[House Hearing, 107 Congress] [From the U.S. Government Publishing Office] PENSION REFORM FOR SMALL BUSINESS ======================================================================= HEARING before the COMMITTEE ON SMALL BUSINESS HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS FIRST SESSION __________ WASHINGTON, DC, MARCH 28, 2001 __________ Serial No. 107-2 __________ Printed for the use of the Committee on Small Business U.S. GOVERNMENT PRINTING OFFICE 72-257 WASHINGTON : 2001 COMMITTEE ON SMALL BUSINESS DONALD MANZULLO, Illinois, Chairman LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD, ROSCOE G. BARTLETT, Maryland California FRANK A. LoBIONDO, New Jersey DANNY K. DAVIS, Illinois SUE W. KELLY, New York WILLIAM PASCRELL, New Jersey STEVEN J. CHABOT, Ohio DONNA M. CHRISTIAN-CHRISTENSEN, PHIL ENGLISH, Pennsylvania Virgin Islands PATRICK J. TOOMEY, Pennsylvania ROBERT A. BRADY, Pennsylvania JIM DeMINT, South Carolina TOM UDALL, New Mexico JOHN THUNE, South Dakota STEPHANIE TUBBS JONES, Ohio MIKE PENCE, Indiana CHARLES A. GONZALEZ, Texas MIKE FERGUSON, New Jersey DAVID D. PHELPS, Illinois DARRELL E. ISSA, California GRACE F. NAPOLITANO, California SAM GRAVES, Missouri BRIAN BAIRD, Washington EDWARD L. SCHROCK, Virginia MARK UDALL, Colorado GELIX J. GRUCCI, Jr., New York JAMES P. LANGEVIN, Rhode Island TODD W. AKIN, Missouri MIKE ROSS, Arkansas SHELLEY MOORE CAPITO, West Virginia BRAD CARSON, Oklahoma ANIBAL ACEVEDO-VILA, Puerto Rico Doug Thomas, Staff Director Phil Eskeland, Deputy Staff Director Michael Day, Minority Staff Director C O N T E N T S ---------- Page Hearing held on March 28, 2001................................... 1 WITNESSES Cardin, Ben, Member, U.S. House of Representatives............... 1 Salisbury, Dallas, President and CEO, Employee Benefit Research Institute...................................................... 9 Calimafde, Paula, Small Business Council of America.............. 10 Kelso, Michael, President and CEO, ELS........................... 12 Bachman, John, Managing Partner, Edward Jones Investments........ 14 APPENDIX Opening statements: Manzullo, Hon. Donald........................................ 26 Velazquez, Hon. Nydia........................................ 27 Prepared statements: Cardin, Ben.................................................. 29 Salisbury, Dallas............................................ 32 Calimafde, Paula............................................. 47 Kelso, Michael............................................... 62 Bachman, John................................................ 64 Additional Information: Prepared testimony of Honorable Rob Portman, U.S. House of Representatives............................................ 69 Prepared testimony of Kevin Brennan, President, JMI Software Consultants, Inc........................................... 73 Prepared testimony of Securities Industries Association...... 75 Prepared testimony of the Principal Financial Group.......... 78 PENSION REFORM FOR SMALL BUSINESS ---------- WEDNESDAY, MARCH 28, 2001 House of Representatives, Committee on Small Business, Washington, DC. The Committee met, pursuant to call, at 10:03 a.m. in room 2360, Rayburn House Office Building, Hon. Donald Manzullo [chairman of the Committee] presiding. Chairman Manzullo. The committee will come to order. We are going to move immediately to Congressman Cardin's testimony and then after his testimony the ranking minority member and I will have our opening statements. Congressman Cardin, you are up. Mr. Cardin. Thank you, Mr. Chairman. Chairman Manzullo. Thank you for being here. [Chairman Manzullo's statement may be found in appendix.] STATEMENT OF HON. BENJAMIN L. CARDIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MARYLAND Mr. Cardin. It is wonderful to be back before this committee. I come to you asking your support for H.R. 10, a bill that truly has been developed in a bipartisan manner. Rob Portman, the other person who is sponsoring the bill, could not be with us today because of some commitments within the Republican leadership, so he sends his apologies. But the two of us have worked together on both sides of the aisle to make sure that this bill would be produced and move forward as a bipartisan bill. I am pleased to tell you we have 281 cosponsors to date, a strong showing on both sides of the aisle. A similar bill passed the House of Representatives twice with over 400 votes. So it is a bill that enjoys strong support on both sides of the aisle. Mr. Chairman, I think it is a good omen that I am here today. In September 1995, I had a chance to testify before this committee on another pension bill that had been tied up for a couple of years. Right after testifying before this committee that legislation moved forward and was passed in 1996. And it really did mark the change of pension policy, I think, by this Congress. We had suffered through a couple of decades of changes in the pension laws that made it more difficult, particularly for small employers, to be able to develop pension plans for their employees. The passage of that 1996 bill that was also sponsored by Congressman Portman and me started the trend, I think, of improving our pension laws to make it easier, particularly for small businesses, to provide pension benefits for their employees. That is particularly important today. I think you all know the statistics. If you look at companies under 100 employees, only about 20 percent of their employees have employer- sponsored pension opportunities, whereas if you look at large companies today, three out of every four employees are covered by pension plans. So pension reform is of particular interest to small business and I very much appreciate your sensitivity, your committee's sensitivity, to that issue by having this hearing today. As we look at the need for pension reform generally, I need not tell this committee what is happening with regard to the baby boomer generation, the number of people who will be eligible for Social Security. Forty years from now, it is predicted that the number of people over 65 will grow from 12.8 percent of our population to 20 percent of our population. We all know the strain that will put on our Social Security system. One of the areas that we need to strengthen as far as income security for people who are retired is private savings and private retirement. As we have gone through the most recent economic expansion of our country where we have seen low inflation, low unemployment rates, one of the trends that have been going the wrong direction has been private savings and private retirement. We have actually found that private savings has declined over the past two decades to last year where we actually had negative quarters of savings in this country. So we need to do more to encourage private savings, private retirement, for many reasons: income security for individuals, to put less pressure on the Social Security system, for the strength of our economy. H.R. 10 was developed with that in mind, to try to deal with some of these problems. Mr. Chairman, I will talk a few minutes about some of the provisions that are of particular interest to small businesses and then I would be pleased to answer any questions that you might have and I would ask that my entire statement be made part of your record. Chairman Manzullo. Without objection. Mr. Cardin. H.R. 10 contains hundreds of changes in the pension laws, but a large number are aimed at reducing complexity, which is particularly daunting for small companies. They find it very difficult to have a pension plan and then there are a lot of traps in the law that may trap them with penalties. So what we try to do is simplify the pension system, particularly for small business, and one of the changes is to change the top heavy rules. It was identified as perhaps the number one obstacle for small businesses developing pension plans, the top heavy rules. The Department of Labor ERISA advisory committee actually recommended the repeal of the top heavy rules. We have not suggested that. Instead, we have modified it to deal with, we think, the most difficult problems: the definition of key employee, that the contributions of the employer, the matching contributions, would count towards the required contributions under the minimum contribution rules. The family attribution rules would be modified to take care of the top heavy rules and the 401(k) safe harbor that I mentioned earlier, that if you have a 401(k) safe harbor currently the non-discrimination rules would not apply, H.R. 10 would expand that to the top heavy rules. The legislation also significantly increases the amount of money that you can put into the pension plans. On the deferred compensation plans, it is raised from $10,500 to $15,000. On the defined contribution package, it is increased to $40,000 and the considered compensation limits to $200,000. One provision that will be, I think, particularly interesting to your committee is the provision that allows for the catch-up contributions for those people who have turned 50 years of age so they can contribute an additional $5,000. This is of particular interest to women, but it also affects all people in the workforce because we find that many times women who did not have the same earning ability because they were out of the workforce for part of their career need the opportunity to put more money in as they get closer to retirement. They have taken care of their family, they now are in the workforce, they want to take care of their retirement and the contribution limits prevent them from reaching their goal. The extra $5,000 will make it a little bit easier for them to reach their security goals when they retire. There are also some specific provisions that apply only to small business: the IRS user fees, the PBGC premium, and the Form 5000s that we can get into. But these were put in at the request of small business to try to deal with their particular problems. Mr. Chairman, I think you will find this legislation is a comprehensive bill to make it easier for individuals and companies to provide for their own retirement and for their employees' retirement and I thank you for your help in crafting the bill and we look forward to this legislation being enacted into law. [Mr. Cardin's statement may be found in appendix.] Chairman Manzullo. I appreciate that. [At this point, the bells ring, indicating a floor vote.] Is it one vote? Mr. Pascrell. Budget resolution. Chairman Manzullo. Budget resolution? Mr. Pascrell. On the rule. Chairman Manzullo. It is on the rule? [To Mr. Cardin:] Ben, are you able to come back? I think what we will do is go into recess now, take the vote, and then come right on back. [Recess.] Chairman Manzullo. We will reconvene our meeting. Congresswoman Velazquez. Ms. Velazquez. Thank you, Mr. Chairman. I would like unanimous consent to enter my opening statement into the record. Chairman Manzullo. Without objection. Ms. Velazquez. Thank you. Mr. Cardin, welcome to the Small Business Committee and thank you for your presentation and your interest in providing a retirement plan for small businesses. When your bill was introduced in the last Congress, it contained many incentives for small businesses that currently do not provide retirement plans to start a plan. However, as the bill was reported out of the committee and passed by the full House, several incentives were excluded; in particular, the tax credit that will allow small businesses to deduct some of the costs of establishing and administering a plan for the first five years. I am a strong proponent of these tax credits and I believe they are very important in providing an incentive for small employers to start a pension plan. As your bill works its way through the Ways and Means Committee, would you advocate to have these tax credit incentives put back into the bill? Mr. Cardin. Well, I very much appreciate that question and the answer is yes. I think that is a very important provision. You are correct. The credit for small business start-up costs was included in the original Portman-Cardin legislation. As it worked its way through the Ways and Means Committee, it was derailed for two basic reasons: one, the cost issue, but, secondly, because the committee at that time was reluctant to move forward with new tax credits. I think that there is a changing attitude within the Ways and Means Committee on thatparticular issue. I think it is a very important provision. I know that Congressman Portman also supports that change. For introduction purposes, we wanted to introduce primarily the same bill that passed the House by such a strong vote last year. We did not add that provision. We hope as the bill works its way through the house that that provision could be added. It is not that expensive and we think it would be a major help to small businesses in starting pension plans. Ms. Velazquez. What do you think are the prospects of including it? Mr. Cardin. I think they are good. It is one of the major-- it is on our list, on a very small list of things that we would like to see included that were not in the introduced bill, so I think we have a good chance to get that included. We know that the Senate has a somewhat different view on this bill. They support the thrust of the Portman-Cardin bill. Last year, they added a tax credit for low wage workers which is, again, something that Congressman Portman and I would support as long as it is part of the current pension system. So I think as the bill works its way through the House and the Senate, it is very likely that some tax credits will be added to the mix and we think the small business start-up cost provision is an important provision to include. Ms. Velazquez. Would you consider supporting an amendment that will expand the administrative relief provided under your bill to a greater number of small businesses by raising the asset threshold for exempting a business from filing Form 5500? Mr. Cardin. As you know, we did provide some special rules currently for 5500 filings and we would be glad to work with you and the committee as to additional relief. We clearly want to make it easier on the filings. We think that we made some improvement in this area, but we think we should make more and we would be very happy to work with you on that. Ms. Velazquez. My final question is looking at the results of the 2000 survey, I have concerns about two groups of people. The first group is the small business owners that have unreliable or uncertain income flows and therefore cannot afford to start pension plans. I am concerned that those businesses will not be able to compete with large and even other small businesses for quality employees. The second group I am concerned about is the seasonal worker. I am concerned that because of the nature of their work they are at risk of never having the opportunity to participate in a retirement plan. What are the provisions in the bill that you see as benefiting these two groups? Mr. Cardin. Well, thank you very much for that question also. In regards to the small employer, there are two major obstacles in current law for why small employers will never set up a pension plan which will benefit not only the small employer's employees but himself or herself also. And the first problem that I mentioned is the complexity. There are a lot of traps in the law. A small company cannot hire a pension consultant or a pension person to handle the pension system. Usually, the employer handles it himself or herself. And it is complicated, it is difficult and many of these tests were put in for large companies who could afford this administrative cost. So we have to get the administrative burdens reduced and this bill significantly reduces the administrative burdens overall for pension plans but particularly for small businesses through many of the provisions I mentioned earlier. The second is that it has to pay for the owner to set up the plan and with the low limits, it just does not pay for an owner to set up a plan. The owner could get almost the same benefits from a non-employer sponsored pension plan. So why bother? So one of the reasons we are recommending increasing the limits is for those individuals who make the decision whether the company will have a pension plan or not to realize that it is in their financial interests to do that. In regards to seasonal workers, we have modified dramatically the portability rules and one of the things that we find is that a lot of people have small earnings here or small earnings there and it is difficult to justify keeping these accounts, particularly with the administrative costs, so what we do is provide complete portability between all types of plans, whether they are non-profit, for profit, government. You can have portability and merge the accounts into one pension plan. Ms. Velazquez. Thank you. [Ms. Velazquez's statement may be found in appendix.] Chairman Manzullo. I just have one question. Congressman, about two or three years ago, I believe, we passed a bill to make a pool of money available for educating people about pension plans. Do you remember that? Mr. Cardin. Yes. Chairman Manzullo. Would any of that--and I think that was signed into law. Mr. Cardin. Well, there is no question that we need to do a better job of promoting what the pension laws provide so people can take advantage of it. We know that with our own thrift plan here as federal employees. The more information we get to our workforce about the advantages of the thrift plan, the more employees sign up for the plan and our participation rates are pretty high. There are two basic things. First, the government offers incentives for their employees to participate and, second, we have gotten the information out so people know that they can take advantage of it. It is clear that just passing the laws in and of themselves will not change behavior. We need to also get adequate information out. You are going to hear in the next panel, you have a lot of people from the private sector which will tell you what they are doing in the private sector to get this information out to employees. They are professionals at it. I think that if H.R. 10 were to be enacted that it would offer incredible incentives for companies working with the private sector to get information to their employees to take advantage of it, particularly younger employees, who have been our lowest percentage of participants. Chairman Manzullo. OK. Mr. Brady. Mr. Brady. I have no questions; I have a statement. Thank you. Thank you, Mr. Chairman, and Ranking Member Velazquez. I would like to thank you for calling this important hearing on H.R. 10. I am wearing two hats here, being a congressman and also a member of organized labor, that this bill, bill 415, hopefully this will add to bill 415, that it will allow multi-pension people that work in unions, some people that work for the unions, they get capped out on a three-year basis and a lot of times their pension is more than their cap and they get penalized for working that hard. As you well know, union people, the jobs that they have sometimes do not have longevity, they can work after 30, 40 years, so they are being penalized. And being penalized, that money is not being utilized. It goes back into the union pension fund and it just sits there and it gets either invested and rolls over and rolls over, probably to a next life with somebody else. So I appreciate, Congressman, you bringing this to the light and having this bill brought up and I hope that we can get enough votes this time to pass it and I thank both of you for having this hearing. Chairman Manzullo. Thank you. Mr. Pence. Mr. Pence. Thank you, Mr. Chairman, and Congresswoman Velazquez. Thank you for the opportunity to speak. I want to congratulate my colleague, Congressman Cardin, for a visionary piece of legislation, one that as a new member of Congress I was very anxious to support. Coming from a midwestern district that is dominated by small business, coming out of a small business family and having built my own small business, I appreciate the struggles that you are addressing in this legislation and am delighted with the enthusiasm with which it is being embraced. Specifically, I found very compelling your testimony about the catch-up provisions. We do see in Indiana, Congressman, we see a great number of women who will make a decision to be at- home mothers, but then use their education or background to enter the workforce, oftentimes in small business, oftentimes as entrepreneurs and small business owners. I wanted to ask you to address the provision of H.R. 10 that while it does not specifically address women in the workforce, I thought your comments to be very thoughtful in that regard. How did you arrive at the $5,000 catch-up provision number and what was the thinking going in the arriving specifically at that number? Mr. Cardin. Well, Congressman, thank you for that question. I appreciate your comments. First of all, the age 50 we picked because that is normally the age where people get a lot more serious about making their retirement security a reality. And, secondly, it is normally the time that people have finished raising their families, sending their children to college and the home mortgage is much more manageable, if it is not paid off. So it is a time when people are thinking more about retirement. It is also the age, as you pointed out, that many times people who have left the workforce to take care of their families are returning to the workforce and have adequate income where they can put money away for their retirement. We were facing up to $15,000 on the deferred compensation plans and we felt adding another one-third made some additional sense. There was no magic to the $5,000, although we felt that it fit well in talking to the people in the private sector as to how much interest there would be and how much money could be contributed. We felt that was the right level. There is always one consideration when you look at limits. You might ask why do we have limits? At one time, we did not have limits. You could defer as much of your compensation as you wanted to, other than your FICA taxes, you could defer. And the reason why we have limits was part of the compromise reached to keep this bill a very bipartisan bill because the higher the limits the argument is made that wealthier wage earners will put more money away than lower wage earners. I do not think that is necessarily true, but we wanted to reach a balance that we could have a broad coalition in support of the legislation and one of the reasons that we used the $5,000 rather than a higher number was to keep that broad coalition. Mr. Pence. One other follow-up question, if I may, Mr. Chairman. I think that the statistics that you presented in your testimony about companies with fewer than 100 employees, as many as 80 percent of the workforce, have no retirement savings plan. As you look at your legislation, Congressman, what do you believe or economists that you trust believe will be the effect on those size companies if your legislation is enacted by Congress? Mr. Cardin. That is a good question. I really do not know the answer to it. We are movingin the wrong direction now. There is actually an erosion of employer-sponsored pension plans, particularly with small business. We think this legislation will certainly stop the erosion and we will find more people that will be covered by pension plans by small employers. I cannot give you any specific number because we really do not know that. And I think the chairman's question about trying to get information out is going to be a key to this. One thing is absolutely certain and that is Social Security is not adequate for your retirement needs. It never was intended to be the sole source of people's retirement. We always assumed that individuals would also have private savings and private retirement. I think it is incumbent upon us to develop a system where every person in the workforce can put money away for their retirement in addition to Social Security. And certainly one of our objectives in H.R. 10 is to make that more of a reality. So we hope that it will make a significant improvement on the number of people who will have employer- sponsored pension plans or participate in IRAs. Chairman Manzullo. Mr. DeMint, did you have any questions? [Mr. DeMint indicated no.] Chairman Manzullo. OK. Congressman Cardin, thank you very much for coming here this morning. The question I wanted to ask you was what can we do to get the Senate to move this? I mean, it has died in, what, two Congresses now? Mr. Cardin. Yes. We have had some problems in the Senate. We are not the only people that have had problems in the Senate. It seems to be a common dilemma. We hope very much that this bill will move very shortly in the House as a separate tax bill and I think Chairman Thomas of the Ways and Means Committee is prepared to do that. And I think you will find a very strong bipartisan support on the House floor. The problem in the United States Senate, as you know, it is difficult to move individual bills, particularly early in the session, unless you get unanimous consent which is almost unheard of in the Senate because every senator has his or her own individual agenda. So I think the best thing we could do is continue to stress the importance of this legislation and that it needs to move quickly if it is going to have an impact on people shortly. The next panel you have will, I think, help us in that argument. They can tell us what practical effect it will have. And I have found one of the best ways to get this legislation moving is to have the people in the private sector who know directly how this will affect behavior as far as retirement is concerned talking to the senators. Chairman Manzullo. OK. Thank you, Congressman. Mr. Cardin. Thank you. Chairman Manzullo. Ben, just a second. [Pause.] Chairman Manzullo. OK. Thank you very much. Thank you, Congressman. The second panel, if you could be seated, please? While the second panel are taking their seats, let me briefly introduce who they will be. Dallas Salisbury is the president and CEO of the Employee Benefit Research Institute here in Washington. Paula Calimafde is an attorney with the Paley Rothman law firm out of Bethesda. Mike Kelso, president and CEO of ELS, Inc., also a small business owner and engineering consultant from Arlington. And John Bachmann, managing partner in charge of a major marketer, Edward Jones Investment Company out of St. Louis. Mr. Salisbury, we will start with you. The clock in front of you starts at green, turns to yellow and then when it hits red, I will bring this down. It is on five minutes and I am sure we will have plenty of time for questions and answers thereafter. Thank you for coming. STATEMENT OF DALLAS SALISBURY, PRESIDENT AND CEO, EMPLOYEE BENEFIT RESEARCH INSTITUTE Mr. Salisbury. Thank you, Mr. Chairman, and members of the committee. It is a pleasure to be here. I know my entire statement will be printed in the record. Chairman Manzullo. All of the statements of the witnesses and any members of Congress will be submitted in the record without objection. Mr. Salisbury. So I would go directly to page 2 of my testimony and to the direct issue of the hearing which is what provisions of the Portman-Cardin act might well assist in expanding the realm of sponsorship of employer-sponsored plans in the small employer sector. Chairman Manzullo. Mr. Salisbury, could you move the mike up? Tip it--try that. Mr. Salisbury. I can do that. Chairman Manzullo. Thank you. Mr. Salisbury. And I refer you to the table that is in the testimony that relates to reasons for not offering a retirement plan by small employers that do not. The most important of those reasons is employers noting that employees prefer wages and/or other benefits. I would note that this Congress enacted the Saver Act, the savings are essential for all employees, and that led to the 1998 summit on retirement savings. There will be a 2000 summit on retirement savings. One of the issues carried forth in that summit and in our own Choose to Save Education program on the importance of savings is to increase employee understanding as to the virtue of employees being convinced to save and contribute, the Saver Act leading to that, and education. It is not necessary for employers, if you will, to have funds to contribute. Obviously employer contributions plus employee contributions are the most desirable, but one of the issues at hand is simply to get employers to begin sponsoring these programs. Too many government regulations is dealt with by the many simplification provisions of this act. Vesting requirements causing too much money to go to short- term employees is dealt with by the alternative provisions in this act relative to top heavy provisions. The issue of employers not knowing where to go for information on starting a plan, as the congresswoman noted, has been dealt with partially by congressional action giving money to the Small Business Administration and the Department of Labor. That has led to the development of a combined website by those organizations, as well as new educational materials available through the Pueblo government information 800 number. The website now created by SBA and DOL does allow any small employer to go there and to do a very thorough analysis of plan options available to them. That has only been available in about the last nine months. Tax benefits for the owner that are too small are dealt with by the limits and by the catch-up contributions. And so I think that looking at this issue of why small employers do not provide for plans, this act does provide provisions that deal with all of them. Our survey also underlined that there are many small employers that say I am inclined to create a plan, which is shown on page 5 of the statement, and so it does, combined with past analysis that we have published, underline that with the types of changes contemplated in this act our econometric modeling suggests that you could readily see as many as 7 to 12 million employees who do not currently have pension coverage gain pension coverage. Thank you, Mr. Chairman. [Mr. Salisbury's statement may be found in appendix.] Chairman Manzullo. Thank you very much. Is it Calimafalde? Ms. Calimafde. No, you did better the first time. Calimafde. Chairman Manzullo. Calimafde. Thank you very much. May I call you Paula so I do not butcher your name again? Ms. Calimafde. I have been called Paula since kindergarten. Chairman Manzullo. OK. Thank you very much. Go ahead. STATEMENT OF PAULA A. CALIMAFDE, ESQUIRE, PALEY, ROTHMAN, ET AL. Ms. Calimafde. My name is Paula Calimafde. I am the chair of the Small Business Council of America. I am also a member of the Board of Directors of the Small Business Legislative Council. I am a practicing tax lawyer. I have been working in the field of qualified retirement plans for more than 20 years. I work with the pension tax laws day in and day out, whether I want to or not. Today, I am here representing the Small Business Council of America, the Small Business Legislative Council and ASPA, the American Society of Pension Actuaries. In our opinion, H.R. 10 will significantly promote small business plan formation and that is critical because, I think as you know, small business coverage lags dramatically. According to the Small Business Administration, the small business sector employs more than 53 percent of all the workers in the private sector and yet coverage of those workers is somewhere in the 30 percent range. If you are with an employer who is more than 25 but less than 99 employees, you are somewhere in the 48 percent range. If you work for an employer with less than 25 employees, you are usually in the 19 percent range. So coverage is a serious issue. This bill, in my opinion--I hate to refer to it as a tax law because what you are really doing is shoring up the retirement plan system, and if Portman-Cardin works the way it is intended, you will lose short-term tax revenue because people will be putting money into 401(k) plans and more money will be deferred--but if you look at this bill from a long- range perspective of where we should put our nation's money, in my opinion this bill may be one of the most important bills Congress will see this year. A young person 30, 35, who puts $2000 into a 401(k) plan this year and gets a match, that money will grow significantly by the time they retire and it may be the difference between a comfortable retirement and no retirement at all. I cannot convey to you how important small business plan coverage is. There is an interesting statistic that has evolved which is that when a small business plan is sponsored, participation in the plan is at the same level as a larger entity. In other words, if you build it, they will come. And what Portman-Cardin is doing is sort of building the field and hopefully small business willcome and start joining the qualified voluntary retirement system. Well, why doesn't small business sponsor more plans? Dallas Salisbury gave you some reasons. There is another reason which is if you look at the legislation of the 1980s and early 1990s, there was constant legislation that cut back on benefits and increased administrative burdens and small business was singled out for the harshest rules. Somehow the concept arose that small business did not treat their employees fairly and even today you can hear people talking in terms of, well, we cannot do that kind of plan because the small businesses will not tell their employees that they are sponsoring it. There is a basic misunderstanding of what a small business is and how important the employees are to that small business. With a retirement plan, it is a cost benefit analysis to the owners of that business whether they are going to sponsor it. It costs money to sponsor it. So, yes, the employees have to appreciate it and Dallas is doing a phenomenal job, in my opinion, of getting the word out there that you had better start saving for retirement, Social Security cannot do it all for you. But there has to be something in it for the company, so (a) the employees have to appreciate it, but (b) it has to provide some benefits for the owners also. And I think Portman-Cardin is trying to redress that cost benefit analysis. It went out of whack in the 1980s and early 1990s. This bill, I think, will bring it at least to neutral. What major provisions in this bill will help small business? There are many, many provisions. In particular, the changes in the 401(k) area are very important. One provision right now, if employees make 401(k) contributions, that counts against the company's 15 percent overall deduction level to a profit sharing plan. What this means in the context of the small business world is if a company wanted to make a 15 percent contribution, the employees could not make a 401(k) contribution. And in the small business area, very often companies make significant contributions to these plans. The 404 deduction level, increasing it to 20 percent helps. There is 401(k) safe harbor match that is a very important provision which will really help small business. Do we have enough plans right now? Does Congress have to come up with new plans? I do not think so. You have a very nice balance of plans. There is a start-up plan, the SIMPLE. It is basically an IRA. We just have to educate people about it. If a company wants to move on, hopefully they will move on to the 401(k) safe harbor, a strong plan. Why? Because it keeps the employees' money in the plan until they actually retire, become disabled, die or leave. There is a lot of flexibility out there and it is from simple to complex and I think the companies can work with it. This bill will really help small business plan formation. [Ms. Calimafde's statement may be found in appendix.] Chairman Manzullo. Thank you very much. Mr. Kelso. STATEMENT OF MICHAEL P. KELSO, PRESIDENT AND CEO, ELS, INC. Mr. Kelso. Mr. Chairman, and members of the committee, I appreciate the opportunity to speak before you. As you perhaps can tell by the brevity of the statement I provided, this is my first time testifying before the Congress. My name is Mike Kelso and I am president and CEO of ELS, Inc., which is a small engineering consulting company in Crystal City. We provide engineering and consulting services to the federal government, mainly to the Department of Defense. We were founded in 1976. We are, as you can tell by the number of people, a small company. In 1987 we used an ESOP, an employee stock ownership plan, leveraged buyout of a retiring owner to purchase the company and today we are a 100 percent employee owned company. One of the means of differentiating, as Congresswoman Velazquez indicated earlier, between large companies and small companies in attraction of employees is the benefit plan. A quality retirement plan for employees in a small business is a must if you are going to compete with the big businesses. The latest study by the Profit Sharing/401(k) Council of America indicated that small firms, people with fewer than 50 people, those who do have retirement plans contribute up to almost 20 percent of net profit to these retirement plans. I would like to summarize briefly what we are doing in the way of retirement planning for our people at ELS and how H.R. 10 will enhance these efforts. First off, as I indicated earlier, we have an ESOP and that ESOP has been in place since 1987. We contribute 6 percent of covered salary per year into that plan. That 6 percent goes toward the 25 percent limit that is going to be relieved by H.R. 10. Our 401(k) plan is rather unique in a lot of ways, but in particular in its matching feature. We do a dollar-for-dollar match up to 4 percent of salary or $2000, whichever is greater. The significance of that $2000 limit is that people who make less then $50,000 a year receive a greater match than those who make more then $50,000. This is mainly the people that we are trying to attract to these 401(k) retirement plans. You do not have to convince the older folks to participate, you have to convince the younger ones. As an example, a person making $40,000 a year who defers $2000 will get a $2000 match or 5 percent. The lower the salary, the higher percentage match the company provides. The other thing we do is allocate the non-vested portions of people's accounts. If somebody leaves the company before they are 100 percent vested, they forfeit the non-vested portion of their accounts and, instead of using those funds to reduce future contributions for the company, we reallocate those to the participants. In 2001, this year, those forfeitures are going to be quite substantial, amounting to about 7.6 percent of salary. There is a corporate benefit to the company that I do not want to minimize that will derive from H.R.10. As Ms. Calimafde indicated, the employee deferral counts toward the 15 percent corporate deduction. Anything over 15 percent, we pay an excise tax on that. So the fact that we have one highly compensated person, believe it or not, who is not participating in the plan, everybody else is, we have over 7 percent contributions of non-highly compensated people going into the plan on average. The 6 percent ESOP. The company is providing the 18.6 percent of salary contribution to retirement plans in 2000 and 2001. Above the 15 percent limit, we pay an excise tax. That is the price we pay for that generosity. And, in addition to that, the employee deferral counts toward the 25 percent limit. That is the benefit to the company, which I do not see as a major reason for me being here. The most important reason for me being here is the elimination of the 25 percent limit because of its effect on junior and mid-level, as opposed to senior people like me. Last year, in the year 2000, I had to tell 75 percent of my non-highly compensated people that they had to stop deferring to the 401(k) plan because they were exceeding the 25 percent limit. It did not affect me and, with all due respect to the members of the committee, if you were employed by ELS last year, you would not have been affected by the 25 percent limit either. The first person who was affected by that was a single mother of two who is over 50. She will benefit in multiple ways by H.R. 10. This woman who makes $36,000 a year, Maria Pingree spoke at the introduction of the Portman-Cardin bill a couple of weeks ago. I had to tell Maria last July to stop deferring into the 401(k) plan. She wanted to defer 10 percent of her salary, $3,600 into the plan, and I had to tell her she had to limit that to $2,500 last year. She will be similarly affected this year if H.R. 10 is not passed. I apologize for running over. [Mr. Kelso's statement may be found in appendix.] Chairman Manzullo. You do not have to apologize. Mr. Bachmann? STATEMENT OF JOHN BACHMANN, MANAGING PARTNER, EDWARD JONES INVESTMENT COMPANY Mr. Bachmann. Thank you, Mr. Chairman. Like my colleagues, we appreciate the opportunity to have this forum to talk about what is clearly a very, very timely issue. I really think that if you step back the heart of the matter that we are addressing here is that of demographics, which simply says we have an aging population. My company, Edward Jones, has about 7500 offices in the United States, Canada and United Kingdom and it is not an American problem. This is a problem in most of the economically developed world, this shift from a young population to much more an aging population and the historic notion has always been that you fund retirement through wealth transfer where the people working support the people who are retired and that system simply does not work with the demographics and the expanding ages of people. So we are confronted with what do you do? And we do know that people want a comfortable retirement. They do not want to work and then at the end of their lives have to dramatically change their life style. Among our customers, and we have about 5 million, the most important concern of older people is family, second is health and third is freedom and dignity in retirement. So the only way we can see to do this is to give people as individuals the opportunity to take responsibility for their retirement and that is a matter, we believe, of public policy which should encourage people to be able to set aside for retirement. And we think that the time is not simply right, we think the time is overdue for this legislation. It is difficult, frankly, for some of us to understand how legislation can go through the House of Representatives by such a massive majority and not be sufficiently an urgent need of the people to become a matter of law. I think we probably share that view with you all, but it is an important matter because delay is the silent thief. Every year that goes by that people cannot set aside money for retirement is a year that it does not compound, that it is not helping them prepare for a more comfortable retirement. So we certainly believe that the legislation that Congressmen Cardin and Portman have put forward is urgent. We are also grateful for the work of Congressmen Blunt and Bentsen who introduced legislation specifically targeting the very smallest businesses, and these are really the businesses that right now are almost economically forced into non- participation. Going back to the summit of 1998, the retirement summit, two of the points that were made are that the system we have now is too complex for small businesses. You have both complianceissues and you have reporting issues that are far more complex than they should be and these lead to the second issue, which is cost. It is very expensive to support these when you have to comply with the same kinds of requirements that large businesses can where they can spread it over many employees. So we believe that the simplification, the streamlining, the addressing of cost, the raising of the limits are all very, very important and we think that that importance is greatest among the very, very smallest businesses which include many of our customers. And, as has been cited, less than 20 percent of the employees in these smallest organizations have an opportunity to participate in this and we believe that number would expand significantly and perhaps even dramatically if there were encouragement through the streamlining, simplification and perhaps some of the tax relief that I believe was mentioned by the congressman earlier. I could go on, but why don't we stop there? [Mr. Bachmann's statement may be found in appendix.] Chairman Manzullo. I appreciate it very much. Congresswoman Velazquez. Ms. Velazquez. Thank you, Mr. Chairman. Mr. Salisbury, let me make sure I am reading the 2000 survey correctly. According to the survey, when small employers that do not currently offer pension or retirement plans were asked what would seriously make them consider sponsoring a plan, 65 percent of them responded that a tax credit for starting a plan will make them seriously consider offering a plan. Is that correct? Mr. Salisbury. That is correct. Ms. Velazquez. And is it correct that this response was second only to an increase in business profits as to the incentives that would make them start a plan? Mr. Salisbury. That is correct. Ms. Velazquez. So would you agree with me that the Cardin- Portman legislation as it is today will not be an avenue for this 65 percent who said that a tax credit will be an important tool for them to start a plan? Mr. Salisbury. Portman-Cardin would be more effective in achieving the objective based on the survey responses if it included the tax credit provision. Yes. Ms. Velazquez. Thank you. Ms. Calimafde, in light of the statistics I just cited from the 2000 small employer retirement survey regarding tax credits, what is your position on Congress returning the small business tax credit to the Portman-Cardin bill? Ms. Calimafde. I am in favor of it. I think there are very few things I would change with Portman-Cardin because I think it is important to get the bill passed through Congress this year, but that is one that I would definitely think should be added. Ms. Velazquez. Are there any other legislative changes you would like to see made in an effort to make pension plans more accessible to small businesses? Ms. Calimafde. In addition to Portman-Cardin? Ms. Velazquez. Yes. Ms. Calimafde. There are, but I would again say, first, I think Portman-Cardin is a giant step forward. After that, I think that we still need to roll back a lot of these sort of unnecessarily complex rules that are still layered in this area. Most of them do not really do anything from a technical viewpoint and some of them, such as the top heavy rules, people feel really do a lot but when you are in the trenches you realize they do very little. So my opinion is that the next bill would continue to take away some of this unnecessary complexity. There are a few little things needed for instance in the 3 percent 401(k) safe harbor which many of us are hoping will be like the next big plan for small businesses--right now, there is a notice requirement on the 3 percent 401(k) safe harbor. Well, the notice serves no rational purpose. In the 401(k) match it does because if you give notice, employees might change their behavior because they know there is a match. Whether an employer is going to make a contribution or not really would not change your behavior. So that is the type of thing, but compared to what Portman- Cardin is achieving, this would be a clean-up type of bill. Ms. Velazquez. Thank you. Mr. Bachmann, in your testimony you mentioned your support for the Blunt-Bentsen bill and some of the reforms included in the Blunt-Bentsen bill have been included in the Portman-Cardin bill. However, the tax credit provisions of Blunt-Bentsen have not been included in Portman-Cardin. You also mentioned in your testimony that many small businesses cannot afford to set up pension plans for their employees in the early years of the business. Could you explain to the committee how incorporating tax credit provisions into Portman-Cardin will help make pension plans more accessible to small businesses that are just getting started? Mr. Bachmann. Well, I think there are certain basic costs that are going to be incurred regardless of the size of the organization and the smaller it is and the newer it is the more onerous those become as a portion of the business expenses. New businesses are typically concerned about survival issues and to add any extra cost becomes an impediment. So I think that the larger the organization the less important these costs are. The smaller the organization, the more important these costs are. And I know there are exceptions. Sadly, you have cited the very small business of the professional individual who has a very large income but that wipes out a lot of people who are in exactly the category that you are talking about, struggling, trying to make a go of things and many of these are operated from people's homes, they are very small, but they are the ones that tend to systematically be left out. Ms. Velazquez. Thank you. Mr. Kelso, in your testimony you stated that your company was founded in 1996? Mr. Kelso. 1976. I am sorry. Ms. Velazquez. And that in 1987 you used an employee stock ownership plan to purchase the company. Does that mean that between 1976 and 1987 your company did not have any type of pension or retirement plan? Mr. Kelso. No. At that time, we had a defined benefit pension plan that existed. We used the assets of that plan to leverage the ESOP, the employee stock ownership plan. There was a sole founder of the company back in 1976 and he did set up a defined benefit pension plan. Ms. Velazquez. Had Congress provided tax credit incentives for small businesses to start pension plans back in 1976, do you think this would have encouraged your firm to do that earlier? Mr. Kelso. Well, the best I could answer that is to tell you what happened in 1987. There were, as you are probably aware, in ERISA, the tax incentives that were granted to owners who would sell to employees through the ESOP legislation. It was very much the reason why that principal owner did sell the company to the employees. Ms. Velazquez. Thank you, Mr. Chairman. Chairman Manzullo. Congresswoman Christian-Christensen. Ms. Christian-Christensen. Thank you, Mr. Chairman. Welcome to our panelists this morning. I have two questions and I guess I will direct this to Ms. Calimafde, but anyone else can answer it. According to the 2000 small business employer retirement survey, one of the reasons cited by small business employers when not offering the pension plans is that the employees prefer other benefits such as health care or vacation time. Actually, I think that was number one. Health care and retirement plans are equally important, and I am a physician, so therefore this question. How do you think we can avoid creating an either/or situation for small business workers when it comes to these two priorities? Ms. Calimafde. Boy, that is a tough question and actually I know your chairman is very involved in the health care cost issue which is a huge problem for small business and, in my opinion, is getting worse. It is going to be a bigger problem. And when we talk about how many dollars are available for benefits, I believe employees of small business choose health care first. That is their first choice, then the retirement plan. And the problem is compounded by a lack of education of understanding how dollars grow in a tax-free environment and how you can put relatively little in at an early date and have it really grow to a significant amount. I was also at the National Retirement Summit and I think one of the most exciting things that came out of that Summit was this concept of educating employees about the need to save for retirement and to save early. I think Dallas Salisbury and his group and ASEC have done a terrific job of getting spots on TV and radio. Before they started doing this, no one ever talked about saving for retirement. It just was a non-issue. And if you think about how often people talk about Social Security and how seldom they talk about retirement savings, there is a disconnect somewhere and I am not sure I understand why. So I think part of the problem with the bill we are talking about today is somehow the press has not picked up on how important this issue is. I mean, this is one of the most vital issues we have on the table today. I am hoping that through education employees are going to realize how important this is. Now, what I have seen in a number of my clients, my own firm, is once a 401(k) goes in and employees start seeing the money grow tax-free and they see their account balance growing and they have the option to pick among a number of mutual funds and they have an 800 number to call and they get investment advice, it is like a whole new world opens up and once that account balance gets large enough, and I am not sure what the magic number is, they do not want to touch it any more. They want to see it grow. So I know that all you have to do is get it going and the thing works. But I still think if a small business is very tight on profits, they are going to have to provide health care first. I really do. To keep those employees. We have a labor shortage going on, so that is helping us in this goal to promote small business formation, plan formation. But somehow we are going to have to get our hands around the health care cost increase and I have a feeling your committee is going to do a lot to help that issue also. Would anyone else want to respond to that question? Mr. Salisbury. I would just underline that if one looks at the small employer retirement survey, 98 percent of those with a pension plan also sponsor health benefits; 69 percent of those without a plan do have health benefits that they sponsor, which would suggest that there is a substantial population of small employers that are saying they are interested in starting a planbecause they have already taken that next step of retirement benefits. If we look at the surveyed group, we find that 20 percent of the employers, the small employers with plans have had them less than one year, a cumulative 33 percent less than two years, a cumulative 43 percent less than four years and a cumulative 52 percent less than six years. So I think one of the things to be stressed is small employers want to have these programs. They are continuing each and every year to put these programs in at the point they can afford to do so. And I think the emphasis of all of the witnesses today is to the degree some of the barriers that would serve to be eliminated and would serve to bring down the cost of implementing a plan, there appears to be every reason to believe that more and more small employers would continue to put in particularly the 401(k) plans if that option was there. I stress 401(k) because the other thing we found in this survey is of those that report having a plan, 9 percent report having a defined benefit plan, 91 percent report having a defined contribution plan. So even if one were to say the defined benefit plan is preferable, as a practical matter of life, it is the defined contribution plan that has been put in place. [To Ms. Christian-Christensen] Ms. Velazquez. Would the gentlelady yield? Ms. Christian-Christensen. Yes. Ms. Velazquez. Mr. Salisbury, I wonder if in those surveys at any time have you gathered any information that could tell us that when the unemployment rate is high there is less of a desire--or not a desire, but because the competition for worker retention is going to be less, if there is any correlation? Mr. Salisbury. We have not looked at that in a survey sense. I think that if one looks even with the slowing of the economy we have experienced thus far that where it does not yet seem to have shown up is in the unemployment rate. One of the reasons for that is you do have projections of relatively tight labor markets in terms of new entrants to the labor market at least for the next 18 years just on pure demographics. So we may end up with a very strange situation: a slowing economy and weak markets without a tremendous up tick in the overall unemployment rate. But clearly business profitability and free cash flow is essential to the creation of these programs and if a slowing economy cuts into small business revenues and profits, then clearly that will discourage the creation of new plans. Ms. Velazquez. Thank you. Ms. Calimafde. Could I quickly respond to that question? Chairman Manzullo. Sure. Go ahead. Ms. Calimafde. I think small business suffers greatly when there is employee turnover and I have a sense it suffers more than a larger business does. I think small businesses try very hard to retain their employees. I have heard small business owners complain that they have a valuable employee and that employee left for a larger business because the benefits are better. So, you know, that is sort of a countervailing balance to, well, it is easy to get good labor out there so we do not have to offer the plan. I think small business, knowing its labor force so well and wanting to keep them, if the employees said we really want this, I think they would try to provide it. Chairman Manzullo. I have a question that really goes to marketing of the available plans. I practiced law for over 20 years and set up a lot of small businesses and corporations. I know the last thing they had in mind, or at least their attorney did, was to get them a quick introduction to pension plans that are available. In fact, in my own law firm, which I established in 1977, it was not until 1977, it was not until five years later that I set up a defined benefit plan. I wish I had set it up earlier. But a lot of it is through--you know, in law school, we had no courses on this, even though I graduated in 1970. I do not know what law schools are doing today, but there just seems to be nothing practical, like how to close a real estate transaction, about doing the legals of setting up a business. I mean, how do you tell small business people, how do you get out the word that there is an affordable plan out there? Anybody. Mr. Bachmann. Well, we make our living doing that. Some of us are doing it full time. It is interesting how the media is able to focus attention and make people aware of things that otherwise are much more difficult to sell. We conduct seminars, we go see business people. We are a part of the local chambers of commerce and other networking kinds of organizations, but-- Chairman Manzullo. Does Edward Jones actually set up the plan for the individuals? How do you do that? Mr. Bachmann. We do not administer most of them ourselves. Chairman Manzullo. How do you go about it? If I am running a retail store in Freeport, Illinois and interested in setting up a plan, do you make blind calls, is that it? Or send out letters explaining that you can help? Mr. Bachmann. Yes. Chairman Manzullo. Okay. Could you answer that, Mr. Kelso? Mr. Kelso. As a small company, in 1993, we set up our 401(k) plan. The way we went about doing it was exactly that. We contacted several who we knew were providers of 401(k) plans. Chairman Manzullo. But how did you know about it? Mr. Kelso. How did I know about it? Hmm. Chairman Manzullo. Did you read it somewhere? Did you see it on TV? Mr. Kelso. I do tend to read a lot in the business world and I guess I just picked it up in articles and, as an ESOP company, I also attended a number of ESOP conferences and there were lots of discussions about merging ESOP and 401(k) plans together. Chairman Manzullo. You had a head start on it. Mr. Kelso. Probably. Chairman Manzullo. But do any of your colleagues that have small businesses not have pension plans? Mr. Kelso. I would say the number in my industry is very small because the availability of other companies that do the same thing and the movement of people in between that industry is so pervasive right across the river in Crystal City that you have to have it in order to be able to attract the people. Chairman Manzullo. What about a company with, say, five employees? What is available out there? Anybody. Mr. Bachmann. These are what we are concerned about. There is very little available because the cost of administration eats into these things. At Edward Jones, we had heard about an organization that had really solved the riddle of how you administer very small plans and so they flew to St. Louis from New York and sat down and announced that they could do plans for as few as 100 people. Well, we were thinking about five people. We were thinking about the truly--exactly what you are talking about. And this is why, frankly, we worked with Congressmen Blunt and Bentsen in designing the piece of legislation that affects the very small businesses because we see these as the ones that the system simply inadvertently works against. Chairman Manzullo. Well, there are 650,000 members of the NFIB and the average number of employees is three. Mr. Bachmann. Yes. Ms. Calimafde. Mr. Chairman, there is an answer and the answer is called SIMPLE. And Congress put this together, I think, two or three years ago and it is basically an IRA based plan and the company simply has to go to a brokerage house or a bank and ask for a SIMPLE plan and the brokerage house sets up IRAs for each of the employees. There is virtually no administration. It was designed to be the starter plan, to just get these companies used to putting money away. I do not look at it as the end-all, but for a simple, beginning micro business, it is the obvious first step. The reason why I would ultimately like to see those businesses move on to the 401(k) area or the 401(k) safe harbor is money in a 401(k) plan cannot be accessed at any time by the employee. It can only be accessed by a loan if the plan allows loans and that is a written loan or due to hardship and hardship is a difficult standard. Chairman Manzullo. You want to use it as a retirement, not a savings account. Ms. Calimafde. Exactly. And the SIMPLE, hopefully, is the starter plan that gets the small business in, there is no administration, it is really--you cannot get easier for a small business. And then you move them into the 401(k) hopefully. Chairman Manzullo. Mr. Bachmann, does your firm set up the SIMPLE plans? Mr. Bachmann. Yes. Chairman Manzullo. What is it, just a form that you can get from the IRS and you sign the bottom of it, or how does that work? Mr. Bachmann. I cannot tell you the details. I do not know exactly the detail, but I know that it is a very important part of our business because those are many of the people that we serve. When you mentioned Freeport, Illinois, that is one of the communities we are in and I believe we have a couple of offices there. Chairman Manzullo. You do. Mr. Bachmann. And it is intended to be available to the people in that community. So we will set up whatever we can for them and typically they start with a SIMPLE plan, but, you know, people do want more. Chairman Manzullo. Mr. Kelso. Mr. Kelso. I can only offer conjecture on my part, again, because I did not found my company. We bought it through the ESOP. But I firmly believe that if some of the parts of H.R. 10 go through like raising the salary coverage to $200,000 and the $40,000 limit and the $15,000, then you are going to be able to show the business owner that this is a benefit to him or her and if you do not show that benefit to him or her, then they are not going to put it in for the real small company. That is my opinion. Chairman Manzullo. Well, I like Congresswoman Velazquez's approach. When you have Republicans and Democrats talking about tax credit, you know, this is pretty bipartisan, and what Congresswoman Velazquez is saying is, hey, you have your choice: either you pay taxes or you start up the beginning of a retirement plan. Good point. That is a good hook. Ms. Velazquez. Do not be so surprised. Democrats, we also support that tax credit. Chairman Manzullo. I know that. I know that. Thank you. Congressman Bartlett. Mr. Bartlett. Thank you very much. I spent a number of years of another life in the business world. I was a mid level manager in one of the larger companies, IBM, and then I had my own small business. I am one of probably 35 people in the Congress who belonged to NFIB, an active member of NFIB, before we came here. So I am very familiar with the problems of small business. A startling statistic relative to the recovery from our last recession was that most of the new jobs were in companies that had from zero to four employees. Most of the new jobs that brought us out of that recession were in companies from zero to four employees. And that speaks to the importance of these companies. Having worked in really big business and in a small business, I know that they are really very different. Regulations that simply require a person or two in a company the size of IBM are no burden that cannot be borne. If you have six employees and two of them have to be monitoring government regulations, that is a burden that buries you. I am really concerned about the availability of these plans to the smallest of businesses and I know that this is a good bill, but my question is do we need to do something after this to make sure that our smallest businesses can be players? Ms. Calimafde. I will start off, but this is an excellent panel so I am sure you are going to have some other opinions also. I think that we are going to need to see if the SIMPLE and the 401(k) safe harbor plans are going to work. We have had the SIMPLE I think about three years, the 401(k) safe harbor, this is going on its third year but Treasury just worked with small business last year to try to make it more workable. One of the key things, and I think you are all onto it is we have to get the word out to small business that there are easy plans that do not require a lot of heartache to put in. Dallas is working hard on that. DOL has a webpage on it. But we really need the brokerage houses out there making ads about we need SIMPLE and 401(k) plans, we can do this for you easily. I do think that we have to see--if Portman-Cardin became law, we have to see whether the incentives in Portman-Cardin work. Some of the problem we had in the 1980s was that we were getting retirement plan law changes literally every year and almost all of them were negative. So what happened was it just brought the system to a halt. Now we are in an era, I would say the last five years, Congress has been passing favorable bills in this area. This is like the big one, but each step has been a good step forward. And what I would like to see is let us see what the statistics show. Are we getting new plans? Most of the statistics out there are still based on 1997 data, so we do not even know if SIMPLE is working yet. But I guess my thinking is let us get this bill passed, get the brokerage houses doing more in the way of selling these plans, have ASEC and EBRI continue to explain to people why they have to save for retirement, get the press involved a little bit and see what happens. There is a clean-up bill behind this one, it is clear to me, but then I think we should just see if the system catches on. This may be enough to revive the whole system. Ms. Velazquez. Mr. Chairman, may I? Chairman Manzullo. Sure. Ms. Velazquez. Ms. Calimafde, when you say to get this legislation passed, Portman-Cardin, would that mean that it will include tax credit or without the tax credit incentives? Ms. Calimafde. My belief is that when this goes through the Senate the tax credit will be back on. Congressman Cardin has indicated that would not be a deal breaker. I think they would be happy to have the tax credit back on. Ms. Velazquez. The only problem that I have is just, I do not trust the Senate. Ms. Calimafde. Well, my problem is the Senate does not pass any bills. Chairman Manzullo. Mr. Bartlett, the time is yours. Mr. Bartlett. You know, when a government person comes to a small business and says I am from the government and I am here to help you, there maybe is outright laughter involved. Somehow we have to get the message out that, in spite of the government, that this is doable for small businesses, because they are just very disbelieving that anything that is government run is going to be easy for them to do. This is going to be a hard sell. Mr. Bachmann. Well, I think that--in addition to my Edward Jones hat, I am involved with the Financial Services Roundtable, the Financial Services Forum, and the U.S. Chamber of Commerce. And the Portman-Cardin legislation is at the top of all of those agendas. I mean, those are very different organizations with different objectives, but this just crosses all of the traditional barriers. I can say the same for the securities industry association, which I am a member there as well. And I think that the thing that is amazing to some of us is that this can have the kind of support it has. When it comes through the Congress the way it has come through the Congress, it clearly has the very broad support of the people. Now, what is needed to solve the riddle on the other side---- Mr. Bartlett. Yes. That is my concern. Clearly with 280 co- signers and broad bipartisan support---- Chairman Manzullo. You can say the word Senate in here. Mr. Bachmann. I was not sure I could, but I do not want to--I have to go over there and talk to them, too. I do not want to make them sore, but---- We at Edward Jones find that this is a far more emotional issue than people seem to realize it is. When you bring it to the attention of the small business people and they discover that these are here and they are not being moved forward, I think that there is going to be--there is ultimately going to be a strong reaction. I think there was a strong feeling last year that this is going to get through and suddenly at the end of the year, it is not through. So I would expect each of the groups that I just mentioned to take a very active role in not only calling for it, but in mobilizing constituencies to speak out on the issue. We have done it in the past and we will continue to do it at Edward Jones. Chairman Manzullo. We appreciate that. Mr. Bartlett. So your general consensus is that we need to wait and see whether this fixes the problem for really small businesses, or do we need follow-on? Mr. Bachmann. I think you have to get legislation passed as quickly as possible. This is very, very important legislation. Chairman Manzullo. Okay. Let us move on to Mr. Issa. Mr. Bartlett. Okay. Thank you. Mr. Issa. Thank you, Mr. Chairman. Last year, I was the CEO of a 200-person, $100 million company; 18 years earlier, it was micro and somewhere in between those years I passed through what some people would call small, but I think I was still small when I left. My predecessor told me that I would have to deal with two definitions of any bill: when a bill has something you do not like in it, you call it a bad bill and when there is something you like in it, you call it a good bill. Every bill would be definable either way depending on which part of the bill you look at. H.R. 10 is no exception. It is a bad bill if you look at the accelerated vestingprovision, which is clearly a slam on the flexibility of employers to help stem the tide of quick turnover. Many proponents of accelerated vesting have, in a defeatist way, said we cannot change the fact that everyone is going to leave every two years. I hope those who support this idea have the same attitude as a Member of Congress because it is exactly that same sort of a thing. The House of Representatives survives because some people stay longer and we would like to encourage good people to stay longer. That concerns me about H.R. 10. One of the burdens that small business faces is unlimited liability with the IRS for something that you do not manage or control. Our plan was controlled by Principal Financial. All we did was wire transfer money every pay period, for which we still had full liability and IRS audits and the like. I see what is wrong with this and I would appreciate it if you would comment on either of these two deficiencies in the bill. However before I give up my time, I would like to say that I am thrilled to see that H.R. 10 provides the opportunity for employees, like the 200 that I left behind, to save more. Many of my employees relatively senior but relatively low paid in the $30,000 or $40,000 range were trying to save much more than they could because they were catching up for a lifetime of not saving. So I leave the negative portion of H.R. 10 for you to comment on. Mr. Kelso. If I may, I agree totally with Congressman Issa about the vesting. We have what we feel is a very reasonable vesting schedule, 20 percent a year over five and a half years, a year qualifying and then 20 percent a year. And, again, turnover is a horrendous problem for a small company. When I first heard about the safe harbor rules, about the 3 percent match and then a 2 percent match on the next $2 and the like, I was ecstatic because I was already doing a dollar-for-dollar match up to 4 percent which exceeded the limits set by safe harbor. The problem was I could not take advantage of safe harbor because of the immediate vesting. There is no way in my industry that I can support full vesting immediately because that is just one more incentive for someone to move down the street for more money. Vesting is a very, very important issue, I think, for small businesses in the way of retention. Mr. Bachmann. I have a different view. We are a fairly large company who was a very small company and have sort of made that move from about 50 people to about--we are over 20,000 workers. So we are a different company than then, but when we were a much smaller company, my predecessor who was the chief executive said I think people should have the right to vest immediately. We think that in effect it is their money. So while I understand that you can tie people to the company with vesting periods, we found that most people did not stay or go because of whether they were vested or not. We found that if we created a workplace and were competitive in other things that--I cannot think of a single case where vesting was an issue one way or the other. It frightened me when my predecessor went to that because I thought we should have a five-year vesting and I have become persuaded that the money really does belong to the workers and I think portability is important. We know that that cuts both ways and most people are going to have a number of jobs in a number of different places as society changes. Chairman Manzullo. Well, related to that is--I know in Congress we just changed it so that you are eligible to participate by payments, I think, by paying into the 401(k), I think it is 30 days now as opposed to year. Is that correct? I thought we changed it for federal workers. Does anybody want to help me out on it? For federal workers. The thrift savings plan, from 30 days to one year. Ms. Calimafde. Mr. Chairman, can I make a comment on that? I am finding that when I discuss with my small business clients the 401(k) safe harbor, which I thought would be embraced by them, the biggest stumbling block is the 100 percent vesting and it is very interesting because if you think--a small business basically has two vesting choices: a three-year cliff, which means after three years they are 100 percent, or six-year graded, which means after two years they are 20 percent vested and then they get an additional 20 percent vesting each year thereafter until six years when they are 100 percent vested. To my mind, there was not a great deal of difference between three-year cliff vesting and immediate vesting, but I have found that to be a major stumbling block. Now, you know, that is in the statute and I guess I would say let us see what happens and see if it works out, but the real life experience, I am finding out there is that small businesses are very reluctant to leave the three-year cliff vesting and it does come down to loyalty. They feel they do not want to be giving pension benefits to someone who is there for six to eight months and leaves. Mr. Salisbury. Mr. Chairman, I would note that as a small employer, we have 25 employees, in our 401(k) plan we do provide for full and immediate vesting on both the match and on the employee dollars. In our money purchase defined contribution plan, which we are the total contributor for, we use four-year graded vesting at 25 percent per year. Going to the survey data, if one looks at the respondents among small employers who do not have plans, 30 percent cite the vesting standards as a major reason for not making the decision, 22 percent cite it as a minor reason, 46 percent say that it has nothing to do with their decision making. So I think as with the members of this panel, what it underlines is for many small employers, it is not an adverse issue, but if one is talking about barriers to decision making by some substantial portion of small employers, the vesting issue clearly is important to a large number of them. Chairman Manzullo. Does anybody else have any questions? [No response.] Chairman Manzullo. Okay. Well, we really appreciate your coming. As Congresswoman Velazquez and I sat here listening to this testimony, it appeared to us that perhaps one of the things that we could do, the two of us, is appear before the Ways and Means Committee and request that they have an amendment on the tax credit and we would ask--our staff will probably be in contact with one or more of you for the exact language on that amendment. We really appreciate your taking the opportunity to be here. This committee is adjourned. 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