[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE CHALLENGE OF RETIREMENT SAVINGS FOR SMALL EMPLOYERS
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HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
OCTOBER 2, 2013
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 113-039
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Ms. Catherine Collinson, President, Transamerica Center for
Retirement Studies, Los Angeles, CA............................ 3
Ms. Paula A. Calimafde, Bethesda, MD, testifying on behalf of the
Small Business Council of America and the Small Business
Legislative Council............................................ 5
Mr. C. Roy Messick, III, CPA, QPA, TPP Retirement Plan
Specialists, LLC, Overland Park, KS............................ 6
Mr. Ray Rucksdashel, Chief Financial Officer, Quest-Tec
Solutions, Inc., Houston, TX................................... 8
APPENDIX
Prepared Statements:
Ms. Catherine Collinson, President, Transamerica Center for
Retirement Studies, Los Angeles, CA........................ 28
Ms. Paula A. Calimafde, Bethesda, MD, testifying on behalf of
the Small Business Council of America and the Small
Business Legislative Council............................... 35
Mr. C. Roy Messick, III, CPA, QPA, TPP Retirement Plan
Specialists, LLC, Overland Park, KS........................ 47
Mr. Ray Rucksdashel, Chief Financial Officer, Quest-Tec
Solutions, Inc., Houston, TX............................... 55
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
ACLI - The American Council of Life Insurers................. 58
AICPA - American Institute of CPAs........................... 64
FSR - Financial Services Roundtable.......................... 73
Ndp/analytics - Nam D. Pham, Ph.D., Managing Partner and
Alexander J. Triantis, Ph.D., Senior Advisor............... 76
Principal Financial Group.................................... 111
THE CHALLENGE OF RETIREMENT SAVINGS FOR SMALL EMPLOYERS
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WEDNESDAY, OCTOBER 2, 2013
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 a.m., in Room
2360, Rayburn House Office Building, Hon. Sam Graves [Chairman
of the Committee] presiding.
Present: Representatives Graves, Chabot, Coffman,
Luetkemeyer, Mulvaney, Tipton, Hanna, Huelskamp, Schweikert,
Bentivolio, Collins, Rice, Velazquez, Payne, Meng and Kuster.
Chairman Graves. Good afternoon. I will call the hearing to
order. Today we are going to meet to examine the challenges
small employers face in saving for retirement.
Americans have always found it difficult to save. In June,
a bankrate.com survey found that 76 percent of Americans were
living paycheck to paycheck. Our workforce is aging, life
expectancy is increasing, and the future of the Social Security
program still remains in doubt. With that, saving for
retirement seems more important than ever.
Small employers understand the importance of providing good
benefits, including retirement savings options, to attract and
retain quality employees. However, in today's economy that can
be very challenging.
The Government Accountability Office recently reported that
only 14 percent of small employers sponsor a retirement savings
plan for their employees. Some small business owners have said
offering retirement plans is just too complex or too time-
consuming. Surveys by the Transamerica Center for Retirement
Studies, whose president is testifying today, have found that
small businesses continue to lag behind large companies in
sponsoring retirement options. Small business confidence polls
have shown that the economic recovery is still uneven, and
entrepreneurs and their employees may not be saving more for
retirement.
We look forward to the new data that Transamerica is
releasing at today's hearing, and during this hearing we will
explore the state of retirement savings by small businesses and
their employees, the barriers they face, and how we can
encourage more small businesses to offer these important
benefits.
I do want to thank all of our witnesses for being here
today. Some of you traveled a long way, and we appreciate that
very much.
And with that, I will turn to Ranking Member Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Retirement security is a universal goal for most Americans.
As part of that retirement plan, most Americans rely on
employer-based retirement plans. As the baby boomer generation
ages, it is critical that small employers and their employees
have financial security as they enter their retirement years.
But the program remains that only 14 percent of small firms
offer such a benefit. With 99 percent of all businesses in this
country being small businesses, if we are truly going to make
retirement security a reality, we must address their needs.
Small firms not only face the challenge of offering a
retirement vehicle, but enrolling their employees. Roughly 50
percent of the private-sector workforce participates in an
employer-sponsored pension plan. While much of the problem can
be attributed to a lack of employer offerings, nearly 20
million workers actively choose not to participate in plans
offered by their employers. Improvements to the retirement
system must meet the needs of business owners, while also
encouraging more workers to participate.
It is clear that small firms face many obstacles when
setting up a retirement plan. First, there is the cost of
selection and administration. The costs do not stop there
either, since employers are required to make much in
contributions much of the time.
Finally, small firms face ongoing fiduciary duties, such as
reviewing investment and running discrimination tests, all
while trying to run a business. Our system seems to almost
discourage small businesses from offering retirement packages,
and helps explain the inequity in coverage rates for workers of
small and large companies.
It is clear that to encourage small businesses to start
offering plans, something needs to be done to address this
obstacle. Small employers face too many challenges and simply
will not offer a retirement plan if they perceive that the
burdens outweigh the benefits. Understanding these challenges
can help us better address the solutions to low participation
rates among small entities.
One approach may be to offer increased tax incentives to
small business owners who choose to sponsor a plan. Another
method to encourage workers to participate is to create an
automatic enrollment IRA.
These and other ideas merit further discussion, but one
thing is absolutely clear: We must act soon to help small
businesses and their employees plan for their future. For these
reasons we need to make sure that retirement plans are
attractive for small businesses as their retirement savings is
integral to our Nation's, and that--our Nation's future, and
that is why we are here today. This hearing would allow members
of this Committee to discuss the kind of vehicles that many
small businesses use to provide retirement benefits and ways in
which they can be improved upon. With the proper tools
America's small firms can sustain the economic growth currently
under way simply by investing in their futures.
And with that, I thank all the witnesses for being here
today, and I look forward to your comments.
Thank you, Mr. Chairman. I yield back.
Chairman Graves. All right. Our first witness today is
Catherine Collinson, who is the president of Transamerica
Center for Retirement Studies in Los Angeles, California. She
is a retirement and market trend specialist and oversees all of
Transamerica research and outreach activities, including its
annual retirement survey, which is being released today at our
hearing.
We appreciate you coming all this way; thanks for being
here.
STATEMENTS OF CATHERINE COLLINSON, PRESIDENT, TRANSAMERICA
CENTER FOR RETIREMENT STUDIES, LOS ANGELES, CALIFORNIA; PAULA
A. CALIMAFDE, BETHESDA, MARYLAND, ON BEHALF OF THE SMALL
BUSINESS COUNCIL OF AMERICA AND THE SMALL BUSINESS LEGISLATIVE
COUNCIL; C. ROY MESSICK, III, CPA, QPA, TPP RETIREMENT PLAN
SPECIALISTS, LLC, OVERLAND PARK, KANSAS; AND RAY RUCKSDASHEL,
CHIEF FINANCIAL OFFICER, QUEST-TEC SOLUTIONS, INC., HOUSTON,
TEXAS
STATEMENT OF CATHERINE COLLINSON
Ms. Collinson. Well, thank you, and good afternoon. I am
Catherine Collinson, president of the Transamerica Center for
Retirement Studies, or TCRS.
Today TCRS released new research as part of its 14th Annual
Transamerica Retirement Survey of 750 employers and more than
3,600 workers, including those from small companies of 10 to
499 employees.
Employer-sponsored retirement plans in small business play
a critical role in facilitating savings among American workers.
TCRS research findings underscore the importance of these
benefits in helping workers prepare for retirement. Eighty-
eight percent of small-company workers value retirement
benefits as important.
I would now like to share four key findings from our
research. Number one, plan sponsorship rates offer room for
growth. Plan sponsorship rates, which may come as a surprise,
are already relatively high. Seventy-one percent of companies
with 10 to 99 employees offer a 401(k) or similar plan, such as
a SIMPLE or SEP, and nearly 9 out of 10 companies with 100 to
499 employees do so, but more can be done, especially for the
smallest of companies.
Nearly one-third of small companies that do not offer a
plan say they would be likely to consider to joining a multiple
employer plan, which is a type of group plan offered through an
entity that handles many of the fiduciary and administrative
functions.
Key finding number two. Plan sponsorship often does not
lead to coverage for part-time workers. Plan sponsorship is not
necessarily synonymous with plan coverage. A critical component
of expanding coverage is encouraging employers to extend
eligibility to their part-time employees. At small companies
only 36 percent of part-time workers are offered a plan
compared to 68 percent of full-time workers.
Key finding number three. Few companies use automatic
enrollment. Automatic enrollment is widely recognized as one of
the most effective ways to increase plan participation;
however, only 19 percent of small companies take advantage of
it. The median default contribution rate is just 3 percent of
annual salary, which is insufficient to ensure a participant's
secure retirement.
Key finding number four. Most small business workers need
to save more. The majority of small-company workers plan to
work past age 65, and the majority plan to continue working
after they have retired, mostly for income-related reasons to
bridge savings shortfalls.
Perhaps the ultimate measure of a worker's retirement
outlook is his or her level of savings. In 2013, the estimated
median household savings in retirement accounts among baby
boomers, which the generation closest to retirement, is just
$92,000 for small-company workers.
It is clear that small business workers need to save more,
and tax incentives are powerful motivators for saving, yet few
small-company workers are aware of the saver's credit, which is
available to low- to moderate-income tax filers who save in a
qualified plan or IRA.
In light of these research findings, TCRS offers the
following five recommendations: One, expand tax incentives to
help offset the cost for small employers to establish a new
retirement savings plan. The current start-up tax credit only
allows small businesses to claim up to $500 for 3 years.
Two, for small businesses in which a stand-alone 401(k)
plan is not feasible, make multiple employer plans, or MEPs,
more attractive to small employers. MEPs should be simple to
administer and provide safe harbors from fiduciary liability
for each employer. In addition, small employers should be
protected from liability-related errors by other employers who
are participating in the plan, and tax incentives should be
provided to encourage participation in these plans.
Three, create additional tax incentives and safe harbors to
encourage plan sponsors to expand coverage to their part-time
employees.
Four, increase the default contribution rates in plans
using automatic enrollment. The current 3 percent minimum
default contribution rate sends a misleading message to plan
participants that savings at these levels is sufficient for a
secure retirement. A new automatic enrollment Safe Harbor under
which employees who are enrolled at 6 percent with increases up
to 10 percent, coupled with a tax credit for adopting it, could
drive up plan sponsorship rates as well as participant savings
rates.
And number five, increased savings along low- to moderate-
income workers by promoting the saver's credit and expanding it
so that more tax filers are eligible.
In conclusion, TCRS commends Committee Chairman Graves and
Ranking Member Velazquez on their consideration of the
particular challenges and needs of small business. We
appreciate the opportunity to share our views and research.
Ms. Velazquez. Mr. Chairman, it is my pleasure to introduce
Ms. Paula Calimafde. Ms. Calimafde is a principal at the law
firm of Paley Rothman, which is located in Bethesda, Maryland.
She chairs the firm's retirement plans, employee benefits, and
the government relations practice groups. Ms. Calimafde is
testifying today on behalf of the Small Business Council of
America and the Small Business Legislative Council.
Welcome, and thank you for coming back to our Committee.
STATEMENT OF PAULA A. CALIMAFDE
Ms. Calimafde. Well, thank you, Chairman Graves and Ranking
Member Velazquez, for having these hearings today.
As I think we all recognize, this is an extraordinarily
important topic. The success of the private retirement plan
system means the difference between a comfortable retirement
and a not comfortable retirement, and so the work you are doing
today, I can think of not many things that are more important
than what you are doing.
I will be citing a number of statistics and data that will
show that the small business retirement plan system is far
healthier than people believe--so, for instance, the 14 percent
number, I think, the data that has been just released from the
Social Security office is much more in line with the data that
you just came up with--but the system is precariously balanced
on tax benefits. And right now those tax benefits are in line
so that when a small business owner or owners decide whether
they want to sponsor a retirement plan or not, they go through
a cost-benefit analysis, and they determine what are the
benefits to be derived to the owners and the business, and they
compare it to the costs and burdens that they will have to
undertake to sponsor that plan. And one of the costs, by the
way, are the costs of making contributions for the employees of
the company, because the Tax Code forces significant
contributions to be made to those employees.
Because of this, any significant cuts to the benefits that
can be derived by the owners will cause small business plan
formation to either be stopped, plans frozen, or new plans will
not be formed. So, it is critically important that steps that
are taken by you--all assist in that cost-benefit analysis by
not overburdening the costs and increase the benefits, or at
least leave the benefits alone.
There are places where the system can be simplified. We
have set forth a number of ideas in the back of our testimony.
I hope I can get to them today. If not, I am more than happy to
discuss them with you. For instance, one idea is that we could
come up with some kind of lottery system inside a small
business, for instance. So any employee who is willing to make
a 3 percent contribution into the plan is entered into a
lottery, and the names of the non-highly compensated employees
only are put into this hat. One name gets brought out, and that
employee would get maybe $500 or $1,000 put into their plan or
maybe made as a cash bonus to them. It sort of brings some
excitement of why we want to save, kind of get people more
excited about it.
I think many times employees look at this as sort of almost
like autopilot, and, in fact, one of the things I will talk
about is that autoescalation and autoenrollment, which is where
employees are literally just put into a 401(k) plan, they can
opt out, but the numbers are startling. Very few opt out, and
why? Well, we think it is because of inertia. It is easier to
just stay in than take active steps to get out, and
autoescalation increases the amount that employee is putting in
on this automatic basis, and, again, the data is startling.
People just let the amounts keep building up, so even at a 6
percent contribution level, so this is 6 percent being taken
out of their compensation, they just stay in and let the 6
percent go in. And putting in 6 percent into your plan and
letting it grow tax free is a very good way to save for your
retirement.
In fact, it is such a good way that EBRI was asked to do
some work for the ASPPA, the American Society of Pension
Professionals and Actuaries, and what they found is that
workers are 14 times more likely to save in a retirement plan
that is offered by their employer than they are to go and put
money into an IRA. And that is a pretty significant statistic,
14 times more likely to save.
I think we are all sort of brought up and know that we--our
retirement security in this Nation rests on a three-legged
stool. The first leg is Social Security, a very fixed system, a
defined-benefit system, you can't outlive it, very little
flexibility in that system, and for many people it is a major
portion of their retirement. For others, it is a safety net. It
is working. I think that you all are going to have to fix it a
little bit, but basically it is working.
The private retirement system, even though highly regulated
by Department of Labor and IRS, is much more flexible, and
plans can be designed to fit a company structure and what they
perceive is will be giving--will be most--they can design it so
that the employees will appreciate it the most or it will fit
best with their own employees, and that system is working
extremely well actually.
Part of it is payroll deduction. As I said, it is
automatic. Employees don't have the money in their pockets.
They can't spend it. They don't have to do anything. It just
comes out of their payroll. It works really well. In the 401(k)
and 403(b) environment, once the money is in the plan, it is
difficult to get your hands on that money, which is one reason
why the account balances tend to grow. If people are putting
their money into an IRA, they can walk into that IRA and into
the bank and take money out. It is much harder in the 401(k) or
403(b) environment.
So, I think I have gone past my time, but I will be happy
to take questions. Thank you.
Chairman Graves. Thank you very much.
Our next witness is C. Roy Messick, who is a certified
public accountant and qualified pension administrator with TPP
Retirement Plan Specialists in Overland Park, Kansas.
Mr. Messick has been a CPA for over 30 years, and he is
responsible for coordinating TPP's retirement plan
recordkeeping, consulting, and administrative services. His
firm is a small business serving a lot of small business
clients.
Thank you for being here.
STATEMENT OF C. ROY MESSICK, III
Mr. Messick. Thank you.
Chairman Graves, Ranking Member Velazquez, and members on
the House Committee on Small Business, I appreciate the
opportunity to be here. It is an honor and my pleasure to have
some input into the process.
Like Representative Graves said, I am a CPA and a qualified
pension administrator as recognized by the American Society of
Pension Professionals and Actuaries, or ASPPA for short. I head
up our retirement plan division, TPP Retirement Plan
Specialists, which is a subsidiary of TPP Certified Public
Accountants located in Overland Park, Kansas, also with an
office on Long Island, New York.
We administer approximately and/or recordkeep 400 plans
across the country, primarily 401(k) and 403(b) plans. Probably
90 percent of those are under 100 employees, so I understand
small businesses and the challenges they face in setting up
these plans.
In my written testimony I did summarize the types of plans
that are commonly offered to small businesses, primarily 401(k)
plans. I am not going to go into that in detail. But in my over
30 years of experience, I have seen--there is a lot of reasons
why employers do set up plans and a lot of reasons why they
don't, some of which have been touched upon already.
Well, why do they set them up? Let us talk about that
first. First of all, employee retention and recruiting. It is a
huge benefit. If you have a 401(k) plan, you need to go out
there and get talent, you got to have a 401(k) plan. And I also
think a lot of the businesses, it is really kind of a
paternalistic/maternalistic instinct. I mean, they want--they
want their employees to have a good retirement. I want our
employees to have a good retirement. So I think that is a huge
reason why these plans are offered, tax incentives, of course.
So much easier to see--you know, defer on a pretax basis. It is
just easier to save that way.
The other nice thing about employer-sponsored plans is the
contribution limits are higher than IRAs. You can put more away
into a 401(k) plan than you can into an IRA, so that is good,
too, for retirement. So that is another reason why they do.
Payroll deduction makes it easy to save, I think we talked
about that, but it is so much easier if that money is coming
out of your paycheck versus you have to sit down on April 15
and write a check to your IRA. Much easier.
Now let us examine why employers don't offer plans
necessarily to their workforce. One, these things are
complicated, subject to a lot of Department of Labor and IRS
rules and regulations, and with complexity comes expense. So
that can be daunting for some small employers.
And it is also all about proportionate cost. For example,
if you have a million-dollar 10-person plan versus a $50,000
10-person plan, same number of employees, totally different
asset size, who is going to get the better deal? I mean, the
recordkeeping and administrative cost is really about the same,
whether it is the 50-grand plan or the million-dollar plan, so
it is all about proportionate cost.
Same thing with investment advice. Now, our firm doesn't
provide investment advice or do investments, but that is a huge
component to a plan. The person who has to advise these 10
people takes the same amount of time whether there is 10 of
them, you know, with 50 grand or 10 with a million. So that
proportionate cost is a huge reason why some employers don't
offer those.
Not enough tax savings. Some employers won't offer a plan
unless the tax savings more that offset the contribution for
the employees. They just won't.
Another reason might be why the business owner personally
can't defer enough into the plan. In a traditional 401(k) plan,
the amount that the business owner can defer is typically
limited to 2 percentage points more than the average of the
rank and file. So, for example, if the rank and file is
deferring 4 percentage points on average, the business owner
gets 6, that person makes 100 grand a year, they can only defer
6,000, they may say, hey, that is not worth it, not going to
set up a plan.
Now, in a Safe Harbor plan, that is a variation on a 401(k)
plan, that makes that test go away where the business owner can
defer the maximum allowed by law, which is $17,500, but the
trade-off is a required contribution of 3 to 4 percent of pay
for the employees. They may not be able to afford that. Their
finances may not be such that they can afford that. So that
would be another reason why a small business may not offer
those plans.
Well, how can we get more participation? I think those tax
credits, that has been alluded to already, that is huge. If we
can expand that tax credit, maybe target more towards smaller
business somehow, some way to get these people to help start a
plan, I think that would be great.
I think that the 401(k) and 403(b) deferral should actually
be increased from the 17,500. I know it is a tax deduction, but
it might spur some business owners to say, okay, hey, now I can
put more away. Yeah, I think I will do that. So, I think that
is something worth considering.
Maybe another type of Safe Harbor 401(k) plan that doesn't
mandate that 3 or 4 percent; maybe something a little bit less
in return for maybe a lesser deferral limit for that business
owner, kind of a compromise, maybe that something like that
would help.
So, with that, those are my thoughts, and I appreciate the
opportunity to be here and welcome any questions you may have.
Chairman Graves. Thank you, Mr. Messick.
Our final witness today is Ray Rucksdashel, who is the
chief financial officer with Quest-Tec Solutions, Incorporated,
in Houston, Texas. He has over 40 years of wide-ranging
financial and general operations experience with closely held
and publicly held companies.
Thank you for being here.
STATEMENT OF RAY RUCKSDASHEL
Mr. Rucksdashel. Thank you, Chairman Graves, Representative
Velazquez, members of the House Small Committee, thank you for
inviting me to testify today.
As said, I am here to testify to let the Committee know
that retirement savings for the small business employees is not
just a necessity, they are a critical component of my company's
ability to attract and retain skilled employees.
As a representative of small business, we offer a 401(k)
benefit to our employees since the company's founding in 2001.
We are not alone in using 401(k)s as a recruiting and retention
strategy. According to a survey conducted by Sharebuilder
401(k), 89 percent of small business owners that offer 401(k)
plans state that their benefit is an important factor for
attracting and retaining the best talent.
So why is this benefit so critical to Quest-Tec? Quest-Tec
is competing for employees in a marketplace where skilled
workers are hard to find. These skilled workers are not just
used in Houston, they are used in any place where the oil and
gas industry is growing, west Texas, North Dakota, and they
will move for higher salaries or better benefits. And so we are
competing with companies all over the country, some of which
are much larger than us.
Quest-Tec learned early on in its 401(k) benefit was easy
to sell to prospective employees since we were matching 50
percent of their contributions. So why is Quest-Tec so generous
with its 401(k) plan? It is simple. The cost is much less than
training, attracting, and keeping good workers. Why? While
401(k) plan is important to Quest-Tec, there is a drawback to
small businesses. 401(k) administration is very complicated. I
have 40 years of experience in financial operations in small
companies, and I don't have the time or the experience to
manage 401(k)s. They are just too complicated.
In addition, there is significant risk in managing 401(k)
plans, and that risk and exposure can serve as a detriment for
small business to offer a 401(k) program. To avoid this risk
and complexity, I have contracted with a professional employer
organization to manage and administer my 401(k) plan.
A PEO is a company that provides payroll, human resources,
and employee benefit solutions to small and midsized companies.
One of the services a PEO can provide to its small-business
clients is access to its 401(k) benefits. By using a PEO to
access 401(k) benefits, Quest-Tec no longer has the
administrative burden associated with a 401(k). My personal
risk associated with being the administrator is minimized, and
Quest-Tec is able to offer benefits that are competitive with
much larger companies.
I think it is important for the Committee to understand
that, in my view, administrative complexities of the 401(k)
plan administration are the biggest obstacles to small
businesses offering employee retirement services. I understand
that the deferment of income for tax purposes is the primary
reason for the 401(k)'s complexity, I understand the need for
strong fiduciary standards, and I understand the need for
strong oversight, but this protection and this disclosure comes
at a price, and that price is complexity and a significant
burden for plan administrators.
Congress should look at ways to both encourage smaller
companies to offer retirement benefits to their employees and
at the same time look to simplify and streamline the
administration of such benefits. Education, outreach, and
improvement to access of the retirement program, like the 401s,
is very important.
I also hope that this forum helps bring to the attention of
the policymakers the challenges facing small businesses who
want to provide these benefits to their employees and begin
discussions on how to make these plans for small businesses to
offer to their employees more successful.
Thank you again for the opportunity to testify, and I
welcome any questions you may have.
Chairman Graves. Thank you all for your testimony.
We are going to start with Mr. Coffman.
Mr. Coffman. Thank you, Mr. Chairman.
I was a small-business employer with 20 employees and
offered a healthcare plan, but we did not have a 401(k) plan
with a match.
For those firms, to me, small business start-ups
particularly in the services industries that have 25 employees
or less, that is a pretty daunting process. And so what kind--I
think you mentioned some tax incentives to offset the
administrative cost. Could you all go into what kind of
incentives that you would see for the really small firms of 25
or less employees?
Mr. Messick. Sure. Why not? Yeah, the $500, I think that is
nice. I mean, it is a nice start for 3 years, but----
Mr. Coffman. Doesn't seem like a lot.
Mr. Messick. It is just not enough to, you know, jump-start
the bandwagon, if you will. It would be one of those things you
might want to try to maybe even double it, maybe even more than
that, phase it down maybe, because, you know, if you can get
them into the plan, they are not going to terminate it after a
year or two, probably not, unless they really have some kind of
adverse business situation. So maybe make it tiered, start off
high, kind of tier it down a little bit, get them hooked, if
you will. So, just my thought off the cuff.
Mr. Coffman. Anyone else? Yes.
Ms. Calimafde. Well, I would say not so much the tax
credit, though I--it is not like I am against it. I think it is
a great idea--but there are things you can do with the law
which would actually help, too. So, for instance, only small
businesses are hit with these laws called the ``top heavy''
rules.
Mr. Coffman. Uh-huh.
Ms. Calimafde. Today--I mean, this is really an accurate
statement. Today they are like an appendix in the human body.
They don't serve any purpose, but they cause problems. And that
is in the defined contribution area; I don't want to speak to
the defined benefit area. But that is an extra additional cost
on administration for small businesses that is truly
unnecessary.
Another thing would be to simplify the 401(k) test, which
is what you were saying. They can be made more simple. There
was a proposal years ago called the ERSA. Simplified, it would
work out really well.
A third idea would be sort of to go through the Code and
take out things which are aimed at small businesses
exclusively. And in this regard I am thinking of like required
minimum distributions where only small-business owners are
required to take money out while they are working from a plan
at 70-\1/2\. You know, just blatant discrimination to small-
business owners.
So my answer would be work with the tax credit, but there
is things where you could simplify that would really help.
Mr. Coffman. Ms. Collinson.
Ms. Collinson. Okay. One thing I would like to add to this,
especially for these small companies of, say, 25 employees, is
the need to create greater opportunities for them to join a
multiple-employer plan, which is a--conceptually it is a group
plan with a plan sponsor that is in an entity who is well
versed in retirement plans that can handle the fiduciary and
administrative duties and take that off the small-business
owners' shoulders. So to facilitate the offering of those types
of plans and then even a tax credit for joining it could help
go a long way towards inspiring plan sponsorship among the
smallest of companies.
Mr. Coffman. Okay. Mr. Rucksdashel.
Mr. Rucksdashel. I have worked with small businesses my
whole career, and the majority of the issues that come to bear
for me when I have conversations about starting a 401(k) with a
business is inertia. These businessmen don't get into business
to run business; they get in business to buy something, sell
something, manufacture something, provide a service. It is not
to run a business. And so the talk about 401(k)s, they don't
understand it. And so the risk involved far exceeds the benefit
to their--what they perceive as their employees. They would
like to help them with their retirement, but the risk to them.
And so if we can minimize the regulation, the hurdles that
are--that they view as getting them into this process, is
going--would go a long way.
Mr. Coffman. Thank you, Mr. Rucksdashel.
I want to thank you all for testifying here today. I think
it is a--you know, as a former small-business owner, and I
think small businesses across the country, we really do need to
have incentives for the owners and their employees to save for
retirement, and so I thank you all for what you are doing, for
testifying here today.
I yield back.
Chairman Graves. Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Ms. Collinson, your study noted that more than half of all
workers feel less confident in their ability to achieve a
financially secure retirement, and that 54 percent of workers
plan to work after retirement.
Given that all the workers have been more adversely
affected by the recession, would allowing other workers the
ability to make larger catch-up contributions be something to
be considered?
Ms. Collinson. Thank you for asking. Anything that we can
do to help older workers save more for retirement, especially
understanding that many will not be able to retire at 65, can
only help better prepare them, help them to help themselves
better prepare.
Ms. Velazquez. And does your data indicate that all the
workers will make those larger contributions despite the
decreased confidence in the financial market?
Ms. Collinson. That is an excellent question, and the first
key to it is awareness. And I spoke in my testimony about
awareness of the saver's credit, which is still low. Among
small company workers it is 23 percent are aware of it. So to
offer some sort of catch-up contribution above and beyond the
current catch-up contribution or incentives, one of the first
things is to make sure that people know about it so that they
can take advantage of it, and also look at it in the context of
when they will conceivably be collecting Social Security,
because many workers plan to work past 65, past 70, are going
to look to generate income from part-time work and may
encounter some sort of conflict with Social Security if they
need to start collecting benefits.
Ms. Velazquez. Thank you.
Paula, one of the biggest challenges, and I believe it was
Mr. Messick that made reference to that, is worker retention.
And we know that many small businesses want to provide a full
range of benefits for their employees. What we find is that
employers realize that health care is generally more important
to the employees and can be more attractive to potential hires.
How often do you experience a small-business owner
allocating their limited employee-benefit dollars to offering
or improving health benefits in lieu of retirement savings?
Ms. Calimafde. Well, it is an excellent question, and it is
probably one of the biggest hurdles for small business owners.
Ms. Velazquez. Uh-huh.
Ms. Calimafde. I think most of us who have been in the
small-business world know that the first 5 years of a small
business' life is fraught with difficulty, and, in fact, the
Small Business Administration has told us back--I think using
2012 data, that 50 percent of all new small businesses don't
make it through the first 5 years. So, you know, the first 5
years are critical to getting stability.
Then, as soon as a company can, it usually goes into the
health insurance market. One reason why is the employees
appreciate that benefit more than retirement plans. And one of
the things I have been trying to figure out is how do you get
employees to appreciate retirement plans more than they do
today, because, particularly if you talk to younger employees,
they would prefer a cash bonus.
Ms. Velazquez. Or how can we avoid creating an either/or
situation for small-business workers when it comes to these two
priorities?
Ms. Calimafde. Right. I think that----
Ms. Velazquez. Would any of the other witnesses like to
comment?
Ms. Calimafde. I think health care usually just wins, and
then once the business gets a little more stable, a little more
profitable, then the retirement plan. But this is an area where
education across the board would be really helpful with
employees realizing the younger they save, the better off they
will be.
Ms. Velazquez. Yeah.
Mr. Messick.
Mr. Messick. I will talk about that a little bit, too.
There is no doubt that health care is number one. It is the big
elephant in the room. There is no doubt. That will always be
number one.
As far as being able to integrate a plan, too, it is that
issue is like you got to take care of the health insurance for
your employees first, and then the qualified plan comes second,
so that the issue is is there something we can do to maybe take
some of that burden for starting it up off that employer so
that they say, yeah, you know what, I can do this, I can do
both, start off small, and it gets better once you get some
dollars into it, but that start-up is tough.
Ms. Velazquez. Okay. I guess they are calling.
Chairman Graves. No.
Ms. Velazquez. I have time for 1 more minute.
Mr. Messick, borrowing against retirement is not always a
good first option. Yet for small businesses having difficulty
accessing loans, it might be their only option to invest in
their business or create cash flow during difficult times, hard
times. In your experience, does the ability to borrow from
401(k) plans and not in SEP and SIMPLE plans affect a small
business decision to offer a retirement plan?
Mr. Messick. I think it does somewhat. I mean, there is no
doubt that people like that--or a lot of employees like the
ability to borrow from their account. And one of the things is,
yeah, you can borrow up to half of your invested account
balance, 50 grand is the cap, and that is nice.
The issue becomes, though, with the employees that borrow.
I mean, you obviously have to offer that to them, too. I mean,
that is only fair. But the problem is is when they leave
employment, they never pay those loans back, and then taxwise
they get crunched. You know, they are always under 59-\1/2\, so
they have the 10 percent penalty. They are paying the Federal
tax and the State tax. They don't have much left for
retirement. So, I am more concerned about that than the
business owner being able to borrow to maybe help start his
business.
Ms. Velazquez. Thank you.
Yes.
Ms. Calimafde. One way of looking at loans is that the key
is to get employees to save in their retirement plan, because
we know that works. When you have the ability to borrow money,
I think, psychologically it makes employees think, I will put
in a little bit more because if hard times come, I know I can
get back--get this money back. So I think it actually is
something that increases the amount of savings is having the
ability to borrow it if you really needed it, and borrowing
from a plan, there is usually a cost involved.
You know, most of the small-business plans run through
either a TPA or an institution, and there is usually, you know,
$50, $100 fee to borrow. So you are not going to go in and try
to borrow $500 for something that is sort of not that critical
when you know $100 is going to go right off the bat.
So, the money doesn't get--it is usually not spent
frivolously, I don't think.
Ms. Velazquez. Thank you.
Thank you, Mr. Chairman.
Chairman Graves. Mr. Tipton.
Mr. Tipton. Thank you, Mr. Chairman, and thank the panel
for being here.
Ms. Calimafde, could we maybe explore a little more in what
the ranking member's question was in regards of either/or when
it comes to health care versus a retirement plan. Do you see a
real challenge as we continue to see government regulations
increasing costs on small businesses? Out of the small business
department, we have the statistics that we $10,585 per employee
in just regulatory costs alone that are being assumed by
businesses. We are seeing the hourly wage right now of
Americans actually being hurt based off of rules, regulations,
and law redefining the workweek in America from 40 hours to 30
hours. You know, there was a time in this country when we
fought to have a 40-hour workweek, and now we are trying to
fight to get a 40-hour workweek back in this country.
So do you see some opportunities? Do you have some advice
for Congress to help get out of the way of business so that
they can actually not be in that either/or sort of a situation,
but actually to be able to take some of the resources that
government is demanding to meet government regulations,
government rules, and actually get it in the pockets of people
that are working hard and struggling right now?
Ms. Calimafde. There is no question that the cost of
regulation in the qualified retirement plan system is
significant and could definitely be reduced. So, for instance,
there is a number of groups that are trying to persuade
Department of Labor that we should be able to have electronic
delivery of notices. We are still--you know, right now we are
still doing paper delivery of notices. And if you were to see
the amount of notices that a small business is supposed to give
employees not just in the qualified retirement plan area, but
that alone is enough, but then when you get into health
insurance and these other areas, I mean, literally there is
like hundreds of notices required and all different dates.
[1:45 p.m.]
Ms. Calimafde. And unfortunately most of these notices are
very long, complicated types of notices that most employees
don't even read. So it would be far more effective to have
electronic delivery. You could have big boxes and colors and,
you know, dollar signs, put money in the retirement plan; would
get far more than 10 pages of fee disclosures, for instance. So
absolutely there could be a lot done to help us out here.
Mr. Tipton. Great.
Ms. Collinson, you deal with a lot of people. Are you
seeing a trend now, given expanded rules, expanded regulations,
and law now, to where we are seeing more and more people become
part-time employees, actually hurting the American workforce,
that this is going to really be discouraging employers and
employees as well because they aren't going to be able to get a
40-hour workweek anymore, it is now 30 hours, from really
participating in a retirement program?
Ms. Collinson. Well, one thing that our research found is
that in small business in our survey sample population, the
workforce was more likely to be a part-time employee compared
to large companies. So part-time employees are widely used
among small business, and so that is something to be very
mindful of.
We have not yet seen the trend that you are alluding to,
will employers start moving employees to part time.
Mr. Tipton. Yeah, this is brand new coming in.
Ms. Collinson. We are on the lookout for that, have not
seen that yet, but that is something that we are monitoring for
in our research, given all of the news reports of it.
Mr. Tipton. Great.
Well, Mr. Messick, you were alluding as well when small
businesses--and we just heard great testimony--that are
struggling, having a tough time particularly those first 5
years, trying to do the right thing. Because I am a small
business guy. Your employees become your family. You spend more
time with them than you do with your family actually. But when
they are trying to do it, we are actually seeing government
rules, government regulations, government law that is just
making it prohibitive and complex to actually even put a
program together to incentivize savings. Is that accurate?
Mr. Messick. Well, it is tough. I mean, there are a lot of
rules and regulations, and you really have to hire somebody
like me to figure it out, and I am appreciative of it, thank
you very much. But it is rough, and that is why I was--I talked
a little bit about maybe streamlining, some kind of a
simplified, you know, Safe Harbor 401(k), you know, maybe make
the required contribution a little bit less, maybe take some of
the fiduciary liability off the table by just saying if you
just invest in target date funds, you are good to go.
I mean, there are some things you could do that would
encourage small business, I think, to maybe offer some of these
plans without it being hugely burdensome, you know, maybe a
simplified 5500 reporting for that type of plan, you know, a
one-pager, you know, and people will charge less then. I mean,
we will. I mean, the marketplace will force us to, and I think
that would be good for these small employers.
Mr. Tipton. We will hold you to that charging.
Mr. Messick. Well, yeah. We will talk. We will talk. Okay.
Mr. Tipton. Thank you, Mr. Chairman.
Chairman Graves. Ms. Kuster?
Ms. Kuster. Thank you very much, Mr. Chairman, and thank
you for your testimony.
I am also a small business--was in small business, and I am
very appreciative of the opportunity that we had for retirement
savings. Particularly with two sons in college and the expenses
that you have in life, it is important.
I wanted to delve into an issue that you may be aware of,
and this is the Department of Labor finalizing a proposal for a
new definition of ``fiduciary investment advice'' under ERISA.
It sort of gets at, Mr. Messick, what your role is. But I
wanted to probe a little bit further, because I am concerned
about an additional hurdle for the type of people that can
provide the information that small businesses need for their
employees.
So if this new definition prohibits plan providers from
assisting small-business plan sponsors in selecting and
monitoring investment options, how would that impact your
ability and willingness to offer a plan? And specifically would
it increase costs?
What this new proposal is about is that they are changing
the definition on ``fiduciary investment advice'' and making it
more stringent so that people can't--they would have to be
highly regulated if they were offering that kind of advice.
Yes, Mr. Messick?
Mr. Messick. Well, we don't offer investment advice. I
mean, we are just third-party administrators and recordkeepers.
But intuitively--I might defer to some of my colleagues here,
but intuitively that just may not--I don't think you want to
make it harder on small businesses. It sounds like it might
make it harder, and then they are just going to say, well,
gosh, you know, if I can't get any help, any assistance, and
these things are expensive, it is just going to make it worse
potentially. But like I said, I am not totally an expert in
that specific area.
Ms. Kuster. Right.
I didn't know if any of the other witnesses had anything to
add to that.
Ms. Calimafde. I have a thought on this, which is I think
the problem the Department of Labor is getting at is if you
have a plan with an institution, and you are dealing with a
broker, it is probably human nature, or it may be human nature,
that that broker would try to steer some of the employees in
the plan more to the institutional's products than some other
institution's product because the broker will get a greater
commission.
So I think that is the issue, and the question is is this
the best way to go about it, and my guess is it probably is
not. It is a difficult issue, and I know like if every small
business could afford to have an independent adviser,
investment adviser, that would be the best way, but I would go
at it almost completely the opposite way. I would say that a
small business that has gone out and has found an institution
that has X amount of assets under its investment, or--that they
should not have fiduciary responsibility at all at that point.
You know, so for instance if I go out to, you know, Vanguard or
Fidelity, or name any of them, that that is--just by definition
that institution should be releasing me from fiduciary
responsibility versus me going to my uncle who has, you know,
$1,000 under his own management and I say, here, manage my
fund. Well, clearly I have breached my fiduciary responsibility
if I am an owner sponsoring a plan.
Ms. Kuster. Thank you very much.
Any other comments?
That was the gist of my concern, and I am concerned about
this rule, that it will make it more difficult, more expensive
for small businesses to be able to offer plans.
So on that I yield back and thank you, Mr. Chairman.
Chairman Graves. Mr. Rice.
Mr. Rice. Thank you, Mr. Chairman, and thank you, panel,
for being here today. A lot of you came a long way, and
appreciate your expertise.
I spent my professional career as a tax lawyer and a CPA. I
set up a couple of these plans, but this area is so very
complex, that it got to where I would just refer these people
out rather than setting these things up. It is a specialty
under tax law, and even people who practice, tax lawyers, are
such nerds that normal lawyers don't even want to do that. So
it is a very, very complex area, and just my observation would
be anything we can do to relieve that complexity and liability
on small employers is what we need to do.
Do you see these--a lot of breaches of fiduciary duty in
your practices? Just curious. Do you see that as a big problem,
employers stealing from or mismanaging these funds? Do you see
that?
Ms. Calimafde. I will start, but I am sure more--everyone
should join in on this. And the answer is a resounding no in
the small business area because this retirement plan is the
primary way that that owner or owners are going to be able to
save for their own retirement, because most small businesses
can't be sold, or certainly not sold for enough money that they
are going to be able to retire on it. And the whole world of
nonqualified deferred compensation plans is not available to
small business owners because of the Tax Code, so that means
the retirement plan is their way to save for their own
retirement. They have invested a lot of money into that plan.
Why would they do anything that would jeopardize that--those
investments? So, to me, I have always sort of felt like if you
want to look at fiduciary issues, you are in the wrong place
when you are in the small-business world.
And sometimes I kind of bristle when I hear about the sort
of notion that these small-business owners are sort of these
clueless blobs just out there without any idea what is going on
with their money, or their plan, or, you know, any of this, and
I just--to me it is--these are the folks who are running our
entire economy to a large extent. These are people who have put
their life on the line to start this business. Many of them
have put their houses on the line to start this business. What
makes us think that these people are incapable of understanding
that they have got a lot of their savings in a retirement plan,
and that they are not going to take care of it?
So I just start from the entirely opposite premise. We
have--I can't think of a time that I have ever heard or seen in
my practice any issues with fiduciary responsibility.
Mr. Rice. Nor I.
Mr. Messick?
Mr. Messick. Oh, I concur. I mean, we work with lots of
quality investment advisers, and they are picking the fund
line-ups from, you know, various places, and it is a total
nonissue. Never an issue. And I think every business owner is
smart enough to know that, you know, I don't think I am just
going to offer a precious metals fund, and that is it, we will
be fine. So it is really a nonissue.
Mr. Rice. And Ms. Collinson?
Ms. Collinson. The thing I would like to add is we are
talking about small businesses and encouraging them to sponsor
retirement plans. Our research has found that cost,
administrative complexity, and concerns about the potential
fiduciary liability are deterrents to them, and anything that
we can do to help alleviate that is going to encourage them to
sponsor plans and help their workers to save.
Mr. Rice. I totally agree, you know, and I think one of the
problems we suffer from here in this job as legislators is we
think that we need to issue all these laws to protect people
from things that just aren't real problems, and that creates
all these strict guidelines and creates jobs for you and myself
as a tax lawyer and a CPA. And I think anything we can do to
relieve all these strict requirements and regulations is what
we need to do if we really want people to participate in this
on a broader scale.
Thank you very much for being here.
Chairman Graves. Mr. Payne.
Mr. Payne. Thank you, Mr. Chairman.
Ms. Calimafde, you noted in your testimony that about half
of new businesses survive their first 5 years, and only about a
third of new businesses survive for 10 years or more. You also
said that no matter how much a small business owner cares about
his or her employees, and we know that they tend to end up
being like family, offering a retirement plan is often a
secondary concern.
Do you or any of the other panelists know the percentage of
new small businesses that offer retirement plans? And has a
connection been found between the business' retirement plan
offerings and its longevity?
Ms. Calimafde. Well, we have some data. We don't have--
anecdotally I can tell you in my practice it is clear that once
a business--it is not longevity as much as once a business
becomes profitable and stable, then right away they move into
the retirement plan area if they can.
But we do know from this study that was done by Social
Security, and it is cited in my testimony, that the size of the
company makes a difference in how much coverage--how many of
those businesses sponsor retirement plans, which is not
surprising because the smaller the company, the more likely
they are to be in that start-up phase. So we know that 46
percent of small businesses with more than 10 employees, but
less than 25 offer a retirement plan. And we know 60 percent of
small businesses with 25 employees, but less than 50 offer a
plan. It moves up to 70 percent when you have 50 employees, but
less than 100. It goes to 84 percent when you have 100. What we
don't know in this particular study, we don't know the
breakdown after 100, and most people think of small business as
going up to 250 employees or 500 employees. So my guess is once
you get up to the 250, you are at a level that is very similar
to larger businesses.
So that is sort of a half answer for you, but there is no
question if a business owner feels like he or she or they are
fighting for their lives and can't make payroll, it is just
probably not a good time to start talking to them about setting
up a retirement plan.
Mr. Payne. Right.
Any of the other panelists?
Ms. Collinson. Yes. In our research, when we asked small-
business owners why they don't plan to offer a plan in the next
couple of years, the subject of business stability also comes
up in terms of they are encountering difficult business
conditions, which is a deterrent from setting up a plan. They
are focused on staying afloat.
Mr. Payne. Okay. Please?
Mr. Rucksdashel. Yeah, it has been my experience that the
entrepreneur, the guy that starts the business, when he gets
profitable enough to start generating his own cash flow, he is
going to want to save it, and that is going to be when he
realizes the best way for him to save it is through this
retirement vehicle. And that is when he begins thinking about
spreading this across to all his employees not only because of
the regulations, but because, like it was said before, these
are really his family. You know, they think about their
employees as their family. And so it is not until they reach
that profitability level that many of the people that I have
been associated with really get into this opportunity. It takes
a while to get to there.
Mr. Payne. Okay. You know, also in addition to incentives,
how do we build awareness and support so that small-business
owners make retirement offerings a priority?
Ms. Calimafde. I have one idea. This is once we have got a
stable company. The folks who pretty much bring the idea of the
plan and the understanding of the plan to the small-business
owners are very often the small-business advisers. So it could
be a CPA, it could be their attorney, it could be an insurance
fellow that they work with. But to the extent we can educate
these advisers about how important it is to set up the plan as
soon as they can, and how it brings along the employees and
employees' savings to the 401(k) plan or the feature, that is
really an audience we need to target is those small-business
financial advisers or their CPAs, attorneys, saying, hey, you
really need a plan; this is how you can do it.
And, you know, there is this sort of--the laws surrounding
the plans are almost ridiculous, and I can say that working
with them for years and years, but a small-business owner
doesn't have to be an expert in retirement plans. They can go
to an institution, and they can find a 401(k) plan and work
with somebody to get that plan set up, or they can go to a TPA
or their accountant. So it is not like we are requiring the
small-business owners to become experts in retirement plan law.
If that were the case, there would be no small business plans.
Mr. Payne. Thank you.
I yield back, Mr. Chairman.
Chairman Graves. Mr. Hanna.
Mr. Hanna. Thank you, Mr. Chairman. I want to ask about
``vestages'' rules. What do most of you consider, and how are
they handled within the plans that you have?
Mr. Messick. I will answer that. Vesting, that applies
where the employer makes a contribution, either a matching
contribution or a profit-sharing contribution. They will
subject that money to a vesting schedule, and what that usually
means is--the most common one we see is like what we call a
graded 6; zero, 20, 40, 60, 80, 100, so that after 6 years of
employment that person is 100 percent vested in that money. If
they leave early, 5 years, 80 percent. So they leave 20 percent
on the table.
So it is designed to encourage some longevity with the
employer. You know, it is that employee retention component. So
it is a good thing. Now, in a Safe Harbor plan, money is 100
percent vested day 1, and that is just one of the deals.
Mr. Hanna. Right. I understand what is going on. What I
want to get to, though, is if an employee--is it appropriate
for an employer to use someone's vestages--vestage plan to
create longevity, and if they earn the money the day they get
there, shouldn't all plans perhaps be treated as Safe Harbor
plans, especially in a climate where people change their jobs
seven or eight times as opposed to, you know, my father and
myself?
I want to ask another question, Ms. Calimafde. You
mentioned that the top heavy rule, you thought, was biased. I
don't know if that was the exact word you used, but I am very
familiar with that. Why do you think that?
Ms. Calimafde. Well, for starters it is based on the
mathematical test, as you know. So if you--a small business
generally has a significant amount of owners compared to
employees, and so they almost always become top heavy. And, I
mean, once you are top heavy today, nothing much happens,
because the way the other rules in the Tax Code operate, you
still have the same vesting schedule. If you are a Safe Harbor
plan, you are basically at the same 3 percent level. So it is
like--the reason why is because it is a mathematical test.
Mr. Hanna. But you said it was biased. I take exception to
that. I mean, I think that what it really does is it guarantees
that a single ownership, one boss, two bosses own the company,
are put in a position where they can't treat themselves
disproportionately better than their employees.
And in terms of we talked about things like fiduciary
responsibility, there has to be some law there to protect the
employee, because this is all they have for their life as they
save it going through. I reference back to vestage rules.
The other thing is that we all remember Bernie Madoff. I
know that he didn't have a lot of small companies perhaps or a
lot of individuals, but the world is replete with fees in that
particular business. Everybody looks good in that business;
they all have the jargon down.
So if you don't like that, if you would like clean
fiduciary responsibility rules, what do you do to save and
protect the average guy who is working day to day, 8 hours a
day, turns 55 years old and expects it to be there, and his
employer borrowed that money out? Because we see every day the
IRS going after the--for people who take FICA money, don't keep
it in a separate account, and spend it, go broke, and there is
no recourse. So people can borrow money out of a retirement
plan, spend. If an individual can go broke, you said leave
their job and not pay it back, what about a business that uses
it, and can't pay it back, and borrows it because they are
already in trouble?
Ms. Calimafde. Well, very good questions, but let us go all
the way back to the top heavy rules, because if your point is
you need some kind of rules to make sure that the employees get
contributions in the retirement plan, the Tax Code does that
without the top heavy rules. That is why I say the top heavy
rules are just like an old appendage that aren't needed. So the
protection is built into the Tax Code, but it is built in in a
number of different discrimination tests today. So 401(a)(4)
provides that kind of protection, and 401(k) provides that kind
of protection. So the Tax Code does protect non-highly
compensated employees.
Mr. Hanna. It provides it if you use it, but you don't have
to use it.
Ms. Calimafde. Well, now, if you are positing what happens
if you have a small business owner who doesn't pay attention to
the brokerage house, or the insurance company, or the TPA and
says, I am putting in whatever I want to--and, by the way,
employers are not allowed to borrow against their retirement
plans; that is a prohibited transaction. Employees are allowed
to borrow against their own account balances if it is at
certain limits. But, you know, if you are positing if a group
of owners does everything wrong, well, are there folks out
there? I am sure there are bad apples out there. Surprisingly,
you would be, I think, I was surprised how much DOL is all over
that. Employees can call the Department of Labor and say, I
don't think my company is running this correctly, and very
often that will trigger an audit.
But in my practice--and it may be because if owners are
coming to me to say, how do I run my plan, then clearly they
are not going to waste their money coming to me and then do
just what they want. They just would skip coming to me and save
my fees, so--and I think that is probably true of everyone on
this panel, you know. Owners are not going to be coming to TPAs
to find out what the rules are and then completely ignore them.
Mr. Hanna. My time has expired. Thank you, ma'am. Thank you
all.
Chairman Graves. Mr. Collins?
Mr. Collins. I want to thank everyone for coming. And, Mr.
Messick, I think you articulated that business owners make a
calculation as to, in some cases, their benefits of
participating, and certainly that is one of the incentives you
get into a profit-sharing or a Safe Harbor contribution
especially.
But I just want to share a story and see if you have heard
anything like this. The medical device tax part of Obamacare
took place January 1. It is 2.3 percent of sales, not profits.
We talk about a 401(k) profit-sharing plan. If there is no
profits, there is no 401(k) profit-sharing plan, 2.3 percent of
revenue in many cases exceeds the profits of the company and
has wiped the profits out. So you could have a fairly
profitable company making 2-\1/2\ percent of sales in profits.
Now all the profits are gone.
There is one local company in the Buffalo, New York, area
that terminated their 401(k) plan the first of the year as a
direct result of Obamacare, of the medical device tax. They had
no choice; they have no more profits. Now, we are early on the
first year of this. I am just wondering, would you see the
sense of a company like that terminating their 401(k) when
their profits are gone, call it an unintended consequence of
Obamacare, but a consequence nevertheless?
Mr. Messick. I will answer that, not that we have any of
those type of clients that I can think of, but it is obvious.
If you are taking 2.3 percent right off the top, and that is
obviously impacting your cash flow and your profitability, you
are going to look for cost-cutting measures, period, and one of
the first things you are going to do is you are going to look
at the match in the 401(k) because that is low-hanging fruit.
You are going to say, well, yeah, we were matching 50 cents on
the dollar up to 6 percent or whatever. Well, at a minimum we
are going to knock that back to 25 cents on the dollar versus
spend it entirely.
But you are right, the law of unintended consequences is a
huge law and one I am a firm believer in.
Mr. Collins. Yeah. Ms. Collinson, do you have----
Ms. Collinson. Yes, thank you.
In the work that we do, our annual survey of employers, we
also do trend analysis in addition to the snapshot that I
presented earlier, and looking at what happened with employer-
sponsored retirement plans during the worst of times, from 2007
to 2012, there was actually some good news in there that
employers were very, very reluctant to terminate their plans.
What we did see was a significant percentage suspending or
reducing their matching contribution, which any reduction in
benefits is clearly disappointing. However, they--we saw--we
did not see evidence of terminating their plan unless the
business itself was going out of business.
Ms. Calimafde. Can I sort of take your question and turn it
around a little bit?
Mr. Collins. Not a problem.
Ms. Calimafde. Though I can say that both of the groups
that I am representing today are not in favor of the medical
device tax, but when you talk about unintended effects, one of
the things that we are very concerned about is in the analysis
of how to reduce the debt, folks have spent a lot of time
looking at this concept of tax expenditures, and the qualified
retirement field gets a really big price tag next to the tax
expenditure. And one of the things we are concerned about is if
the amount of contributions allowed to retirement plan were to
be cut back, or contributions being put into the plan now
became taxable if your tax rate was over a certain amount, that
might seem like, well, that is not going to have much of an
effect, but in the small business-world that will have a
tremendous impact.
And it is because of what we have been talking about when
the owners are going through this analysis if--you know, folks
sort of forget that the owners own the profit, and they don't
have to give it to their employees. They could take it out as
compensation, they could put it back in the business, or they
could do some mixture of those. Well, if the cutback to
contributions in the retirement plan area is significant, and
you still have all the same costs and burdens, most owners, I
think, would say, okay, we will take out the money as
compensation, or we will put more money back in the company,
but we are not going to put it in that plan, because the plan
costs too much. It is just not a good deal for us.
And so what I am worried about is on one hand saying, well,
we are going to get all of this revenue because the tax
expenditure number is so high, and at the other hand you end up
with the retirement security of millions of small business
employees being affected; not the owners, the employees. And
meanwhile, I think those numbers are really skewed because of
the budget, that--the budget time period they are looking at,
and if you ran out knowing that all that retirement plan money
ends up coming back into the system again as taxable, I think
you would find that the real cost is the cost of the time value
of money and not that enormous price tag they are putting on
it.
Mr. Collins. That is a point well made. I appreciate your
comments and yield back, Mr. Chairman.
Chairman Graves. Mr. Huelskamp.
Mr. Huelskamp. Thank you, Mr. Chairman. I appreciate you
having this hearing today. There are some folks that think we
are not working. We certainly are on the House side. There
might be some misimpressions based on perhaps the other
Chamber.
But thank you, gentlemen, for being here. I appreciate the
gentleman from Kansas. I might take exception with Overland
Park being a suburb of somewhere in Missouri, but I will visit
with the Governor about it. I hope you do live in the State of
Kansas. The tax rates are very different, Mr. Chairman, as you
know. But with that, a couple questions.
I think it was mentioned about the regulatory burden on
what you all do that are in the business of advising and
helping out, give a few examples. Can you repeat a few of those
examples and others that you say, hey, this is a significant
burden to limiting what small businesses are willing to do, and
the cost, and the type of paperwork, and things that--as they
always say, the longer the paperwork, the less likely folks are
to read it. You probably see that. Could you give a few more
examples and describe more, and I will ask at the end that you
provide that stack of stuff that is required for the employer
and the employee later to the Committee. So if you could share
some more information on that front, whoever would like to
answer that.
Ms. Calimafde. Well, I will give you one example, and I am
sure the folks to the right and left of me will be able to give
you some more. One is this thing called interim amendments, and
right now we are not getting hit with them that much, but that
is simply because there hasn't been a number of laws recently
in this area.
But what has happened is you all would pass a law, and IRS
would then do--make--you know, do their regulations on it. And
then IRS would say, okay, you have to go amend your plans now
to incorporate the changes we just did in our regulations,
which then meant in the private-practice world--and this goes
to, you know, the huge institutions as well. So they may have
20,000 plans, they are sending out 20,000 of these interim
amendments, you end up with an amendment going to the company
that is, frankly, just gobbledygook. I mean, I could line up a
bunch of ERISA experts, and they would say, who knows what this
means. I mean, it is that bad.
So, you know, we are dancing on the head of a pin. This
amendment gets sent out to the owners. There is usually a price
tag with that amendment, because everyone can't do this for
free, and you end up with owners saying to the TPAs or the
institutions, what does this mean? Why are you giving this to
me? And I am supposed to hand this out to my employees, and
they are supposed to make sense of this?
So this was happening year after year after year, and the
costs were getting significant, and you had a number of small-
business owners who don't like notices to begin with, let alone
nonsensical notices, and it was really getting bad.
Now, IRS is trying to figure out how to work their way
around this, but one easy way is for you all, anytime you pass
a bill where you are trying to help us out, which you do on a
fairly regular basis in this area, it would be great to have
something that says, and, by the way, no amendments are
required to plans until the next time there is a restatement or
for 3 years at least, or something, so that at least we have
some breathing room from this kind of churning of crazy
amendments.
Mr. Huelskamp. I will follow up on that. On the issue of
paper versus electronic, that all has to be paper or in this
particular instance?
Ms. Calimafde. Well, right now the default is paper, and
the default should today be electronic. And I don't know how
many of you have looked at the required fee-disclosure notices
that were handed out to employees. I mean, what a waste of
trees. And it is just a shame because, you know, 10, 15, 20
pages of a notice, well, there is very few employees around who
are going to be wading through that. If it had been done
electronically with maybe a chart right in the front that
someone could look at, we had a chance of them looking at it.
Mr. Huelskamp. Other comments?
I had one other general question. Do you see from the folks
you work with any difference, generational differences? You
know, if you are 30 and under, 40 and under, if you aren't
doing this, you are out of luck. I mean, is the message getting
there yet? Where are we at for younger folks which are going to
be having to heavily rely on this, given the incapacity for
Washington to meet these promises they have made? Yes?
Ms. Collinson. Okay. One thing that we found in our
research of workers, comparing and contrasting the retirement
outlook of different age ranges, and something that is really
quite startling is workers in their twenties share very similar
levels of retirement confidence as people in their fifties,
which are presumably mathematically right about their parents'
age. And what seems to be happening is workers are inheriting
their parents' gloomy outlook. And part of the messaging that
we need to work together to do is they have years, they have
decades to plan and save, and they can change their retirement
destiny; however, they, one, need to be shown the possibilities
as well as have the ability to learn from their parents'
successes as well as missteps so that we can change the course
of history.
As we are looking towards legislative and regulatory
changes that can help facilitate that, the clock keeps ticking,
and it is up to each and every one of us to take greater levels
of ownership of our own retirement outcomes.
Mr. Huelskamp. Thank you. I would be happy if you would
provide a link to that summary, those attitudes. I would be
very interested personally in looking at those.
I yield back. I thank you, Mr. Chairman.
Chairman Graves. Mr. Luetkemeyer.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Just kind of curious. You know, one of the statements that
was made in one of the testimonies today, and I think it was
Ms. Collinson, if I am not mistaken, with regards to people
working past 65, there was some kind of interesting numbers
there. It was like 59 percent people anticipate working past
65; is that correct?
Ms. Collinson. Of the small-company workers, yes.
Mr. Luetkemeyer. Okay. Is this--do you have a reason for
that? Are they just--they need the extra money? They are not
ready to retire yet? They just enjoy working? All of the above?
Ms. Collinson. In most cases it is because they need or
want the income or benefits.
Mr. Luetkemeyer. Okay. So at this point the retirement
benefit is not something that is attractive to them, not a
reason to retire?
Ms. Collinson. They can't afford to retire.
Mr. Luetkemeyer. Can't afford to retire, okay.
It is kind of interesting from the standpoint that, you
know, we have a retirement program sitting there, and they are
not wanting to take advantage of it because it is not good
enough to retire on.
Ms. Collinson. Well, just to be clear, that is all small-
company workers regardless of whether they are offered a plan
or not. And even those who are offered a plan, the majority of
workers in small companies and large companies are expecting to
work past age 65 or not retire simply because they are afraid
they haven't saved enough. And looking at account balances, I
referred to the $92,000 median among baby boomers of small
companies, they need to keep working.
Mr. Luetkemeyer. With regard to the small businesses, I
mean, they are taking a pretty good hit over the last 3 or 4
years. A lot of them probably can't financially afford to build
into their business plans retirement benefits for their
workers. I am just kind of curious, am I right in that? Is
there a trend toward less retirement benefits for their
workers, or are they being able to maintain that or--sir?
Mr. Rucksdashel. Yes, I can speak to that. It goes back to
profitability. It is not a desire to not offer it to employees.
It is when I am being asked to match in a time when the
business economy is slowing down, and my sales are going down,
my margins are going down, I have got 1 or 2 percent to begin
with. So it is no different than your question about the
employees, why are they not taking advantage of retirement when
they are worried about their retirement? It is because today is
more important than tomorrow. So these workers can't--you know,
they get to the end of the month, they don't have enough money,
so let us put $100 or $50 away, well, that is just going to
have to wait. It is the same thing with the employer. My
profitability is going down, and so my contributions to my
employees' retirement is going to have to go down.
Mr. Luetkemeyer. So what you are saying is retirement
benefits are great things as long as you can afford them,
whether it is the employer or the employee?
Mr. Rucksdashel. That is exactly right.
Mr. Luetkemeyer. Thank you.
I will yield back. Thank you, Mr. Chairman.
Chairman Graves. Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman.
I want to ask a little bit different line of questioning.
Just out of curiosity--I ran, I have run several small
businesses before I came here. Some of them did well enough, to
your point, sir, about being able to offer these types of
benefits to the employees. Others didn't; they weren't big
enough, they didn't make enough money. I ran a restaurant, for
example; we didn't offer retirement. And I would see these
young people especially, but also we had folks at the upper end
of the age scale, but young people especially coming in who
weren't saving, and I didn't offer them anything, couldn't
afford to do it.
How can we, as small-business people or as a small-business
community, outside of the realm of an ordinary employer-
sponsored plan--how could we encourage younger folks to start
participating in these plans on their own? I throw that open to
everybody because I don't know the answer to that question. I
am curious about it.
I will ask the same question, by the way, while you are
thinking about it, for older folks. We had folks come in who
were near retirement, wanted to work just a little bit more,
and they didn't participate either. They wanted to save a
little bit extra, but figured, well, it is not worth it because
I can't put enough away in a short period of time to help.
So I am curious about both ends of the spectrum just if
anybody has any thoughts on that. Yes, ma'am?
Ms. Calimafde. We have one thought, which is we call it the
KidRoth, and the idea is today for people to make Roth
contributions, there has to be earned income, and if you took
away the earned income requirement for people, let us say, who
are under 21, and you allowed--so, you know, a 2-year-old is
allowed to have a Roth, and you could have grandparents and
parents and aunts and uncles making small contributions into
this KidRoth for that person. And you would have some special
rules, so you couldn't take money out of this plan until you
are 65, let us say, or maybe you modify it somewhat, but once
you reach 65, you could take money out of it and get only
capital gains treatment instead of ordinary income. You know,
just sort of ways of using the Tax Code to inspire people
instead of buying, you know, the latest, newest toy, I am going
to put some money into this KidRoth. So that is an idea.
Mr. Mulvaney. Ms. Collinson?
Ms. Collinson. Well, one thing that we can do if a
qualified plan or retirement savings plan is not available to
the employee is most employers now use a payroll service that
offers direct deposit----
Mr. Mulvaney. Correct.
Ms. Collinson. And direct deposit into multiple accounts.
Well, what we can do is help educate people on the need to
save, and, better yet, save for retirement, and, when they set
up their direct deposit instructions, to set aside a certain
amount that goes to savings, that goes to a savings account or
an IRA, and the balance of their paycheck to go to their
checking account. And by virtue of that, they are automating a
certain element of savings, setting it aside every paycheck,
and for many people, once that money is in a savings account or
an IRA, it is much safer from withdrawals than in a checking
account where, for many, it is fair game. That is just a very
simple trick to get in the habit of saving.
Mr. Mulvaney. That is available now, and that is legal.
What you mentioned, ma'am, is not. It was just an idea going
forward.
Ms. Calimafde. Right. It would require some changes to the
laws.
Mr. Mulvaney. What about letting the kids opt out of Social
Security? What about letting new folks who come in say, look, I
am going to waive my rights to Social Security, but I am going
to take that same 6, 7 percent, I am going to put that into an
IRA for myself, under the theory that, historically speaking at
least, they would be better off over the long run, plus they
can choose when they want to retire; 62, 72, 82, it doesn't
make any difference. What do you think about that? I would
address you by name, but I have no idea how to pronounce it, so
I am not going to try and embarrass myself.
Mr. Rucksdashel. That is fine.
Mr. Mulvaney. I sit next to Mr. Luetkemeyer, and my name is
Mr. Mulvaney. We feel your pain.
Mr. Rucksdashel. They pronounce it Rucksdashel.
We have seen that already. In Texas, the teachers society
opted out years ago from Social Security. They had their own
Texas teacher retirement. They have their retirement plan, and
they cannot benefit from any Social Security. Of course, my
wife is bitter about that that she gets none of my Social
Security, but that is another issue.
But in that particular case, if they can see--they can take
that money that probably to a young employee today is skeptical
that they will ever see it in Social Security. If they can see
they are directing it, I think that is a very strong
possibility.
Ms. Calimafde. I would--I mean, I understand what you are
saying, and it certainly has some merit, of course. The problem
with it is that Social Security is a defined-benefit system, it
is an annuity system, so you can't outlive those payments. And
the qualified retirement plan system today is largely a
defined-contribution system. So the two are sort of dovetailing
quite nicely right now. I could see some people being concerned
that if you went only to a Social Security system where it was
based on contributions going in and not a guarantee that you
would be getting annuity payments throughout your lifetime,
that we would have removed a safety net for some people.
Mr. Mulvaney. Thank you very much. Appreciate your
participation.
Thank you, Mr. Chairman.
Chairman Graves. I want to thank all of our witnesses for
being here today. Obviously saving for retirement is always
going to be a challenge, for Americans, and with an aging
workforce and the uncertainty in Social Security, I think it is
more critical than ever.
We appreciate the new data and everyone bringing in your
ideas and thoughts, and we are going to continue to monitor
this issue. And with that I would ask unanimous consent that
all Members have 5 legislative days to submit statements and
supportive materials for the record. Without objection, that is
so ordered.
And with that, the hearing is adjourned. Thank you.
[Whereupon, at 2:31 p.m., the Committee was adjourned.]
A P P E N D I X
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Testimony of Ray Rucksdashel, Chief Financial Officer, Quest-Tec
Solutions
The Challenge of Retirement Savings for Small Business
Before the House Small Business Committee
October 2, 2013
I would like to thank Chairman Graves, Representative
Velazquez, and the House Small Business Committee for inviting
me to testify today.
My name is Ray Rucksdashel, and I have 40 years of wide-
ranging financial, operational and general management
experience as a partner in charge of consulting. Chief
Financial Officer and Chief Operating Officer for businesses
from closely held companies to publicly held companies at the
senior executive level. I have worked and consulted in a
variety of industries including manufacturing, sales and
distribution, mortgage banking, and financial institutions. My
consulting experience encompasses clients across the country
and Canada, and includes working in and consulting with
virtually all operational areas including sales, operations,
human resources, information technology, treasury, accounting,
and finance.
Currently, I am the Chief Financial Officer for Quest-Tec
Solutions (``QTS''), located in Houston, Texas. QTS specializes
in the development, engineering and manufacturing of products
used primarily in the oil and gas industry, such as magnetic
level indicators, liquid level gages and valve product lines.
We also manufacture, steam level indicators, and liquid level
gage accessories. QTS is a privately owned business that
employs 38 people, primarily skilled employees in trades such
as welders, CNC machinists, engineers, draftsmen,
instrumentation specialists, and shop foremen. QTS is on track
to do about $12 million in sales this year.
I believe that the subject of today's hearing is very
important and I am pleased and honored to testify on this
matter on behalf of small businesses. I am here to tell the
committee that retirement savings are not just a necessity--
they are a critical component of my company's ability to
attract and retain skilled employees. QTS has offered a 401(k)
from the very beginning. In fact, there was a 401(k) in place
with the predecessor company to QTS when I joined that company
in 1996. It has long been part of our strategy to attract and
retain skilled employees. QTS is not alone in using this
strategy. According to a survey conducted by Sharebuilder
401(k), 89 percent of small business owners that offer a 401(k)
plan state that this benefit is an important factor for
attracting and retaining the best talent.
So why is this benefit so critical for QTS? QTS is
competing for employees in a marketplace where the skilled
workers the company needs are in high demand, not only in the
Houston area, but in other parts of the country where the oil
and gas industry is growing, such as North Dakota and West
Texas. Individuals with these skills will move for higher
salaries and better employee benefits. QTS needs attraction and
retention tools such as a 401(k) in order to compete for these
highly skilled employees. The 401(k) plan that QTS offers is
something we use to distinguish our company from others.
QTS learned early on that our 401(k) benefit was easy to
sell to prospective employees since we were matching part of
their contributions. It not only encourages our employees to
save for their own retirement, it gave us another benefit to
help us edge out our competition in hiring the best prospects.
QTS matches 50 percent of an employee's contribution, up to a
company maximum contribution of three percent. So, if an
employee contributes six percent, it's the same as giving him
tax-deferred income of 3 percent of his salary.
So why is QTS so generous with its 401(k) plan? It's
simple. It costs the company far less to offer generous 401(k)
benefits than it does to hire and train a new skilled employee.
Turnover is a significant yet hidden expense that can be
overlooked by managers. In addition, long-term employees are
more loyal and enjoy greater satisfaction in their jobs with
these benefits. That, in turn, leads to more productive and
engaged employees. Moreover, offering retirement benefits to
our employees is the right thing to do, as it allows them to
secure their futures. We show our employees that when an
average 45 year old contributes to their retirement plan along
with our contribution on his behalf, by the time they reach
retirement age, they would have saved $150,000.
All QTS employees are eligible to participate in our
company's 401(k) plan. I would classify 23 of QTS' employee as
``skilled''--people who are welders, CNC machinists, engineers,
draftsmen, instrumentation specialists, shop foremen, sales
personnel and management. These are the employees QTS has a
hard time finding and the company does whatever it takes to
keep them. Of these employees, more than 60 percent (14)
participate in our 401(k) plan.
While our 401(k) plan is important to QTS, there are
drawbacks for a small company like mine that wants to offer
retirement plans to their employees. Administering these plans
is extremely complicated. As I mentioned earlier in my
testimony, even though I have 40 years' experience in financial
operations in small companies, there is no way I have the time
or expertise to understand all of the rules governing the
operation of a 401(k). In addition, there is significant risk
in managing a 401(k) plan, and that risk and exposure can serve
as a deterrent for a small business to offer a 401(k) program.
To avoid this risk and complexity, I have contracted with a
professional employer organization (PEO) to administer my
401(k) plan. A PEO is a company that provides payroll, human
resource, and employee benefits solutions to small and mid-
sized companies. One of the services a PEO can provide to its
small business clients is access to 401(k) benefits. By using a
PEO to access 401(k) benefits, QTS no longer has the
administrative burden associated with a 401(k), my personal
risk associated with being a plan administrator is minimized,
and QTS is able to offer employee benefits that are competitive
with larger companies. And we are not the only ones: According
to a new study by McBassi and Company, PEOs offer retirement
plans to small businesses that would be unlikely to sponsor
them otherwise, and their employees participate at much higher
rates than small businesses that do not use a PEO.
I think it is important for the committee to understand
that, in my view, the administrative complexities of 401(k)
plan administration are the biggest obstacles to small
businesses offering employee retirement benefits. As a CFO, I
understand that the deferment of income for tax purposes is the
primary reason that 401(k) plans are complex. I understand the
need for strong fiduciary standards to protect those who invest
their earnings into these plans. And I understand the need for
oversight and rules ensuring that participants understand their
rights and are fully informed of the risk associated with
investing their money in these plans. But these protections and
disclosures come at a price, and that price is complexity and a
significant administrative burden on plan administrators.
The Government Accountability Office (GAO) found that there
are 43 million people who work for businesses that employ 100
or fewer people, and only 14 percent of those companies offer
retirement benefits to their employees. This data is clear
evidence that there are obstacles preventing small companies
from offering retirement plans. The GAO and private surveys
have found reasons such as complexity, legal liability, and
cost as the obstacles to small companies offering retirement
benefits. Because of these obstacles, many working Americans do
not have access to retirement savings programs. The fact that I
have to use an outside administrator speaks to the complexity
and administrative burden of retirement plans.
Congress should look at ways to both encourage smaller
companies to offer retirement benefits to their employees and
at the same time look to simplify and streamline the
administration of such benefits. Education, outreach, and
streamlining regulations are just a few steps that have been
suggested to improve access to retirement programs like
401(k)'s. I also hope that this forum helps bring to the
attention of policymakers the challenges facing small
businesses who want to provide these benefits to their
employees, and begins discussions on how to make such plans
easier for small businesses to offer to their employees.
I would be happy to answer any questions you have.
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The American Institute of Certified Public Accountants
(``AICPA'') would like to thank Members of the Committee for
the opportunity to submit this statement for the record of the
hearing on The Challenge of Retirement Savings for Small
Employers, held on October 2, 2013. I am Jeffrey A. Porter,
Chair of the AICPA Tax Executive Committee. I am a sole
practitioner at Porter & Associates, CPAs, a local firm in
Huntington, West Virginia, which concentrates on providing tax
planning and business advisory services for local businesses
and high net worth individuals.
The AICPA is the world's largest member association
representing the accounting profession comprised of over
394,000 members in 128 countries and a 125-year heritage of
serving the public interest. Our members advise clients on
federal, state and international tax matters and prepare income
and other tax returns for millions of Americans. Our members
provide services to individuals, not-for-profit organizations,
small and medium-sized businesses, as well as America's largest
businesses.
We appreciate the Committee's efforts to promote retirement
savings and provide small businesses an opportunity to set up
and maintain retirement plans for their owners and employees.
Our remarks, which are supportive of this objective, focus on
tax and simplification issues impacting many small businesses,
specifically: (1) the various types of retirement plan options;
(2) consolidation and simplification of the multiple types of
tax-favored retirement plans and the rules governing them; (3)
top-heavy provisions; and (4) repeal of the requirement that
benefits become fully vested upon a partial termination of a
qualified retirement plan.
Retirement Plan Options
The Internal Revenue Code (IRC or ``Code'') provides for
more than a dozen tax-favored employer-sponsored retirement
planning vehicles,\1\ each subject to different rules
pertaining to plan documents, eligibility, contribution limits,
tax treatment of contributions and distributions, the
availability of loans, portability, nondiscrimination,
reporting and disclosure. Although some consolidation of the
rules governing these options has been introduced in recent
years, further simplification of the confusing array of
retirement savings options should be undertaken.
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\1\ Currently the following plans are representative of the variety
that may be sponsored by an employer: simplified employee pension
(SEP), salary reduction SEP, savings incentive match plan for employees
of small employers (SIMPLE), SIMPLE-401(k), profit sharing, money
purchase pension, 401(k), 403(b), 457, target benefit, defined benefit,
cash balance and the new defined benefit/401(k) combination created in
the Pension Protection Act of 2006 (Pub. L. 109-280).
When a small business grows and begins to explore options
for establishing a retirement plan, the alternatives, and the
various rules, can become overwhelming. There are too many
options that businesses need to consider before deciding which
plan is appropriate for them. Some plans are only available to
employers with a certain number of employees, whereas other
plans require mandatory contributions or create significant
administrative burdens. Such administrative burdens include
annual return filings, discrimination testing, and an extensive
list of notice requirements with associated penalties for
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failures and delays in distributing such notices to employees.
To determine which plan is right for their business, owners
must consider their cash flow, projected profitability,
anticipated growth of the work force, and expectations by their
employees and co-owners. The choices are overwhelming, and many
are too complex or expensive for small business owners.
Consolidation and Simplification of Retirement Plan Options
We recommend that the multiple types of tax-favored
retirement plans currently available and the many rules
governing such plans be consolidated and simplified to minimize
the cost and administrative burden for employers.
Possible measures for simplifying the number and complexity
of the various types of retirement plan vehicles include:
1. Create a uniform employee contributory deferral type
plan. Currently there are four employee contributory deferral
type plans: 401(k), 457, 403(b), and SIMPLE plans. Having four
variations of the same plan type causes confusion for many plan
participants and employers. While we would like to see a more
streamlined approach with regards to these types of plans, we
also acknowledge that keeping a simple plan as well would
benefit small businesses.
2. Eliminate the nondiscrimination tests based on employee
pre-tax and Roth deferrals for 401(k) plans. These tests
artificially restrict the amount higher-paid employees are
entitled to save for retirement by creating limits based on the
amount deferred or contributed by lower-paid employees in the
same plan. They result in placing greater restrictions on the
ability of higher-paid employees to save for retirement than
those placed on lower-paid employees. Although the 403(b) plan
is of a similar design, there is no comparable test on
deferrals for this type plan.
There are currently two tests:
a) The actual deferral percentage (``ADP'') test
which limits the amount highly compensated employees
can defer pre-tax or by Roth after-tax contributions by
reference to the amount deferred by non-highly
compensated employees. This test applies only to a
401(k) plan.
b) The actual contribution percentage (``ACP'') test
similarly limits the amount of employer matching
contributions (which are based on employee
contributions) and other employee after-tax
contributions that highly compensated employees may
receive. This test is applicable for both 401(k) and
403(b) plans.
An example of complexity in the rules is as follows: In the
case of the traditional 401(k) plan, both the ADP and ACP texts
would apply, while the same deferral and match formula in a
403(b) plan would result in only the ACP test being applicable.
3. Create a uniform rule regarding the determination of
basis in distributions. Depending on the plan type, there are
currently different methodologies to be used to determine basis
in a distribution. For example, in a Roth individual retirement
account (IRA), basis is considered returned first while in a
traditional IRA or 401(k), including Roth 401(k)s, basis is
distributed on a pro-rate basis, and distributed based on an
algebraic formula if there are a series of payments. In
addition, there are complicated rules concerning the
aggregation of accounts. For example, traditional IRA accounts
with pre-tax and after-tax (not Roth) contributions are
aggregated separately from Roth IRA accounts. There are also
special basis recovery rules in defined contribution plans that
contain pre-tax, after-tax and Roth contributions.
4. Create a uniform rule of attribution. Currently, the
rules of attribution are governed by different Code sections
which each have subtleties and are used for different purposes:
a) Section 267(c) \2\ referenced and modified in
determining a disqualified person under prohibited
transaction rules.
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\2\ Unless otherwise indicated, all ``section'' references are to
the Internal Revenue Code of 1986, as amended (the ``Code''), and to
the treasury regulations (the ``Regulations'' or ``Reg.'') promulgated
pursuant to the Code.
b) Section 318 for determination of highly
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compensated and key employee status.
5. Create a uniform definition for terms to define owners.
Currently, there are different definitions for the terms
``highly compensated employee'' and ``key employee.'' A
defining factor of a ``highly compensated employee'' is a five-
percent owner which is further defined as an individual with a
direct or indirect ownership interest of more than five-
percent. The ownership rules governing a ``key employee''
consider the five-percent ownership rule but also consider
persons owning one-percent with compensation of $150,000 or
more annually.
6. Eliminate the required minimum distribution rules.
Participants must begin taking distributions beginning at age
70\1/2\ or be subject to penalties. In the case of qualified
plans, a less than five-percent owner who continues employment
may defer taking distributions until his or her subsequent
separation from service. Additionally, in the case of a
traditional IRA, the participant is entitled to consolidate
multiple accounts, subsequently taking a required minimum
distribution from a single IRA; however, in a qualified plan
the required minimum distribution must be taken from each plan
individually and consolidation is not permitted.
If full elimination of required minimum distribution rules
is not possible, the age requirement of 70\1/2\ should be
addressed. The rules would be better served if the
distributions were required to begin on a specific birthday as
opposed to the computation of the ``half-year birthday'' for
purposes of these regulations.
7. Create uniform rules for early withdrawal penalties.
There are currently different rules governing penalties
depending on whether the account is an IRA or a qualified plan.
An example of this complexity is a distribution for higher
education expenses; for an IRA the distribution avoids the ten-
percent excise tax, while a hardship distribution from a
qualified plan is still subject to the excise tax. The same is
true for qualified first-time homebuyer distributions and
medical insurance premiums.
Top-Heavy Provisions
The top-heavy rules were enacted under the Tax Equity and
Fiscal Responsibility Act of 1982 (``TEFRA''), and subsequently
amended, to protect employees when an employer offers a
retirement plan which primarily benefits its ``key employees.''
\3\ Section 416 imposes a minimum vesting period of either six-
year graded or three-year cliff and requires a minimum
contribution of generally three percent for ``top-heavy''
plans. Retirement plans are considered top-heavy for a year,
and therefore subject to the above rules, if the aggregate
value of the key employees' accounts exceeds 60 percent of the
aggregate value of all of the employees' accounts under the
plan.\4\
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\3\ Generally, a key employee is defined as an officer with
compensation in excess of $130,000 (indexed annually), a 5%-or-more
owner, or a 1%-or-more owner with compensation in excess of $150,000.
IRC section 416(i)(1)(A).
\4\ IRC section 416(g)(1)(A)(ii).
Based on our members' experiences, the imposition of the
top-heavy rules for retirement plans is causing some employers
to (1) cease employer contributions to their plan, (2)
terminate existing plans, or (3) not adopt a plan at all to
cover their employees. This is primarily an issue with small
and family-owned businesses sponsoring a 401(k) plan which
consists of employee deferrals only, or employee deferrals and
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employer matching contributions.
Many small business retirement plans inevitably become
subject to the top-heavy provisions for two reasons. First,
most small businesses are owned by family members or a close
group of individuals. Due to this type of ownership, it is
common that the owners remain relatively static over the life
of the business. As such, there is frequently very low or no
turnover of its key employees. Second, in today's work
environment, employee turnover is commonplace. It is not
unreasonable for employees to change jobs multiple times over
their working careers as personal goals change, their skills
improve, or they move geographically. Due to the static
ownership of small businesses and the increasingly transitory
employee base, it is becoming a certainty that most retirement
plans sponsored by small businesses will become top-heavy at
some point during the life of the plan.
Some small businesses can satisfy the top-heavy
requirements. These businesses adopt provisions for their
retirement plans to meet safe-harbor designs, such that they
either provide for a matching contribution that rises to a
statutory level (i.e., four percent for a 401(k) plan) or they
provide for a non-elective contribution of at least a statutory
rate (i.e., three percent for a 401(k) plan).
Unfortunately, many small businesses cannot afford to meet
the strict contribution requirements imposed by the top-heavy
rules. Their profitability margins and financial situations are
such that these contribution levels cannot be attained. During
the recent economic downturn, retirement plan contributions--
specifically matching contributions--were an issue for many
employers. Many employers which were able to satisfy the safe
harbor requirements in the past were no longer able to continue
making the same contributions. In too many cases, top-heavy
rules become a financial burden by imposing an employer
contribution for deferral only plans--where there was never
intent for an employer contribution, or by requiring an
additional contribution of three percent on top of the matching
contribution the employer previously determined as being
affordable to their budgetary and cash-flow constraints. As a
result, the employers terminate the plan, which significantly
diminishes the ability of their employees to save for
retirement.
Prior to the top-heavy provisions, some employers
terminated employees prior to vesting in order to use the
forfeited dollars to reduce their contributions to the plan for
current and future years. However, at the time these rules were
passed, vesting schedules were 10-year cliff and 15-year
graded. Employer plans are now subject to minimum vesting
periods of either three-year cliff or six-year graded. The
Pension Protection Act of 2006 changed the non-top-heavy
defined contribution vesting schedule to generally coincide
with the top-heavy schedule for contributions made after
December 31, 2006. As a result, many defined contribution plans
are unaffected by the top-heavy vesting requirements.
We recognize that the top-heavy rules were enacted to
address the concern that employers will ``churn'' their
employee base prior to the participants becoming fully vested.
However, based on our members' experiences, smaller employers
suffering from these top-heavy rules employ moderate matching
formulas--less than those offered in safe-harbor 401(k)
designs. Their actual cost of hiring and training employees is
much greater than any benefit they might gain from this
practice.
Although employees who find themselves not covered under an
employer-sponsored 401(k) plan could contribute to an
individual retirement account, the AICPA thinks that an
employer-provided retirement plan is a better option for
employees. First, the employees can contribute a higher amount
to a 401(k) plan--up to $17,500 for 2013 (or $23,000 for
individuals age 50 or older) for pre-tax contributions compared
to the contribution limit for IRAs of $5,500 (or $6,500 for
individuals age 50 or older).\5\ Next, 401(k) plans generally
offer access to more competitive investment alternatives than
are accessible to an IRA investor. Finally, if an employer-
sponsored plan the employer often pays at least a portion of
the fees and the employee is part of a larger group that is
likely to be charged a lower fee.
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\5\ IR 2012-77, Oct. 18, 2012.
The AICPA supports the protection of employees and their
ability to save for retirement. However, the top-heavy rules
have become unnecessary due to the enactment of other
provisions which protect the interests of employees. For
example, section 401(k) plans are generally subject to special
discrimination rules (the average deferral percentage test and
average contribution percentage test, commonly referred to as
the ADP/ACP testing) designed to prevent highly compensated
employees \6\ from receiving too much in contributions as
compared to other employees.\7\ These plans are also subject to
general nondiscrimination rules designed to prevent qualified
plans from covering too many highly compensated employees as
compared to non-highly compensated employees.\8\ As a result,
the non-key employees are protected from employer
discrimination regardless of whether the minimum contribution
requirements for top-heavy plans are in effect.
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\6\ A highly compensated participant is, in general, a more-than-5%
owner in the current or preceding plan year or any employee who in the
prior year earned in excess of $110,000 (indexed annually). IRC
sections 401(k)(5) and 414(q).
\7\ IRC section 401(k)(3) and m(2).
\8\ IRC section 410(b).
The AICPA recommends an exception from the top-heavy rules
for certain defined contribution plans. We think that
retirement plans which provide for employee deferrals only and
plans which provide for employee deferrals and matching
contributions should not be subject to the strict minimum
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contribution requirements as other top-heavy plans.
Vesting Upon Partial Plan Termination
Section 411(d)(3) requires qualified retirement plans to
provide for immediate 100% vesting upon a partial plan
termination. In general, a partial plan termination may be
deemed to have occurred when significant reductions in the
workforce occur in a plan sponsor's business.
This section was added to the Code as part of the enactment
of the Employee Retirement Income Security Act of 1974
(``ERISA''). At that time, most qualified retirement plans were
primarily or entirely employer-funded, and permitted vesting
schedules were much longer than schedules that exist today. In
the 1970s work environment, the vesting rule was necessary to
protect the workers' retirement balances. However, the funding
of retirement plans has changed significantly over the last
forty years. In the present 401(k) environment, most, and
sometimes all, retirement benefits are funded by employees' own
contributions which are by law immediately 100% vested and not
affected by the vesting rules. In addition, the maximum
permitted vesting schedules have been greatly shortened. As a
result, to the extent there are employer contributions in a
retirement plan most workers are partially or even fully vested
by the time an issue of partial termination arises.
The immediate vesting rule unfairly punishes small
businesses. It is not uncommon for all employers to face a
certain amount of turnover in their employee population.
Employees can change jobs multiple times over their working
careers as personal goals change, their skills improve, or they
move geographically. For some employers, their employee base is
sufficiently large that their experience closely follows the
statistical performance of the labor pool as a whole. However,
for small businesses, normal turnover can inadvertently create
problems with the partial termination rules.
Furthermore, employers have not been given a clear and
specific definition of what constitutes a partial plan
termination. Employers must instead attempt to apply a series
of narrow IRS rulings to their own situation, often by
retaining outside counsel. The resulting uncertainty and
expense creates an additional administrative burden when small
businesses may lack the time and resources to resolve such a
legally ambiguous situation.
We recommend an amendment to section 411(d)(3) to provide
for an exception for ``small plans''--under 25 participants--
such that the partial termination rules do not apply.
* * * * *
We appreciate the Committee's efforts to promote retirement
savings and are available to provide additional input on ways
Congress can make further improvements in this area in general
and with respect to small businesses.
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FSR SUPPORTS RETIREMENT SECURITY:
FSR shares Congress' and the Obama Administration's goal of
increasing opportunities for Americans to save and plan for
their retirement. It is our belief that providing these
opportunities is important because savings increase domestic
investment, encourage economic growth, and result in higher
wages, financial freedom, and a better standard of living. FSR
supports access to a wide-range of retirement products and
vehicles to help employers, especially small employers, and
employees plan for their retirement, including traditional
pensions, 401(k), IRA, and similar retirement savings accounts.
The financial services industry, which manages close to 20
trillion in retirement savings,\1\ has played a key role in
helping to increase the number of Americans who plan and save
for their retirement. Although the U.S. retirement market is
projected to grow to nearly $22 trillion by 2016,\2\ more must
be done to ensure the retirement security of every American.
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\1\ FSR Research, http://www.fsroundtable.org/fsr/pdfs/2013/
StrengtheningTheUSRetirementSavingsSystem-September.25.2013.pdf
\2\ Margarida Correria, U.S. Retirement Market Projected to Hit $22
Trillion by 2016, BANK INV. CONSULTANT, Jan. 30, 2012, http://
www.bankinvestmentconsultant.com/news/cerulli-predicts-retirment-
market-will-exceed-22-trillion-by-2016-2677132-1.html.
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TAX INCENTIVES HELP SMALL BUSINESSES OFFER PLANS:
The key to whether or not an employer, especially small
employer, offers a plan in the first place is the availability
of tax incentives. For instance, if a small business owner
wants to use a tax-favored vehicle to save for his own
retirement, the Tax Code requires that he provide a plan for
his employees. It is critical to note that unlike other tax
incentives, income contributed to 401(k) and traditional IRA
accounts is not a permanent tax deduction or exclusion, it is
only a deferral of taxes. When a distribution is made to a plan
participant, all amounts (the original income that was deferred
plus the investment gains on amounts deferred) are subject to
ordinary income tax.
One thing we have learned over the last 30 years is that
once the right incentives are in place, retirement savings will
increase. The median salary deferral to a 401(k) plan is 7%.
The median account balance for Baby Boomers rose 33% to $99,320
in 2012. Gen Xers (people born between 1965 and 1978) increased
their median savings by 30% to $41,821. According to American
Society of Pension Professionals and Actuaries (ASPPA), only 5
percent of employees save if their employer does not offer a
retirement plan.\3\ Thus, we know the keys to increasing
retirement savings are:
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\3\ Id. at 2.
a. Providing incentives to businesses to provide
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plans to their employees; and
b. Providing incentives to employees to take
advantage of the plans offered to them.
REGULATIONS MAY DETER RETIREMENT SAVINGS:
Small business owners rely on investment education and
guidance from retirement professionals in choosing a plan
investment menu to offer to their employees. If this education
and guidance is effectively prohibited by the upcoming
Department of Labor (DOL) fiduciary duty proposal small
business owners will have to either a) select their own
investments without the help of a retirement professional and
assume fiduciary responsibility; or b) find and pay a third
party expert to do that selection, which may be cost
prohibitive. Thus, if DOL moves forward with its re-proposal,
it is critical that the Administration ensures that the DOL and
the Securities & Exchange Commission work together on the
substance and the timing of their respective rulemakings, or
risk confusing and overlapping regulations on small businesses
and retirement professionals. FSR believes governmental
policies preserve consumer choices--including the consumers'
choice to select the retirement services product that fits
their needs, and work with their preferred financial services
provider.
CONCLUSION:
In closing, FSR urges Congress to build on the successes of
the current retirement savings system. As a country we need to
promote policies to encourage more retirement savings--not
less. FSR supports maintaining the current tax incentives,
which provide appropriate incentives for employers to offer
plans and for employees to participate in the plans that are
offered. The current system is working--the number of people
saving via DB or DC plans is higher than at any time in
history. Thus, there is no need to dismantle and rebuild the
retirement system. FSR believes increasing retirement savings
should be a national priority and is committed to working with
Congress and the Administration on policies that promote
retirement savings, and enable the financial services industry
to better meet the long-term retirement needs of hard-working
Americans.
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