<nobr>Oct 27, 2008</nobr>

House Education and Labor Committee Holds Field Hearing on Retirement Security

Chairman George Miller (D-CA) and Representative Lynn Woolsey (D-CA) on October 22 held in San Francisco a field hearing of the House Education and Labor Committee to examine issues that the current economic environment raises about the retirement assets of American workers. The hearing was the second in a series of hearings the House is conducting to investigate the causes of the financial crisis, and what additional steps are needed.

Although Chairman Miller and Rep. Woolsey were the only Members who attended the hearing, which included two current retirees, two academics, and two investment advisors as witnesses, Miller has indicated his intention to not only continue hearings but to introduce legislation early in the next Congress to reform pension legislation, possibly opening up issues raised by the Pension Protection Act with which Democrats were unhappy with when the PPA was passed.

In his opening statement, Miller pointed to testimony by Congressional Budget Office Director Peter Orszag who recently said that American workers have lost more than $2 trillion in retirement savings over the last fifteen months.

Miller said that what was also troubling is that his Committee obtained preliminary estimates showing that the Pension Benefits Guaranty Corporation lost at least $3 billion in equities in the last fiscal year. Miller said the estimates "raise serious questions about a controversial new investment policy that the agency recently approved that shifts assets from fixed-income securities into more risky securities like real estate."

Miller reportedly said after the hearing that the testimony "is compelling that we need major repair of the 401(k) system to provide for greater security and information and transparency for the savers, both for employers and employees."

Retiree Testimony

Both retirees testified about their retirement savings and investments. Roberta Quan, 74, testified about her husband's need for long-term care following his diagnosis with Alzheimer's Disease on their retirement. Ms. Quan is a retired schoolteacher who is currently making required minimum distributions from her 403(b) plan in addition to her pension. Steve Carroll, a 69 year-old retired freelance writer, testified that his partner is taking required minimum distributions and that those distributions are, in effect, locking in the losses in his 401(k) plan. Mr. Carroll expressed concern that he would be required to make similar withdrawals soon forcing them to realize losses.

Academic Testimony

Dr. Jacob Hacker, from the University of California at Berkeley and fellow at the New America Foundation, testified about the changes in the retirement system that have put employees and retirees at greater risk. He recommended that 401(k) plans be significantly revamped to make them more effective vehicles for retirement savings. He supported current initiatives such as automatic enrollment but proposed a progressive government match for employee contributions (so that a higher portion of lower-income employee contributions are matched by the government than are matched for higher-income employees). Dr. Hacker also proposed mandatory annuitization of 401(k) balances at retirement and suggested that a government agency could provide and pay the annuities.

Dr. Shlomo Benartzi, from the Anderson School of Management at the University of California at Los Angeles, testified that while 401(k) participants time the market, they unfortunately tend to buy high and sell low. He said that this was partly due to efforts to chase returns and a myopic focus on short-term losses. Dr. Benartzi contended that most plan statements do not focus on the long-term impact of short-term losses, but instead highlight the short term performance of the investments. This results in employees focusing on the 20 percent decline in their current account balance instead of the likely much smaller decline in projected retirement income. Dr. Benartzi proposed that 401(k) statements provide a projected retirement income based on the current savings rate, account balance, and projected returns.

Investment Advisor Testimony

Tif Joyce, president of Joyce Financial Management, testified that employees need to plan better for the different kinds of risk they will face before and during retirement. He said that too many employees plan their retirement on a best case scenario and do not account for potential risks such as short or long-term disability, serious illness, and longer and shorter lifespans. According to Mr. Joyce, employees can plan and manage these risks. Mr. Joyce strongly disagreed with Dr. Hacker's annuitization proposal as counterproductive.

Mark Davis, a Partner in an investment firm that provides investment services to qualified retirement plans, testified that there was a need for greater financial education from kindergarten through twelfth grade. Mr. Davis also testified on the need for greater fee transparency and praised Chairman Miller's efforts on the issue. He said that the importance of fee disclosure is heightened in periods of market turmoil like the current environment. Mr. Davis also noted that required minimum distributions create a greater risk for participants outliving their assets. Like Mr. Joyce, Mr. Davis contended that retirees should not annuitize all of their retirement assets because they lose a large degree of control over them by doing so. He cited termination fees and default risk of insurance companies as reasons why retirees should only annuitize some of their assets.

Looking Ahead

ERIC expects the Committee to look at many of these issues early in the coming year, and it is likely that Miller will propose major reforms in the upcoming Congress. ERIC's Retirement Security Committee meeting on November 20th will address these and other issues as we prepare our legislative agenda for the incoming Congress.

Contact Mike Chittenden, mchittenden@eric.org, or Kathryn Ricard, kricard@eric.org, if you have any questions or comments regarding the hearing.

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Witness Testimony

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