[Senate Hearing 111-762]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 111-762

        THE RETIREMENT CHALLENGE: MAKING SAVINGS LAST A LIFETIME

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                             WASHINGTON, DC

                               ----------                              

                             JUNE 16, 2010

                               ----------                              

                           Serial No. 111-19





         Printed for the use of the Special Committee on Aging










                                                        S. Hrg. 111-762

        THE RETIREMENT CHALLENGE: MAKING SAVINGS LAST A LIFETIME

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JUNE 16, 2010

                               __________

                           Serial No. 111-19

         Printed for the use of the Special Committee on Aging






  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html





                                  ______

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  61-707 PDF               WASHINGTON : 2010
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                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    BOB CORKER, Tennessee
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
BILL NELSON, Florida                 GEORGE LeMIEUX, FLORIDA
ROBERT P. CASEY, Jr., Pennsylvania   ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri           SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado                 SAXBY CHAMBLISS, Georgia
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
                 Debra Whitman, Majority Staff Director
             Michael Bassett, Ranking Member Staff Director

                                  (ii)










                            C O N T E N T S

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                                                                   Page
Opening Statement of Senator Herb Kohl...........................     1
Opening Statement of Senator Susan Collins.......................     2

                                Panel I

Statement of Honorable Phyllis C. Borzi, Assistant Secretary of 
  Labor, Employee Benefits Security Administration, U.S. 
  Department of Labor............................................     4
Statement of J. Mark Iwry, Senior Advisor to the Secretary of the 
  Treasury and Deputy Assistant Secretary (Tax Policy) for 
  Retirement and Health Policy, U.S. Treasury Department.........    17

                                Panel II

Statement of Ted Beck, President and Chief Executive Officer, 
  National Endowment for Financial Education.....................    31
Statement of Kelli Hueler, Founder and Chief Executive Officer, 
  Hueler Companies...............................................    43
Statement of William J. Mullaney, President, U.S. Business, 
  Metlife, Representing the American Council of Life Insurers....    60
Statement of Lisa Mensah, Executive Director, Aspen Institute 
  Initiative on Financial Security...............................    91

                                APPENDIX

Mr. Iwry's Responses to Senator Kohl's Questions.................   105
Statement from the American Academy of Actuaries.................   107
Statement from Certified Financial Planner Board of Standards, 
  Inc............................................................   130
Testimony of Amy Matsui, National Women's Law Center.............   145
Testimony of Leonard M. Glynn, Managing Director, Policy Putnam 
  Investments....................................................   155
Statement from World at Work.....................................   163
Testimony submitted by AARP......................................   165
Statement by Thomas Bartell, Americans For Secure Retirement.....   181
Testimony submitted by Brian K. Atchinson, President and CEO 
  Insurance MarketPlace Standards Association....................   185
Testimony of Catherine J. Weatherford, CEO and President, Insured 
  Retirement Institute...........................................   187
Statement of the Investment Company Institute....................   194
Statement from Retirement Solutions, LLC.........................   223
Statement from the American Benefits Council.....................   229
Testimony of Jessica R. Flores, Managing Partner Fiduciary 
  Compliance Center, LLC.........................................   239
Written Testimony Provided by: American Agriculture Movement, 
  Federation of Southern Cooperatives, National Latino Farmers 
  and Ranchers Trade Association, National Association of Farmer 
  Elected Committees and Women Involved in Farm Economics........   242
Statement from The American Council of Life Insurers,............   245
Written Testimony from Retirement Income Industry Association....   274

                                 (iii)



 
        THE RETIREMENT CHALLENGE: MAKING SAVINGS LAST A LIFETIME

                              ----------                              --



                        WEDNESDAY, JUNE 16, 2010

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:06 p.m., in 
room SD-562, Dirksen Senate Office Building, Hon. Herb Kohl 
(chairman of the committee) presiding.
    Present: Senators Kohl [presiding], Franken, and Collins.

        OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

    The Chairman. Good afternoon to one and all, and we thank 
you very much for being here. Our hearing today is the start of 
a legislative debate about how we can help Americans make their 
retirement savings last a lifetime. So far the focus of most of 
our education efforts have been on encouraging people to save, 
but we've done very little to help the average retiree make the 
difficult choices about how to make their savings last.
    Our goal is to find ways to ensure retirees have access to 
lifetime income options that provide adequate consumer 
protections at a reasonable cost. It goes without saying that 
the most important source of retirement income is Social 
Security. This committee has long been an ardent supporter of 
the program and we recently released a report on the various 
ways it can be fortified for coming generations. With modest 
tweaks, we will be able to improve solvency and strengthen 
benefits for those who rely on Social Security the most.
    The pension landscape has changed considerably over the 
past several decades, with defined contribution savings plans 
replacing defined benefit plans, which provided individuals 
with a payment throughout their retirement. While individuals 
have more control of their finances under this new system, they 
do face complicated investment choices. Now when individuals 
retire they have a plot of savings--I'm sorry--a pot of savings 
and must choose how to use it over time.
    With Americans living longer, the stakes are high for not 
adequately managing one's savings. Unfortunately, the vast 
majority of people have to make these difficult decisions on 
their own, as fewer employers provide their retirees with 
lifetime income options. According to Hewitt Associates, only 
14 percent of defined contribution plans offer annuities and 
only 1 percent of the covered participants invest in them.
    We need to provide employers with more guidance, more 
tools, and more protection to encourage them to offer a range 
of options to their employees. We also need to better educate 
workers to understand their choices. Senators Bingaman, 
Isakson, and myself recently introduced the Lifetime Income 
Disclosure Act, which would require 401(k) statements to show 
account holders how much their balance would pay out if they 
were annuitized.
    However, while annuities may be the right fit for some, 
they can also be highly complex and in the retail market they 
have often been associated with aggressive sales tactics. I'm 
pleased to have worked with the National Association of 
Insurance Commissions on improving the suitability standards 
and the use of professional titles in selling annuities. As 
with other retirement instruments, we are dedicated to ensuring 
that all fees associated with annuities are disclosed and that 
they are competitively priced and also that consumers are fully 
educated about the risks and the opportunities of these 
products.
    I'm also encouraged by the recent innovations in the 
financial services industry to develop new products that will 
help retirees manage their savings. This is a rapidly 
developing area and we want to encourage employers to consider 
offering such products to meet their workers' needs. However, 
we must also ensure that these products have adequate 
regulation that provides consumer protections and fosters a 
competitive, low fee market.
    With all the talk today about encouraging options, I want 
to be clear that no one should be forced to purchase a lifetime 
income product. I will not support any kind of mandate for 
consumers because we recognize there is a wide range of 
circumstances and need. When it comes to retirement, there is 
no one size fits all. Instead, our aim with this hearing and 
through legislation is to create an environment where 
participants have the option of investing in a stable product 
that best fits their needs at a fair price.
    So we're pleased that you're all here today and I'd like 
now to turn to Senator Susan Collins, who would like to make a 
statement.

           OPENING STATEMENT OF SENATOR SUSAN COLLINS

    Senator Collins. Thank you, Mr. Chairman.
    Let me begin by thanking you for scheduling this hearing 
today on the all-important subject of retirement savings. When 
we think about the coming demographic shock of millions of baby 
boomers reaching retirement age, usually we who are involved in 
public policy focus on the economic challenges facing Social 
Security, which, as the chairman pointed out, remains the most 
critical component of retirement income for many Americans.
    We do not spend nearly the amount of time that we should in 
considering how changes in the way that Americans build their 
retirement nest eggs and how they spend those assets after they 
stop working affect their ability to remain financially secure 
throughout their retirement years. For that reason, I commend 
the chairman for focusing on that issue today.
    All of us are familiar with the dramatic shift that has 
occurred in recent years away from defined benefit plans toward 
defined contribution plans. Three decades ago, nearly two-
thirds of those Americans who participated in a pension plan 
received defined benefit. Now, however, nearly two-thirds 
participate only in a defined contribution plan. It's 
completely reversed.
    Those defined contribution plans have many positive 
features, but they can make retirement planning especially 
challenging in times of stock market volatility. The decline in 
the market in 2008, for example, reduced total assets held by 
defined contribution plans by $1.1 trillion, nearly 28 percent, 
and all of us know seniors who were planning to retire and 
could not because of the drop in the value of their defined 
contribution plan.
    While much of that loss fortunately has since been 
recovered, the recent economic crisis underscores how important 
it is that Americans approaching retirement or in retirement 
diversify their assets and engage in financial planning that is 
appropriate to their long-term needs.
    This issue is tremendously important. Without better 
planning, millions of American workers will be facing 
retirement years that are anything but golden. This is 
particularly true given the demographics of the next few 
decades, when the tidal wave of retiring baby boomers will be 
imposing unprecedented burdens and challenges for both the 
Social Security System and for private pensions.
    So again, Mr. Chairman, thank you for calling this 
important hearing.
    The Chairman. Thank you very much, Senator Collins.
    At this time we'll turn to the first panel. Our first 
witness on the first panel today is Phyllis Borzi, the 
Assistant Secretary of the Employee Benefits Security 
Administration at the Department of Labor, where she oversees 
the administration, regulation, and enforcement of Title 1 of 
ERISA. Previously Ms. Borzi was a research professor at George 
Washington University Medical Center and served as pension and 
employee benefit counsel for the House Committee on Education 
and Labor.
    Then we'll be hearing from Mark Iwry, a Senior Advisor to 
the Secretary of the Treasury and the Deputy Assistant 
Secretary for Retirement and Health Policy. Previously Mr. Iwry 
was a senior fellow at the Brookings, and he also served as the 
benefit tax counsel at the U.S. Treasury Department, where he 
was responsible for tax and regulations relating to tax-
qualified pensions and 401 plans.
    We welcome you both and we will take your testimony now, 
starting with you, Ms. Borzi.

  STATEMENT OF HON. PHYLLIS C. BORZI, ASSISTANT SECRETARY OF 
    LABOR, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, U.S. 
                      DEPARTMENT OF LABOR

    Ms. Borzi. Thank you, Chairman Kohl. Good afternoon, 
Senator Collins, Senator Franken. Thank you so much for 
inviting me to discuss the Department of Labor's activity 
regarding lifetime income options for participants and 
beneficiaries in retirement plans.
    I'm Phyllis Borzi, the Assistant Secretary of Labor for the 
Employee Benefits Security Administration. I'm proud to 
represent the Department, EBSA, and its employees. We work 
diligently to protect the security of retirement and other 
employee benefits for America's workers, retirees, and their 
families.
    The administration shares the committee's interest in 
examining policies to help America's workers manage their 
retirement savings to last a lifetime. Workers both need and 
deserve an opportunity for a dignified and secure retirement. 
As you know, today the risks for retirement security have 
largely shifted onto the shoulders of American workers. Workers 
are living longer, baby boomers are beginning to retire in 
larger numbers. We need to explore what we can do to ensure 
that workers have the information and the tools they need to 
both accumulate adequate retirement savings and make those 
savings last a lifetime.
    To that end, the Departments of Labor and the Treasury 
published a request for information in order to start a dialog 
around the challenges and issues facing today's workers at 
retirement. The RFI asks a number of questions that are 
generally organized into categories under which we may decide 
to provide additional guidance in the future. The responses to 
the RFI will inform our analyses of a wide variety of issues 
relating to the offering and selection of lifetime income 
products.
    We're committed to exploring what can be done through 
interpretation, regulation, and legislation to address these 
issues.
    For the remainder of my testimony, I just would like to 
discuss a number of important considerations that have been 
raised in the comments and the next steps we're considering. 
I'm extremely pleased that the RFI has generated so many 
thoughtful responses with so many different perspectives. We've 
received nearly 800 public comment letters. As a general 
overview of the types of commenters, we received more than 600 
letters from ordinary citizens and approximately 10 more 
comment letters from organizations such as labor organizations, 
consumer groups, representing workers, retirees, and plan 
participants. Approximately 40 of our comment letters are from 
representatives of the financial services industry, including 
insurance companies, investment companies, and banks. About 30 
letters are from plan service providers, including third party 
administrators, recordkeepers, actuaries, consultants, lawyers. 
About ten more are from representatives of employers, plan 
sponsors, plan administrators. Of course, approximately ten 
comment letters are from government officials and members of 
academia.
    We're still in the process of reviewing these letters and, 
even though we haven't finished analyzing all of them, I can 
certainly make a few observations about their contents today. 
We have received a number of comment letters from individuals 
who are very concerned that this RFI is the first step in a 
government plan to take over workers' 401(k) plans or to 
mandate that they invest their retirement savings in 
government-sponsored retirement products or treasury bonds.
    Of course nothing could be farther from the truth. We do 
not support a government takeover of private retirement plans. 
I've repeatedly and publicly said that the RFI is merely 
intended to start a national dialog about the question of 
whether a lifetime income stream is a good thing and, if it is, 
whether and how the Department can facilitate access to and use 
of lifetime income streams.
    Now that we've begun analyzing the comment letters, I'm 
even more convinced that this is an important discussion worth 
having. Even though it's still early in our review process, 
many of the commenters believe that the government can and 
should do more in this area. On the other hand, others disagree 
that there is a problem at all.
    Perhaps the biggest area of disagreement among the 
commenters centers on whether employers should be required to 
provide workers with an option of a lifetime income 
distribution. Far less disagreement occurs, of course, on 
whether or not there ought to be additional educational 
incentives. Many commenters believe that the interest of 
participants as a whole will be best served by educating 
employers and workers on the benefits and features of lifetime 
income, so they'll better be able to make choices on their own.
    Many commenters discuss the type of information that would 
be useful to workers, and in particular of course I want to 
thank you, Chairman Kohl, for your response to the RFI. You put 
a spotlight on these disclosure issues by joining, as you 
mentioned, Senator Bingaman and Senator Isakson in introducing 
the Lifetime Income Disclosure Act. We believe that providing 
account-specific information on lifetime income may be very 
useful to workers as they make critical decisions concerning 
their retirement accounts.
    We're reviewing the RFI comments to better inform us 
regarding the feasibility of providing participants with this 
type of information.
    So the number and scope of the comments reinforces our 
prior sense that providing lifetime income raises a lot of 
different issues and tradeoffs. I'm pleased to announce that 
we've decided to build on this dialog started with the RFI by 
holding a public hearing in the near future to focus on some of 
these critical financial technical issues that have been raised 
in the comments.
    We're finalizing the details of the hearing and a formal 
announcement will appear soon in the Federal Register.
    So thank you again for the opportunity to testify before 
you today. The Department is committed to ensuring that workers 
have the information and tools they need to enjoy a dignified 
and secure retirement, and we're happy to work with all of you 
on the committee and Chairman Kohl, and I look forward to 
taking your questions.
    Thank you.
    [The prepared statement of Ms. Borzi follows:]




    The Chairman. Thank you very much, Ms. Borzi.
    Now we'll hear from Mr. Iwry.

 STATEMENT OF J. MARK IWRY, SENIOR ADVISOR TO THE SECRETARY OF 
 THE TREASURY AND DEPUTY ASSISTANT SECRETARY [TAX POLICY] FOR 
     RETIREMENT AND HEALTH POLICY, U.S. TREASURY DEPARTMENT

    Mr. Iwry. Mr. Chairman, Senator Collins, Senator Franken. 
Thank you very much for holding this hearing and for the 
opportunity to appear before you today.
    We know that most Americans enjoy a fundamental level of 
protection against the risk of outliving their assets, 
longevity risk, in the form of Social Security. That continues 
to provide, thankfully, a basic foundation of guaranteed, 
predictable lifetime income.
    In addition, the private pension system plays a critical 
role in enhancing retirement security. But with the continuing 
shift from pensions, classically thought of as employer-funded 
programs, such as defined benefit plans, that provide 
predictable income for life at retirement, to account-based 
retirement savings arrangements that depend mostly on employee 
salary reduction contributions made at the initiative of the 
employee, and that typically make single-sum cash payments at 
each change in employment, we've seen a shift as financial 
prospects for retirement security in this country increasingly 
turn on how much people save and how they manage their savings.
    We know it's not easy for people to manage their savings. 
For one thing, predicting how long we're going to live is 
different, if not impossible. The result is that for many 
people there's anxiety about how to manage the assets they've 
got so that they don't run out of assets during their lifetime. 
Some people are anxious to the point where they fall into the 
opposite error of hoarding the assets to a much greater extent 
than they needed to and not enjoying the kind of lifestyle that 
they could have afforded if they had had some methodical way of 
ensuring themselves that their assets would last for life.
    This initiative that Assistant Secretary Borzi and I have 
been launching, and we very much applaud your leadership on 
these issues, not only submitting the comment, holding this 
hearing, and on an ongoing basis over the past several years on 
these retirement security issues--this project is not intended 
to require or mandate any particular type of payment, annuity 
or otherwise. It's not intended to promote or favor any 
particular industry or any particular type of product. But it 
is intended to help Americans with the difficult challenge of 
managing their savings during retirement, and to do so in a 
context where people have increasingly expressed the concern 
that they do not have enough advice, do not have enough 
realistic options to provide the appropriate mix of income 
security and flexible assets.
    We don't purport to know what's best for people and we're 
not suggesting that more lifetime income or annuitization on 
top of what Social Security provides is necessarily the answer 
for everyone. As you said, Mr. Chairman, it's not a one size 
fits all situation. But we do think that we need to do more to 
help the system provide options to people, provide choices that 
are more realistic, more attractive, and that people better 
understand, choices that are reasonably priced, that are 
transparent in their features, that are not confusingly 
complex, that are, in other words, user-friendly and responsive 
to the needs of retirees.
    We applaud the creativity of the private sector in coming 
up with new products and innovations that look like they would 
be responsive to a lot of these needs and that take advantage 
of the plan sponsor's ability to help individuals through their 
fiduciary exercise of expertise, by negotiating with providers 
of lifetime income or other financial products on a group basis 
that can reduce costs and that can give more bargaining power 
to the individual.
    It's premature for us to say exactly what we're going to 
do. We are reading the comments with great care and interest. 
They're very thoughtful. We appreciate all the work that people 
have put into them and we're very much looking forward to the 
dialog with you today and an ongoing dialog with the 
stakeholders.
    [The prepared statement of Mr. Iwry follows:]



    
    The Chairman. Thank you very much, Mr. Iwry.
    First question for you both. We found with our 
investigation of target date funds the importance of making 
sure that retirement products are clearly defined. How can we 
make sure that consumers understand how lifetime income options 
work and what their costs and benefits are? Ms. Borzi, you want 
to comment?
    Ms. Borzi. Well, I couldn't agree with you more that that's 
really the crux of the issue. The comments we've gotten from 
the industry say to us basically if people understood the 
benefits of these kinds of approaches, more people would choose 
them, because the difficulty is even when they're offered 
participants don't choose them.
    These are extremely complicated products. We absolutely 
need more transparency. We need more explanation. We need more 
understanding. We need to understand what the risks are, what 
the rewards are. I think this whole question of disclosure is 
critically important.
    We've gotten lots of interesting suggestions on how to deal 
with it, and this is certainly one of the themes that we're 
going to be focusing on going forward. Your bill, of course, is 
certainly something that we've been looking forward--we've been 
looking forward to working with you on that because it's one of 
the issues that we've been thinking about in the context of our 
own benefit statement regulations.
    The Chairman. Thank you.
    Mr. Iwry?
    Mr. Iwry. Mr. Chairman, I agree with what Ms. Borzi said, 
Mr. Chairman. I think that there are real education needs and 
challenges here. I think Ted Beck from NEFE's going to be 
testifying on the next panel. They've done a great job of 
trying to promote better understanding and education in this 
area.
    I think we all need to do more in that regard. There are 
basic facts that folks don't really understand, to the point 
where, picking up on what Ms. Borzi just said, the economic 
literature is full of expressions of bafflement at what they 
call the annuity puzzle. Why is it that folks don't pool some 
of their assets in order to protect themselves against 
longevity risk by purchasing annuity type products that will 
let people put in enough money to last for the average life 
expectancy, so that people who live longer than the average 
will not have to be uncertain about whether there will be 
enough left, folks who die earlier, their funds will in effect 
subsidize people who die later than the average.
    People don't understand, for example, the fundamental 
asymmetry in up and down investment returns between the 
accumulation phase and the spenddown phase. In other words, 
we're used to thinking that if you stay invested for the long 
term, you buy and hold, many people say, up markets and down 
markets will eventually work out, the down markets will be 
succeeded by better times, and it will all be fine.
    Well, in retirement that can also be true, but what people 
don't take into account is that when you're spending down on a 
regular basis, when you're withdrawing, a few bear market years 
early on cannot be recovered from as readily by some bull 
market years later as they can when you're in the accumulation 
phase.
    It's not quite a symmetrical process. That's why the 
financial planners and the literature tell people, don't 
withdraw more than X percent from your retirement savings on a 
regular basis. In other words, if you were not to adjust and 
you were just to ask how much can I safely withdraw without 
much of a risk of running out, the literature suggests some 
people say 4 percent, 4.5, 5 percent, depending on how high a 
probability you want of not running out of assets.
    Many people aren't even aware of that. They may think, 
well, gee, I've got a couple hundred thousand dollars in my 
401(k), I'm retiring, I'm set for life. That should last me 35 
years. They don't think about how to convert that large-
sounding account balance into a pension paycheck, a stream of 
regular income that will last them for life.
    If they're confronted with the proposition, do you want to 
use some of that account balance to buy an annuity or to buy a 
lifetime income of some kind, they'll often say: You mean 
you're only going to offer me this piddling number of dollars 
per month for this huge treasure I've got in my account 
balance? It's a wealth illusion. We're not used to thinking in 
income terms when we're starting with a large lump sum.
    So we've got a lot of education to do, and the disclosure 
the framing of the benefits, as your bill would promote, in an 
income format, in the form of a pension paycheck or a 
retirement paycheck on a monthly basis is one step in getting 
people to start thinking in those terms.
    The Chairman. Thank you.
    Senator Al Franken.
    Senator Franken. Thank you, Mr. Chairman, for this very, 
very important hearing. We've all had parents who faced this 
very challenge. My mom got an annuity and I think it was a good 
thing. But very few people do get annuities, isn't that right?
    Mr. Iwry. Comparatively few.
    Senator Franken. What are the percentages of people who get 
annuities in their retirement?
    Mr. Iwry. Well, to give you an example from the 401(k) 
world, which of course is still the part of the retirement 
universe that's growing fastest, the percentage of people who 
take annuities I believe is down around 1 to 2 percent of all 
the payouts.
    Now, defined benefit plans, a much higher percentage. But 
unfortunately those are dwindling.
    Senator Franken. So what are the barriers? I imagine it's 
complexity, that people are looking at these things and they're 
complex.
    Ms. Borzi. Cost.
    Senator Franken. I think that people--do people by and 
large underestimate how long they're going to live?
    Ms. Borzi. They do. As Mark said, the fact is that they 
have no concept of how much they will need, even in a normal 
retirement, even if they don't outlive the actuarial 
predictions. They don't really understand how much they'll need 
to live.
    Senator Franken. That's an answer to a slightly different 
question. I just want to know whether people actually on 
average underestimate how long they're going to live.
    Mr. Iwry. Senator, I think that there is--yes. I think 
there's evidence in the behavioral economics literature and in 
the related literature about aging, that people do tend to 
underestimate how long they're going to live. Plus people tend 
to look at life expectancy statistics, if they're informed 
enough to know what the life expectancy is at any given age, 
and not think so much about the 50 percent chance that they'll 
exceed that life expectancy.
    Senator Franken. Also sometimes they're looking at life 
expectancy of the general population and not someone who's 
already reached their age, and not----
    Ms. Borzi. Exactly.
    Mr. Iwry. Exactly. But if they're looking at a table where 
they're 65 and they're saying, what's the life expectancy of a 
65 year old, a lot of people seem to be eager to not look at 
how much they need to have to deal with the contingency that 
they'll live way past their life expectancy.
    Senator Franken. I'm sorry, Ms. Borzi. What you were saying 
is that exacerbating that is the fact that people have kind of 
no idea how much money they're going to need per year?
    Ms. Borzi. That's absolutely right, Senator. What they 
particularly don't usually take into consideration is how much 
in medical costs they will have to spend, because we know for 
most people from 55 and older it's the medical costs that are 
the most unexpected. Hopefully, with health care reform some of 
that will be alleviated.
    Senator Franken. Well, the doughnut hole will be. But we're 
talking about Social Security and Medicare as really the safety 
nets that have--when you're talking about income security and 
when you're talking about paying for health care you're talking 
about the two basic foundations, which thank goodness we have 
those, right?
    Ms. Borzi. Thank goodness we do. But of course, as you 
know, the largest bit of medical expense occurs in those pre-
Medicare eligibility years.
    Senator Franken. Sure, the 55 to 65.
    Ms. Borzi. The 55 to 65.
    Senator Franken. Well, speaking of which, when you talk 
about people learning about how they're going to get through 
their retirement years, have income security during their 
retirement years, are you mainly talking about getting this 
message out to 25 year olds, to 35 year olds, to 45 year olds, 
to 55 year olds, or to 15 year olds?
    Mr. Iwry. Senator, yes.
    Ms. Borzi. All of the above.
    Senator Franken. Well, it wasn't meant to be answered that 
way.
    Mr. Iwry. Seriously, I think that there's a different type 
of strategy for each of those age groups, but that we actually 
need the education to start in the schools and then to be 
directed in an age-appropriate form to each of those age 
groups.
    The time when people really start to care about it the 
most, of course, is when they reach their typically 50's or so.
    Senator Franken. I think that----
    Ms. Borzi. The point that--I'm sorry. What I was going to 
say is at the point at which they're ready to make these 
decisions, in many respects that's the most critical, because 
they have no way to make up the time that they've lost. So to 
me the most important priority--I agree that all of these age 
groups need to be educated, but right now our immediate problem 
is to focus on the people close to retirement age, so that they 
begin to understand what their choices and options are, because 
they're much more limited than in the 30's and 40's.
    Senator Franken. If they started--if we started earlier 
with financial literacy--and I'm talking about in high school, 
before kids get credit cards and get student loans and all 
those things----
    Ms. Borzi. We're working on elementary school, actually, 
financial literacy in elementary school.
    Senator Franken. You're better than me, in high school. 
[Laughter.]
    But OK. I mean, it seems to me that one of the biggest 
problems here is financial illiteracy, and if we started early 
with kids in elementary school, say--here's an idea I have---- 
[Laughter.]
    Ms. Borzi. It's brilliant, a brilliant idea.
    Senator Franken. Thank you, thank you. That's why I'm a 
Senator.
    Then it seems to me that they'd be able to adjust during 
their lives and start thinking about it sooner. Anyway, 
probably my time has lapsed.
    The Chairman. Go ahead.
    Senator Franken. Well, I probably don't think this is 
necessarily the place, but we need to make sure that Social 
Security is sound, and I have some theories on how we could do 
that. But maybe that's not what this hearing is so much about.
    Yes?
    Mr. Iwry. Senator, if I may just add to our response, one 
of the things that people in their 50's or 60's could use some 
more information about is the value of, in addition to the 
saving--as Phyllis was pointing out, it may be too late to do 
as much as we'd like about saving more at that point--the value 
of deferring retirement incrementally.
    If you postpone retirement for one more year, if you can do 
it, if you've got the health, if you've got the job, etcetera, 
how much will you gain in terms of financial security?
    You get an additional year of earnings. You get an 
additional year subtracted from the number of years you won't 
be earning that you have to support with the savings from your 
earnings. If you postpone Social Security, the time when you 
start Social Security, of course, that can be helpful. People 
haven't gotten enough information about that.
    In our discussions earlier about what people don't know and 
the misperceptions that folks have, I'm sure I speak for 
Phyllis, too--we don't need to convey an attitude that people 
are not intelligent, that Americans aren't smart, not at all. 
First of all, I include myself in all of those statements, that 
we don't understand as much as we should, that we're not as 
disciplined perhaps as we should be, that we don't have as much 
information, we need more education.
    It's true of most of us. Partly it's denial. Sure, people 
understand about life expectancies. They know that there's a 50 
percent chance they'll live more than the average. These are 
sometimes painful and anxiety-inducing realities that we're 
grappling with. So I think we need to help people, and that's 
why we're embarked on this.
    We've heard and we've gotten a sense from you and others 
here that there might be a constructive role for public policy 
to play in this.
    Senator Franken. For example, what you're talking about in 
terms of deferring retirement, that would be an entirely 
voluntary thing.
    Mr. Iwry. Absolutely.
    Senator Franken. That's what we're talking about. It's 
interesting on age and life expectancy, and you were talking 
about denial. I would think that denial would be on the other 
side, that I would think it would be human nature to think: I'm 
going to outlive the actuarial table. But it isn't, is it?
    Ms. Borzi. Actually one of the other interesting things 
that you discover in the literature is most people think 
they're going to--along the lines you're suggesting, most 
people assume that they're going to work a lot longer than they 
do. If you ask people when they think they'll retire, the 
overwhelming majority of people think that they're going to 
work until at least age 65.
    But when you look at the statistics, people actually retire 
much earlier than that, because of health problems, because of 
financial problems, because of caregiving responsibilities, 
where they'll have--particularly women who will have to leave 
the work force early to care for ill spouses or children or 
siblings or parents.
    Mr. Iwry. Because it can be harder for an older person to 
get a job if they lose their current job.
    Ms. Borzi. So there are a lot of issues around this 
question about when you're going to retire, how much money 
you'll need, how long you're going to live, that people haven't 
really focused on. You're right, the misperceptions, the 
misunderstandings, go in both directions really.
    Senator Franken. Thank you. Thank you both very much. Very 
helpful.
    Mr. Chairman thank you.
    The Chairman. Thanks a lot, Senator Franken.
    Thank you both for being here. You've made great 
contributions.
    Ms. Borzi. Thank you so much.
    The Chairman. We appreciate your taking the time.
    Mr. Iwry. Thank you, Mr. Chairman.
    The Chairman. We'll turn now to the members of our second 
panel. Our first witness on this panel will be Ted Beck. Mr. 
Beck has been the President and CEO of the National Endowment 
for Financial Education since 2005. Previously he was an 
Associate Dean at the University of Wisconsin School of 
Business and spent more than 20 years in senior management 
positions for Citibank, Citigroup.
    Welcome.
    Next we'll be hearing from Kelli Hueler, CEO and Founder of 
Hueler Companies, which is an independent data and research 
firm on the annuity and stable value marketplace. Ms. Hueler 
headed the development of income solutions and is nationally 
recognized as an industry expert. Welcome.
    Then we'll be hearing from Bill Mullaney, President of U.S. 
Business for MetLife. MetLife is a leading provider of life 
insurance, annuities, and other retirement and savings 
products. Mr. Mullaney is responsible for the oversight of all 
of MetLife's insurance, retirement, and corporate benefit 
funding businesses in the United States. He will offer 
testimony on behalf of the American Council of Life Insurers.
    Then we'll be hearing from Lisa Mensah. Ms. Mensah is the 
Executive Director for the Aspen Institute's Initiative on 
Financial Security, where she has an advisory board which 
investigates financial products that build wealth for working 
families. Previously Ms. Mensah served as the Deputy Director 
of economic development for the Ford Foundation. Welcome.
    Mr. Beck, we'll start with you.

 STATEMENT OF TED BECK, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
           NATIONAL ENDOWMENT FOR FINANCIAL EDUCATION

    Mr. Beck. Thank you, Mr. Chairman. My name's Ted Beck. I am 
President and Chief Executive Officer of the National Endowment 
for Financial Education, located in Denver, CO. We at NEFE 
would like to thank Chairman Kohl, Ranking Member Corker, 
Senator Franken, and the members of the Special Committee on 
Aging for this opportunity to share our views on retirement 
income.
    For those of you that don't know the National Endowment, 
we're a private nonprofit foundation solely focused on 
improving the financial knowledge, capability, and wellbeing of 
all Americans. We have been deeply involved in the financial 
education arena for several years, ranging from high school on 
through to retirement.
    I'd like to tell you about a recent development that we've 
been involved with. In 2006 we took a step back and looked very 
hard at the questions around retirement. We were very concerned 
about how few people were actually calculating what their 
financial needs were. The current estimate on that is 46 
percent, actually do the calculation.
    Also, only about 40 percent--excuse me. Only 60 percent of 
the population is currently saving for retirement. Those are 
2010 numbers.
    Also, research tells us that workers age 55 and older have 
very weak financial knowledge and skills.
    So these caused great concern. As we looked at this, we 
also discovered that there is a limited knowledge base on 
decisions made in retirement on assets you've accumulated. 
We're especially concerned in this area in families who are 
making between $30,000 and $100,000 pre-retirement.
    So as we looked at this situation, we thought the best 
thing we could do would be to assemble a task force of people. 
We pulled together 40 experts from consumer education, 
financial service industry, academic, regulation, including two 
of our witnesses today, Kelli Hueler and Mark Iwry from the 
earlier panel. We wrestled with the question of what should be 
done about this.
    The project that came out of that is an effort that we're 
deeply involved with called ``My Retirement Paycheck.'' The 
goal of this project is to help people generate the equivalent 
of a paycheck in retirement using the assets they've 
accumulated effectively. The program looks at eight different 
categories: work, home and mortgage, pensions, debts, Social 
Security, insurance, retirement plans, and fraud. We try to 
look at these categories in a holistic way and look at the 
interaction of what happens if you make a decision in one area 
and how it affects other areas.
    For example, we talked a second ago about working 2 to 4 
years longer. What does that do for you if you have that 
option? A typical retirement age right now is 62 to 63. If you 
are able to continue to work, how much extra security does that 
give you?
    Likewise on Social Security, if you start taking benefits 
at 62 versus age 70 by delaying, it you're actually giving up 
75 percent difference. So if you get $1,000 in your retirement 
paycheck at age 62, the equivalent of that if you wait until 
age 70 is $1750, a significant difference that everybody should 
be informed of and able to make as part of their retirement 
decision.
    We've developed a very rich resource that is now available 
to the public, that was made available in 2009, and we feel 
that this sort of education tool will be of great importance 
going forward.
    However, there are several next steps we need to talk 
about. Merely developing a new web site with the best 
intentions is irrelevant if people don't use it. Therefore 
we're spending a lot of our time on trying to figure out how to 
get this information to people in a manner that is acceptable 
to them and that they will actually respond to. That is a big 
function of what we do every day.
    So we're very focused on retirement education. As an 
example, we've just finished a study at Darthmouth College that 
used different social marketing tools as a way to get more 
people involved in their 401(k) plans early in their career, 
and by approaching this sort of question differently we found a 
very significant increase in involvement.
    Likewise, we think workplace is a great opportunity to do 
more work here, especially early in the career, not one year 
before retirement, as many of the programs are now. We're also 
very convinced that we have to spend more time on segmentation. 
Senator Kohl, you are absolutely right, one size does not fit 
all here. There are differences between social and economic 
groups, different levels of education, and especially with 
women, that we want to do more work with.
    Another area that we're very concerned about is seniors who 
are suffering from diminished capabilities. How do we make sure 
that we get information to not only those individuals, but 
their caregivers, to make sure that they're making intelligent 
decisions that are informed?
    Our real goal here is to help people build savings and 
financial planning that will allow them to make informed 
decisions, and we are convinced that the American people are 
perfectly capable of doing this.
    Thank you.
    [The prepared statement of Mr. Beck follows:]



    
    The Chairman. Thank you so much.
    Ms. Hueler.

STATEMENT OF KELLI HUELER, FOUNDER AND CHIEF EXECUTIVE OFFICER, 
                        HUELER COMPANIES

    Ms. Hueler. Good afternoon, Chairman Kohl, Senator Franken, 
a fellow Minnesotan.
    Senator Franken. Yes, I was going to say.
    Evidently, Mr. Chairman, we have two votes or something?
    The Chairman. Yes. We probably will get through her 
testimony and then we'll have to call a break.
    Senator Franken. OK, is that what we're going to do? Good.
    Ms. Hueler. Should I continue?
    Senator Franken. Welcome from----
    Ms. Hueler [continuing]. Members of the committee as well. 
My name is Kelli Hueler. I'm founder and CEO of Heuler 
Companies. I want to express my sincere thanks to both of you 
for holding this hearing today, and Chairman Kohl particularly 
in your efforts to champion this issue and concern.
    We're very grateful for the opportunity to be here at the 
hearing today on what we believe to be one of the most 
important economic issues facing our Nation, ensuring greater 
retirement income security for millions of Americans.
    Our company's been providing independent data and research 
to large institutions and employers since 1987. Hueler's 
written submission provides background and extra information 
regarding our experience.
    I'm honored to come before you today to discuss how overall 
retirement income levels can be substantially improved and 
ultimately the use of annuity and lifetime income programs can 
be more broadly accepted. If plan participants are provided 
access to lifetime income and annuity alternatives by their 
employers and IRA providers through independent, 
institutionally priced, competitive offerings, they are in fact 
able to pensionize their hard-earned savings into a paycheck 
for life and increase their monthly income by an average of 6 
percent or more over what they could likely achieve in the 
retail market.
    Not only can the income amount be dramatically improved, 
but this type of approach allows retirees to transfer some of 
the key risks associated with longevity, inflation, and 
unforeseen market losses to a preestablished group of qualified 
providers.
    As shown by the data in our written submission, the 
economic benefit of combining institutional or group pricing 
with competition among providers is substantial, and we can 
simply not afford to ignore this fact.
    Statistics show that participants have basically rejected 
traditional annuity distribution offerings. For that to change, 
we believe lifetime income and annuity products need to be 
presented in a simple, easy to understand format, requiring 
quote responses to be standardized, to promote straightforward 
apples to apples comparison and objective review.
    Participants need flexibility. As we've been talking about, 
there is no one size that fits all. They need educational tools 
to help them determine not only how much of their nest egg--
what percentage of their nest egg to convert into income, but 
what features best meet their personal financial goals.
    It's worth noting that the calculators on our web site are 
the most frequently visited pages and that we typically see 
participants request on average of four quotes before they make 
a decision.
    Participants also need to be encouraged to diversify across 
multiple providers and to pensionize in increments over time to 
additionally limit provider and investment risk. Institutional 
offerings must eliminate the bells, whistles, and marketing 
hype that hide relative costs, create substantial confusion and 
suspicion, and ultimately lead to inaction or poor decision 
making.
    Some key observations we can make are that when 
professional, objective assistance is provided to participants 
during the decisionmaking process, there is far greater 
purchase activity than those programs that are delivered purely 
on line in a self-serve format; and there is a direct 
correlation between employer communication and participant 
activity. Both quote and purchase activity increase 
dramatically following directed, targeted communication by a 
plan sponsor to the key demographic participant group.
    This leads me to a critical point. Participants have a high 
degree of trust with their employers when it comes to financial 
decisions. If employers do not endorse lifetime income or 
annuity programs, participants will shy away from them, even if 
they're being offered.
    Hueler's research shows fiduciary liability relative to 
issuer selection and appearance of endorsement as two of the 
top roadblocks for employers to offer any form of lifetime 
income distribution. While our program can be offered either as 
a plan distribution or a voluntary IRA rollover, better than 98 
percent of the sponsors choose the IRA rollover.
    Additionally, sponsors cite two main reasons for adopting 
that type of program: the competitive multi-issuer format and 
the independent issuer selection and ongoing due diligence.
    Providing a fiduciary safe harbor that reflects legitimate 
plan sponsor concerns is critical if we expect them to 
encourage and endorse lifetime income alternatives. Given the 
recent financial crisis and persistent market volatility, the 
need for mitigating risk is urgent and the time is now for 
promoting education around and access to alternatives for 
converting retirement savings into lifetime income. Without 
low-cost income alternatives being widely accessible to plan 
participants, the defined contribution system will have severe 
limits going forward in terms of serving the public interest 
and meeting the needs of an aging population.
    Increased life expectancy is a wonderful, albeit expensive, 
gift and I believe it's incumbent upon all of us to work 
together to improve the likelihood that individuals will be 
able to financially sustain themselves with dignity during 
their retirement years.
    Thank you very much.
    [The prepared statement of Ms. Hueler follows:]



    
    The Chairman. Thank you so much.
    We'll now have a break for two votes of 15 minutes, maybe 
20. Thank you.
    [Recess from 2:57 p.m. to 3:29 p.m.]
    The Chairman. Mr. Mullaney.

  STATEMENT OF WILLIAM J. MULLANEY, PRESIDENT, U.S. BUSINESS, 
  METLIFE, REPRESENTING THE AMERICAN COUNCIL OF LIFE INSURERS

    Mr. Mullaney. Good afternoon, Mr. Chairman and members of 
the committee. My name is Bill Mullaney. I'm the President of 
MetLife's U.S. Business Division, testifying on behalf of the 
American Council of Life Insurers.
    ACLI member companies represent more than 90 percent of the 
assets and premiums of the U.S. life insurance and annuity 
industry and offer insurance contracts and investment products 
and services to qualified retirement plans and individuals. As 
both providers and employers, we believe that saving for 
retirement and managing assets throughout retirement are 
critical economic issues facing individuals and our Nation.
    Today's hearing focuses on the crisis that retirees face in 
managing their assets in retirement and the need for public 
policy to help them avoid outliving their savings. I applaud 
the committee's foresight and appreciate the opportunity given 
the industry to offer insights and potential solutions.
    My written testimony highlights issues and recommendations 
that the industry submitted in response to the Department of 
Labor and Treasury's request for information regarding lifetime 
income annuities and similar lifetime income options available 
to defined contribution plans.
    Today I will discuss the role of annuities in providing 
retirement income security, product features and innovations, 
how public policy can enhance the use of guaranteed lifetime 
income, and consumer protections.
    Retirement begins with a fundamental transition, from 
living off one's wages to living off one's savings. With this 
transition comes multiple risks for individuals to manage, the 
most difficult of which is longevity risk, the risk of 
outliving one's savings.
    Today most Americans won't receive a guaranteed monthly 
paycheck for life from their employers when they retire. For 
many people, defined contribution plans such as 401(k)s have 
become their primary retirement savings vehicle. Guaranteed 
lifetime income products shift the risk of outliving one's 
savings to a life insurer.
    In addition to guaranteed income for life, today's annuity 
products address survivor benefits, liquidity for emergencies, 
and inflation. Annuities with optional guaranteed living 
benefits can provide protection against both longevity and 
investment risk.
    Employers play a key role in helping employees understand 
the benefits of and to gain access to the protection provided 
by guaranteed lifetime income products.
    ACLI has included a number of legislative and regulatory 
recommendations in its written statement which can help 
employers assist their employees in obtaining guaranteed 
lifetime income. Among those recommendations are simplifying 
the fiduciary standard by which the employer chooses an annuity 
provider and allowing insurers to administer the joint and 
survivor rules for married individuals.
    In addition to employer efforts, participants need 
education about the value of guaranteed lifetime income. To 
that end, ACLI thanks Chairman Kohl and Senators Bingaman and 
Isakson for their bipartisan sponsorship of S. 2832, the 
Lifetime Income Disclosure Act, a bill that would provide a 
lifetime income illustration on workers' 401(k) statements. 
With this information, workers can decide whether they need to 
increase their savings, adjust their 401(k) investments, or 
reconsider their retirement date if necessary to assure the 
quality of life they expect in retirement.
    ACLI also asks the Treasury Department to modify some of 
their notices to workers to include information on guaranteed 
lifetime income and the availability of lifetime income 
distribution options. Furthermore, ACLI supports legislation to 
facilitate a worker's election to use a portion of her account 
to obtain guaranteed income for life. Most notably, ACLI 
supports H.R. 2748, the Retirement Securities Needs Lifetime 
Pay Act, which contains three proposals which we hope this 
committee will endorse:
    First, to facilitate the use of longevity insurance in 
employer plans and IRAs, it excludes the longevity insurance 
premium amount when calculating an individual's required 
minimum distribution.
    Second, to encourage employees to take a portion of their 
retirement savings as guaranteed lifetime income, it includes a 
limited tax incentive.
    Last, for those individuals with an individual deferred 
annuity, it would permit partial annuitization of that annuity. 
This last proposal was included as part of the administration's 
2011 budget proposal.
    As the committee considers these recommendations, it is 
important to note that all insurance products are regulated by 
the States. State insurance departments have a number of 
safeguards in place which not only protect the consumer, but 
ensure life insurers' unsolvency and provide protection to the 
consumers in the rare instance of an insolvency. Each State has 
laws and regulations governing the activities such as licensing 
requirements, sales practices, market conduct regulations, and 
product approvals.
    I want to thank the committee again for holding this 
hearing and for inviting the ACLI to testify. The goal of 
helping Americans achieve personal retirement income security 
is one of the industry's top public policy issues, and I'm 
happy to answer any questions that you have.
    [The prepared statement of Mr. Mullaney follows:]



    
    The Chairman. Thank you, Mr. Mullaney.
    Ms. Mensah.

 STATEMENT OF LISA MENSAH, EXECUTIVE DIRECTOR, ASPEN INSTITUTE 
                INITIATIVE ON FINANCIAL SECURITY

    Ms. Mensah. Thank you, Chairman Kohl, and my thanks as well 
to Ranking Member Corker.
    My name is Lisa Mensah and I'm the Executive Director of 
the Aspen Institute Initiative on Financial Security. It's an 
honor to be here today. I'm the granddaughter of an Iowa 
insurance agent and the daughter of an African engineer who 
comes before you today as a personal witness to America's 
greatest promise, that we can all share in the prosperity of 
this land if we can grab hold of the basic tools we need to 
succeed. I believe savings is one of those basic tools.
    I spent 13 years at the Ford Foundation working in some of 
our poorest areas, including the Delta counties of Tennessee 
and the Iron Range of Wisconsin. Workers there and elsewhere in 
America are struggling to get off the hamster wheel of just 
making ends meet, and we've failed to give them an accessible 
and robust system of savings.
    I founded Aspen IFS with a simple dream: to help bring 
about the policies and the financial products that enable all 
Americans to join the savings and wealth-building system in 
America.
    We commend the administration for its fresh look at 
retirement savings and we were pleased to be hosted recently by 
you, Senator Kohl, to describe our hopes for an automatic IRA 
system that builds large nest eggs. At Aspen IFS we believe the 
journey to financial security is not just a people problem, but 
also it's a product problem, and that we really need simple and 
secure financial products to help all Americans save, invest, 
and own.
    So today I come before you with a message of hope, but also 
a message of caution. I'm filled with hope because this hearing 
is really the first serious consideration of helping Americans 
manage their nest eggs in retirement.
    This summer we celebrate the 75th birthday of the Social 
Security System, perhaps our most popular government policy. 
Social Security provides the securest of lifelong income, but 
it was never intended to be the only income in retirement.
    So I believe our question is: How can we build a better 
private savings system for the next 75 years?
    Now my cautions. We can say confidently that everyone needs 
to save, but we can't say that everyone needs to annuitize. 
There is an all too common refrain that if we don't force 
people to do what's best for them, those people can just head 
to Vegas or buy an RV with their nest eggs.
    I think this is a painful stereotype. I propose instead 
that we keep annuities voluntary, but make them easier, safer, 
and a better deal.
    We've heard from everyone that we'll need more than one 
choice or one default, and we've heard that one size does not 
fit all. Some people are very healthy and look forward to a 
long retirement. Many others are not. Some have grown children 
and a spouse with a pension. Others are in a second marriage 
and have a young family. Many are sandwiched, supporting 
parents and children or grandchildren. Some have children with 
special needs who must be cared for when they've gone. Some 
have large 401(k) balances and other savings and others have 
very modest assets, but have paid up their house.
    So there really is more to consider here than just an 
account balance. That's where we bring us to the challenges. 
First, the workplace challenge. While we think the employer 
plan system can play an important role, let's not experiment 
with the whole system until we have broad agreement on the 
suitable products for our extremely diverse workforce. We risk 
jeopardizing the entire noble effort of making savings last a 
lifetime if we start too big and create a backlash of 
opposition.
    In addition, annuity options will add another layer of 
complex laws and regulations to plans and entail greater 
fiduciary liabilities for employers. Will the small and medium 
employers accept this or will they head for the exits? Will 
workers accept being defaulted into products they don't value 
or understand?
    So the second risk I'd like to talk about is the default 
risk. An annuity is a promise that can last for decades and 
it's only as good as the insurance company standing behind it. 
We've been in such a tumultuous time with the solvency of our 
financial system. Who will secure the promise of the annuities 
in 401(k) plans? Will it be the insurance companies, State 
guarantee funds, the employers, or will it fall to the Federal 
Government?
    Last, I'd like to speak about the value challenge. What 
consumer love about Social Security is both longevity and 
inflation protection. It does little good to promise paychecks 
for life if they don't keep up with inflation. Value must also 
be judged by cost. Until we can offer our consumers a product 
with inflation protection and at a reasonable cost, we must 
proceed with caution.
    These are all big issues, but it doesn't mean we can't get 
started. So I believe we could start by helping the over 3 
million baby boomers who reach retirement each year convert 
their savings into modest monthly checks by piggybacking onto 
our Social Security System. Aspen IFS has proposed a new 
public-private partnership to market security-plus annuities 
through the Social Security Administration. Seniors who are 
deciding to claim Social Security could opt to buy an 
additional layer of Social Security-like income with their own 
money and have it added to their monthly checks. Private 
companies would underwrite these basic immediate annuities, 
which could be priced reasonably on a group basis.
    The key point here is that it's better to start small with 
a voluntary system that's simple and secure.
    In closing, I want to return to my hope. I have a hope that 
we can demand more innovation from our private insurance 
providers. It's time for better products that match today's 
consumers and we believe the industry is ready to deliver. I 
also have a hope that we can regulate annuity products so 
they'll be suitable, safe, and good value. Finally, I hope that 
we'll learn much more about what Americans actually want with a 
lifelong income product. Once we do, we'll be able to deliver 
and improve on our system of savings so that it really can 
deliver lifelong income for a very diverse America.
    Thank you very much.
    [The prepared statement of Ms. Mensah follows:]




    
    The Chairman. Thank you very much.
    Mr. Beck, in your testimony you talk about how workers can 
improve their lifetime income by delaying taking Social 
Security benefits. In the last Congress I introduced an older 
workers bill to allow seniors to earn Social Security tax 
credits up to the age of 72. How do you feel about that 
proposal?
    Mr. Beck. I think anything that improves the flexibility 
available to the worker is a positive thing. The key thing, 
though, from our point of view is does the person understand 
what that flexibility means to them? If somebody has the 
ability to defer beyond age 70 as it currently sits and that 
doesn't create a burden on them, that puts them in a much 
better position. So I think it's a very positive factor 
available to workers, so long again as they understand what 
they're doing and how they would go about making that fit into 
their monthly budgets.
    The Chairman. All right. Ms. Hueler, you said that many 
employers are reluctant to take on the responsibility for 
offering lifetime income products. How can we remove some of 
the barriers so as they would be more willing to offer these 
options, as well as educating their workers?
    Ms. Hueler. That's one of the really--we call it kind of 
the conundrum, where the employee and the employer's behavior 
is inextricably linked. If the employer doesn't offer or 
encourage, the employees are not going to move.
    But the employers have this burden or concern that's very 
legitimate over issuer selection and the language that's 
utilized in the Department of Labor regulations relative to 
that issue. So I think what we see is that employers have a 
willingness of heart, but they face the concern over the 
specific liability. So if we offered safe harbor language that 
would give them a simple road map to something that they know 
they could comply with--and it's important, too, to think about 
it this way. You have the HR-benefits side of the house and you 
have the finance side of the house. So there's a lot of 
consideration that goes into the financial risks relative to 
offering annuitization. So if you gave them a simple road map 
where they could diversify and ensure low costs and know that 
they were providing a real value to those participants that 
mitigated certain risks like inflation and other things, then 
they are going to be far more receptive to adopt programs that 
fit within a safe harbor.
    In essence, the safe harbor can't just be for the heck of 
providing a safe harbor. It has to really reflect the plan 
sponsors concerns about their participants.
    The Chairman. On the way over to the vote, Senator Franken 
said to me: Well, what happens if somebody buys an annuity from 
a company and the company goes out of business?
    Ms. Hueler. We've got an issuer at the table.
    The Chairman. Do you want to answer that question, Mr. 
Mullaney?
    Mr. Mullaney. Sure. I think first of all, if you think 
about the insurance industry, the insurance industry has been 
paying annuity benefits to millions of people for a number of 
years. Over the last 10 years or so, insurance companies have 
continued to see the capital requirements that States require 
for them to operate continue to increase. I think as we've gone 
through this recent financial crisis, insurance companies have 
held up very well in terms of their financial strength and 
their ability to continue to provide benefits to their 
policyholders.
    You know, the State regulation of insurance really allows 
for State insurance regulators to look very closely at the 
financial performance of an insurance company, the capital 
requirements, the reserves associated with the liabilities that 
that insurance company has written. If there's any sign that an 
insurance company might be in trouble, State regulators step in 
early and begin to take the necessary steps to resolve an 
insurance company's issues.
    In the rare event that there is an insolvency, there are 
State guarantee funds that can step in and continue benefit 
payments.
    The Chairman. So you don't consider that to be a major 
problem?
    Mr. Mullaney. I do not consider it to be a major problem.
    Ms. Hueler. Chairman Kohl, if I could respond as well.
    The Chairman. Ms. Hueler.
    Ms. Hueler. I think one of the other issues is 
concentration of risk. By having multiple providers, you also 
do reduce the risk of exposure to any single incident or any 
single event that might occur at a given insurance entity, not 
only all the protections that Bill describes. But that's a 
really important aspect of not concentrating risk into one 
single provider and assuming that a provider will stay the same 
for eternity.
    The Chairman. That's a good point.
    Mr. Mullaney. Just maybe to follow up on that if I could, 
Mr. Chairman. The competitive landscape in the annuity industry 
is very robust. There are dozens of companies that provide 
annuities to millions of Americans. So there's plenty of 
competition in the annuity industry for consumers and employers 
if they choose to do so, to offer a wide range of product 
providers and solutions to their employees.
    The Chairman. Thank you.
    Ms. Mensah, we've heard the value of educating 
participants, of course, is extremely pertinent here. While 
your security-plus annuity proposal would be relatively simple 
for participants, what education efforts do you think would be 
needed to ensure that Americans were aware of and fully 
understood this option?
    Ms. Mensah. Thank you, Chairman Kohl. What we love about 
this idea is that it's catching people right at the moment when 
they're retiring. It's saying at the time that you sign up for 
Social Security, you could receive information at this point 
from the Social Security Administration. You could be directed 
to a call center, to say: Would you like to purchase some 
additional income? So that you would be making--this is the 
perfect time to have a comparative yardstick, something that 
you're going to get from Social Security and what else you'd 
like to do with your nest egg.
    So we think it's not only educating, because that's the 
focus on just people only. It's matching people and a product 
at the right time in their life. We've heard a lot about how 
education is more effective at the right moment. So we think 
that that's the power of this, that you could do this talking 
about it, and it would be from a trusted source. Here it could 
be your Social Security Administration giving you the 
information or with a private call center that would help 
direct those questions.
    So it seems to us a timing question, to time the education 
with the purchase decision.
    The Chairman. To the rest of you: The security-plus annuity 
proposal, would you critique it a little bit for the rest of 
us? Mr. Beck?
    Mr. Beck. Just from an education point of view, it's an 
interesting idea. The challenge I would have from an 
educational point of view is is the consumer at that point 
aware of alternatives available to them? There's a big 
difference between financial knowledge and financial 
sophistication. If you're being offered a product at a specific 
time and you have no comparative program to look at and do not 
necessarily understand the pluses and minuses--I would be more 
comfortable with the concept if the education process had that 
comparative component into it, rather than saying, here's an 
add-on to an existing trusted source product delivery.
    The Chairman. Ms. Hueler, would you agree with that?
    Ms. Hueler. I do. I agree with Ted's comments. From our 
perspective in dealing directly with employers, I guess there's 
a couple of issues. If you really look at the participant, they 
place a high degree of trust in their employer. We need--we 
believe we need employers to be involved, both public and 
private, to be involved in this process.
    I think it would be difficult to have them excited about a 
proposition like this. I do think that would be one of the big 
hurdles. It may look very easy on the surface, but the appetite 
for more emphasis on a government-sponsored program, even if 
it's just the perception, I think that that's a big challenge.
    I think government support is very different, government 
encouragement, providing the framework and allowing the private 
sector to really come through with programs that meet the needs 
of the participants. So I think you have to really consider 
what the participants face in this decisionmaking process and 
who their sources, who their trusted sources really are.
    The Chairman. Yes, Ms. Mensah?
    Ms. Mensah. Yes, just to say, we also design this for so 
many people who are not in plans. That's really 50 percent of 
our workforce. So while I would not disagree, when you have an 
employer who can play that role for you you're in a privileged 
position, and I wish more Americans were there. But there are 
many employers who won't.
    Just to make very clear, we've always seen this. We 
designed this in partnership with CEOs from the financial 
sector. So this is a private product. It's a public-private 
partnership. It's private companies who would underwrite.
    Also, we've always said that it should be a starter 
annuity. It isn't everybody's choice, Ted, you're correct on 
that. This would be a way to get started for some people who 
want to annuitize some of their nest egg. You could do it in a 
trusted way, and maybe this is your starter and you would make 
your way to other products that might give you more flexibility 
and control.
    But for some people, just the chance to add an additional 
$100 to that Social Security check, it would make sense at that 
moment. That's our contention.
    The Chairman. Mr. Mullaney, you're sitting between these 
two adversaries. Would you like to offer a little illumination 
to us?
    Mr. Mullaney. I would, yes. Thank you, Mr. Chairman. I 
think the proposal that Lisa has put out there is elegant in 
its simplicity, but one of the things that I would be concerned 
about is the fact that retirement planning for individuals is 
somewhat complicated, because it's a function of each 
individual's unique circumstances. In the earlier panel that we 
had before, we heard about how long people expect to live. In 
studies that we've done, over 60 percent of the people don't 
expect to live as long as the mortality table suggests that 
they will.
    There are issues around how much money people need to save 
to cover things like medical expenses in retirement. So the 
industry's view is that it's important for people to be able to 
get the appropriate level of advice, to be able to customize a 
retirement program that includes some amount of guaranteed 
income where appropriate, so that a person will never run out 
of income in retirement. While your point is well taken that 
many people are not in plans today, there's a very robust 
market where, in the retail space, people can go out and get 
some advice and counsel, and some of the products and solutions 
they might need to be able to provide guaranteed income in 
retirement. So that's just not something that's available to 
people who are at work.
    The Chairman. Ms. Hueler?
    Ms. Hueler. Sure, if I could clarify a couple things. We 
don't view plans as the only source of retirement savings, for 
sure. There's a lot of individuals that are not covered by 
plans, and that's a very legitimate position.
    But even in the IRA sector, we believe this group 
institutional approach for all participants in qualified plans, 
whether that be individual IRA plans or retirement plans that 
are sponsored by employers, can be done efficiently and cost 
effectively. If there's a starter program, I can understand the 
value, the true value of that. But I think we also have to look 
at the broadest base of where people have their savings, who 
they're utilizing as their resources for this type of 
educational and financial planning information, and we have to 
provide them access through those channels if we really expect 
it to work in a meaningful way.
    The Chairman. All right.
    Mr. Mullaney, I think we're all pleased to see the 
development of new and innovative products to provide consumers 
with lifetime income. Obviously that's key. But I'm concerned 
that they have adequate consumer protections, such as spousal 
protections and reasonable fees. How is your industry 
guaranteeing that these products are designed in the interest 
of your consumers?
    Mr. Mullaney. First of all, as we think about product 
designs and new innovations that we might want to bring to our 
products, the first place we start is with the consumer, to 
understand what the consumer needs are. If you look at 
guaranteed lifetime income products from where they started 
many years ago to where they are today, many features have been 
added to these products. Those features really reflect the 
needs that consumers have expressed to us in terms of the type 
of features that they would like to see in guaranteed lifetime 
income programs.
    Whenever you design these programs, you also have to 
consider the cost, and we believe very much in making sure that 
the products that are offered in the marketplace are suitable 
to the people who buy them and that there's full disclosure 
around how those products work and the fees and the costs 
associated with those products.
    As I said before, there's a very competitive market for the 
sale of lifetime income products. So the value that consumers 
look for and the competitive nature of the market certainly 
keeps the prices associated with these programs well in line 
with what consumers can afford.
    The Chairman. Mr. Beck, have you found any particular 
retirement challenges among specific demographic groups, and 
what suggestions do you have to help?
    Mr. Beck. We have been doing some studies on specific 
issues related to different groups. We have been doing research 
specifically on Hispanic households with the University of 
Notre Dame for several years. There are different challenges 
and there have to be sensitivities.
    But I think understanding those is the first key. We do not 
yet have something that we could say specifically do this for 
this group, be it different racial groups, be it different age 
groups, be it different income groups. So the message from us 
is this is something we need to study and do more research on.
    The greatest risk here is doing ready, fire, aim. So we're 
still in the research and data gathering mode to see what sort 
of suggestions might be available to people to be more 
sensitive and more applicable to different groups.
    The Chairman. Ms. Hueler, can you explain the large 
variations in the price of annuities and share your 
recommendations with us on how to bring down the price of 
annuities for all Americans?
    Ms. Hueler. The comments we provided to you stem from 
better than two decades of observing insurance company price 
variability. It's inherent in the nature of the way that 
products are designed and priced. Even in the case where 
issuers are providing you their very best price of the day, at 
very low cost or no cost, they may not in fact be competitive 
with their peer at a given point in time for a given type of 
annuity product.
    It doesn't mean they're not doing a great job and it 
doesn't mean they're not delivering at low cost. But their 
price models are fluid and there is no one insurance company's 
model that can deliver the best the market has to offer on any 
given day.
    So when you include peers who are doing best case pricing, 
low cost delivery, low fees, you have the opportunity to 
provide to the individual at the point in time that they're 
converting the best the market has to offer. It's not to say 
that insurance company A, B, and C are not all doing their best 
job. But they will have a different price at any given point in 
time on a particular annuity benefit, and that's just the 
nature of the business.
    We've done study after study, so we're confident in that 
data, and we know the way to resolve that is to have apples to 
apples comparative quote capabilities, so that when a person 
asks for a particular type of benefit there's no confusion, 
there's no additional bells, whistles, etcetera, and it's very 
easily compared one to another, and the issuers have had the 
opportunity to compete on that given day at that point in time 
for that piece of business.
    The Chairman. Good.
    Well, I think you've all done very well and offered a lot 
of illumination into something that's emerging and very 
important in our society as we continue to go forward. So we 
thank you for being here, thank you for your contributions. At 
this time I think we'll terminate the hearing.
    [Whereupon, at 3:58 p.m., the hearing was adjourned.]
                            A P P E N D I X

                              ----------                              


            Mr Iwry's Responses to Senator Kohl's Questions

    Question. A March 29, 2010, Treasury Inspector General for 
Tax Administration (TIGTA) report identified a significant loss 
in Federal funds due to individual noncompliance with 
Individual Retirement Account (IRA) excess contribution and 
minimum distribution requirements. The report estimates that 
these two forms of IRA noncompliance amounted to nearly $300 
million in tax revenue losses for tax year 2006 and 2007. The 
report also states that IRA noncompliance has continued to grow 
since tax year 2005. The IRS agreed to address the problem when 
it was first identified over two years ago in an earlier 2008 
TIGTA report, but the noncompliance has continued to grow 
unchecked. With the possibility of losing significantly more 
than $300 million in tax revenue over the next two years due to 
IRA noncompliance, what can be done now to protect these 
Federal funds?
    Answer. To respond to your questions about what more can be 
done to protect Federal revenues from noncompliance with the 
IRA excess contribution and minimum distribution requirements, 
we have consulted with the IRS. The information they have 
provided is reflected in our responses to your questions, 
below.
    The IRS completed an IRA study late last year that 
responded to GAO and TIGTA audit findings involving both the 
IRA Required Minimum Distributions (RMD) and IRA Excess 
Contributions. TIGTA originally proposed use of the IRS 
Automated Under Reporter (AUR) matching program for working 
these IRA issues. However, the IRS study concluded that neither 
issue is a good fit for AUR: RMD cases are not well suited for 
AUR inventory because of difficulties with accurate matching 
and the complications created by the need for two years of data 
to determine non-compliance. Additionally, IRA cases involving 
excess contributions are not well suited for AUR inventory 
because of difficulties with accurate matching, multiple year 
issues, and the low average penalty for an IRA excess 
contribution, resulting in average potential assessments in the 
$300 range.
    It became evident to IRS management that a broader strategy 
was needed for addressing IRA non-compliance, and that 
examinations would be only one component of a more 
comprehensive approach that would also consider amending 
regulations, modifying existing forms and publications, 
conducting additional research studies, and developing outreach 
and education. Subsequent to the Committee's hearing, the IRS 
convened a cross-functional group using executives in its 
Candidate Development Program to review the TIGTA data and 
identify activities that might be effective in preventing the 
loss of revenue. The group consisted of key personnel in Wage 
and Investment (W&I), Small Business/Self Employed (SB/SE), Tax 
Exempt and Government Entities (TE/GE), Large Business and 
International (LB&I) and Modernization and Information 
Technology Services (MITS). This cross-functional team 
developed several high-level suggestions, including initiatives 
for working toward a broad-based strategy to effectively 
address the issues while focusing on aspects such as forms and 
regulations.
    Question. In response to the report, the IRS has proposed a 
Service-wide strategy to address IRA noncompliance in regards 
to excess contributions and non-disbursements of required 
minimum distributions, with a proposed implementation date of 
October 15, 2012. How do you feel about the IRS's timeline, and 
do you believe this much time is necessary to successfully 
implement the strategy?
    Answer. We believe that the IRS has appropriately 
accelerated its original timeline for implementing its proposed 
Service-wide strategy to address IRA noncompliance relating to 
excess contributions and required minimum distributions. While 
some elements of the strategy can be implemented in 2011, 
successful implementation of other elements can be expected to 
take until the Fall of 2012.
    More specifically, it will take a significant level of 
effort to address the myriad and complex issues surrounding IRA 
noncompliance and develop a comprehensive strategy encompassing 
all of the interrelated issues. There would be a considerable 
opportunity cost if the IRS redeployed extensive exam resources 
to work cases with relatively small average potential 
assessments compared to other workload categories. But if we do 
not pay sufficient attention to individual IRA cases because 
the average assessments are small, then we risk forgoing the 
substantial total assessments that are involved when the small 
dollar per case average is multiplied by the large universe of 
potential cases. We believe the answer is to find ways to 
prevent the IRA compliance issues from occurring in the first 
place, and relying less on remedying those issues with exams 
after they have already occurred.
    The suggestions developed by the cross-functional IRS team 
referred to earlier should have a positive impact on the level 
of non-compliance while limiting unnecessary contacts with the 
taxpayer. To follow up, the IRS will be are convening a 
strategy team in the first quarter of FY11 to develop an 
overarching compliance strategy for addressing IRA 
noncompliance. The team has been charged with identifying both 
``quick hits'' and longer term proposals. The quick hit 
recommendations will be options that can be implemented in 
calendar year 2011. The proposed timeline of 2012 is needed to 
coordinate the substantial activity connected with properly 
working the longer term options, including systems changes and 
significant outreach and education. Researching and 
implementing actions such as these require a balancing of other 
IRS priorities related to IT and Counsel resources and cannot 
be accomplished in a relatively short timeframe.
    Question. The Inspector General recommended the development 
of processes to identify individuals who do not comply with 
retirement provisions as well as the development of compliance 
efforts to address the noncompliance. The IRS has stated that 
their Service-wide strategy will contain compliance, education/
guidance, and outreach components. What are the most critical 
elements of a strategy of this nature and how would you 
envision this strategy being the most quickly and effectively 
implemented?
    Answer. A strategy of this nature relies on continued 
vigilance on the compliance side, but also, in particular, 
initiatives grounded in education/guidance and outreach. These 
types of initiatives may hold the promise of being particularly 
efficient by preventing noncompliance in the first place.
    The IRS has indicated that, in connection with education/
guidance and outreach, the IRS strategy team will examine 
options such as enhancing IRS Web-based service and information 
offerings; presenting lists of common mistakes and how to avoid 
them; increasing the clarity of published guidance; modifying 
existing forms and publications, and examining the potential 
for a ``soft notice'' campaign. The IRS team plans to identify 
any quick-hit action items that can be put into place promptly, 
while the more time- and resource-intensive solutions are 
developed by the Service.
    If the Senate Aging Committee staff would find it helpful 
to have more detail or to discuss this strategy with the IRS 
and Treasury, we would be glad to meet with Committee staff for 
a discussion of these efforts.