement.
In its Trust form, the SAFE Plan Act does provide that employees would benefit from earnings in the Trust above the assumed interest rate used for funding the Trust. This would provide the opportunity for them to begin retirement with either an annuity or an income stream with purchasing power sufficient to maintain their standard of living. However, no provision is made for similar participation in earnings or dividends with the SAFE Annuity form. In addition, the Act seems to presume that the annuities that would be purchased by the plan or by individuals at retirement would be fixed annuities.
One of the lessons that I learned when I was President of the Commission on College Retirement was the importance of the "participating" and "variable" forms of annuities. The TIAA-CREF pension plans have historically been funded with participating and variable annuities both as accumulating and payout annuities.
TIAA is essentially a large portfolio of fixed-income investments that promises to its participant/investors a guarantee of principal plus a minimum rate of return. Any earnings above the minimum guarantee are paid to participant/investors as dividends. This is true both while the participants are working and when they choose to annuitize the accumulated funds.
CREF was established in 1952 as a variable annuity with a diversified portfolio of stocks as its underlying investment. Since 1989, CREF has diversified to include a money market fund, and a variety of stock and bond portfolios. Unlike TIAA, CREF does not guarantee a minimum rate of return. During the accumulation period, however, participants do receive the full benefit of the earnings in the underlying assets, much like participants in 401(k) plans. At retirement, participants also have the option of converting their CREF accumulations into a variable payout annuity. Initial payments begin using a 4% assumed interest rate and adjustments are made periodically, up or down, based on whether the investment returns reach or exceed the 4% target.
TIAA and CREF annuities have served higher education and the non-profit community very well. The TIAA-CREF approach toward participating and variable annuities provides one example of how these annuity forms can help preserve the purchasing power of retirement benefits for workers.
If the SAFE Plan Act's provisions are included in ProSave, a modification of its provisions to include participating and variable annuities both in the SAFE Annuity form for active employees and for deferred and payout annuities for terminated employees and retirees would greatly enhance the benefits that could be paid by these plans without increasing their cost to employers.
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Last Update: March 17, 1998
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