LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

April 13, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 2943 words

HEADLINE: PREPARED TESTIMONY OF LESLIE B. KRAMERICH ACTING ASSISTANT SECRETARY OF LABOR PENSION AND WELFARE BENEFITS ADMINISTRATION

BEFORE THE SENATE COMMITTEE ON HEALTH, EDUCATION, LABOR AND PENSIONS

SUBJECT - A MORE SECURE RETIREMENT FOR WORKERS: PROTECTING PENSION ASSETS IN BANKRUPTCY

BODY:
Mr. Chairman and distinguished members of the Committee. I am Leslie Kramerich, the Acting Assistant Secretary for the Pension and Welfare Benefits Administration (PWBA) of the U.S. Department of Labor. I am responsible for administering title I of the Employee Retirement Income Security Act of 1974 (ERISA), which protects participants' retirement benefits. Thank you for providing me the opportunity to testify on the importance of protecting the pension assets of American workers. I also appreciate the opportunity to state the Administration's strong opposition to the provision in the Senate- passed bankruptcy reform bill that undercuts the sound, decades-old policy of preserving retirement assets for a participant's retirement income. My testimony will address only the waiver provisions of the bankruptcy bill, and will not address concerns about other provisions of that bill which have and will be the subject of other statements from the Administration. I would like to especially express my appreciation for the leadership of Chairman Jeffords, Senator Kennedy, and the Committee members on protecting the retirement benefits of American workers and in promoting the growth of private sector employee benefits. As we enter the 21st century, our private retirement system is strong and evolving to meet the needs of our retirees. While we have much to do to expand coverage in our system, the strength of our private retirement system is in many respects attributable to the role of this Committee in fighting for the rights of participants and retirees. Our retirement system is working well; it is providing retirement security for workers, retirees and their families. Today more than 8.5 million retirees are receiving monthly checks from the private pension fund of an employer. For retirees age 65 and older who receive private pension benefits, the benefits represent more than one-fourth of their total income and for those age 55-64, the pension represents over one- third of their income. As of 1998, approximately 47 million private sector workers are earning pension benefits in their current jobs. This is more than four times as many as fifty years ago and nearly twice the number as recently as the late 1960s. The assets of the private pension system currently exceed $4.9 trillion, up from $260 billion in 1975. This latest figure represents nearly one-sixth of the financial assets in the U.S. economy and far exceeds the total Gross Domestic Product of most other nations. Indeed, our retirement system has been a source of strength and stability in our economy, and many other countries are following our leadership in patterning their pension reforms after our system.

RETIREMENT SAVINGS UNDER PENSION LAW

The preservation of pension assets for retirement purposes has been a long-standing national priority. Critical elements of the design of our retirement system have been the requirements that pension assets not be used for any purpose other than providing retirement benefits, that they be held in separate accounts or trusts, and that they be held solely in the interests of participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying certain reasonable expenses. This concept, which is known as the exclusive benefit rule, is a central element of the fiduciary structure of ERISA. Similarly, a wide range of retirement plans require that the assets be nonforfeitable, sometimes after a vesting period, and include controls or impose penalty taxes on early distributions from those plans; Individual Retirement Accounts, Individual Retirement Annuities, section 403('o) annuity plans and section 457 accounts all generally share these core design features under the Internal Revenue Code of 1986 (the Code). This concept is also manifested in the antiassignment and anti-alienation rules of ERISA and the Code which have been given full effect by the courts and are reflected in other laws including the Bankruptcy Code.

I would like to focus now on the many provisions in ERISA and the Code that reflect the importance Congress has historically placed on ensuring that funds set aside for retirement are not diverted to other purposes. The purpose of ERISA, which is reflected in its name, the Employee Retirement Income Security Act, is to make employees' retirement income more secure. Permitting employees to waive protections so that creditors can go after funds set aside for retirement would put the retirement income of millions of Americans at risk.

Both ERISA and the Code contain provisions that prohibit the assignment or alienation of benefits in a plan. This restricts the ability of beneficiaries to spend funds prior to retirement. This provision, sometimes known as the spendthrift rule, was specifically designed to preclude workers from prematurely spending funds that are set aside to pay them a retirement income. The legislative history of ERISA reflects longstanding congressional concern with this issue.

This restriction is part of the Internal Revenue Code's tax qualification provisions. This means that a plan, the employer sponsoring the plan, and its beneficiaries will not receive the benefits of tax qualification if this condition is not satisfied. These benefits are substantial. An employer may immediately deduct amounts contributed to a tax-qualified plan and a tax-qualified plan enjoys tax-exempt status so that assets in the plan can grow without having the investment profits taxed. In addition, employees do not have any taxable event until they actually receive a distribution from a plan, so that they benefit not only by deferring income tax liability, but also by the prospect of having that income taxed at a lower rate if their total income is lower in retirement.

The cost to the Federal Government of these tax benefits is estimated to be approximately $89 billion in the year 2000. A subsidy in this amount is provided because of the importance of encouraging savings for retirement and because safeguards are in place to preclude the funds which are set aside for retirement from being used for other purposes. The restriction against assignment or alienation of an employee's retirement benefit is one of the conditions for receiving the benefits of tax qualification. As an additional safeguard, this restriction is also present in ERISA, which makes it applicable to additional pension and benefit plans and facilitates the enforcement of this restriction by the Department and third parties.ERISA also contains numerous provisions to assure that participants' retirement benefits are not diminished. The prohibited transaction rules are meant to absolutely prevent investments or other transactions with parties who could exercise undue influence on the plan fiduciary's decision. The prohibited transaction restrictions in ERISA and the Code also prohibit a beneficiary of a plan from obtaining the present enjoyment of their retirement funds by reason of their own investment decisions. This is important because it prevents personal considerations from influencing a person to make an investment which provides a lesser rate of return, which would diminish the beneficiary's retirement income.

Similarly, ERISA requires that an employee benefit plan be managed solely in the interest of its participants. The Department of Labor has consistently interpreted this requirement to prohibit the use of retirement funds to accomplish desirable social goals if that would unfavorably affect the rate of return on the funds or increase the risk of the investment compared to comparable alternative investments.

If such investments were permitted they would either raise the cost of providing retirement benefits or lead to lower retirement benefits for workers, or both.

These statutory provisions and interpretations reflect a sound policy, shared by both Congress and the Administration, to encourage retirement savings by reducing its cost relative to the cost of current consumption. Congress recognized that Social Security alone is inadequate to provide for an adequate retirement. According to a 1994 survey, when asked what they have saved for retirement, one out of three Americans said that they had saved less than $10,000 for their retirement. In fact, the personal savings rate in the United States as a share of disposable personal income is at a record low since the Commerce Department started keeping such records in 1946. Indeed, as recently as 1997, Congress passed the Savings Are Vital to Everyone's Retirement Act ("SAVER Act"), which directed the Department of Labor to host a national conference on retirement savings policy. This Act complements the ongoing work of the Department of Labor's Retirement Education Savings Campaign, which began in 1995. Through this campaign we have encouraged workers to save, we have provided workers with information about the retirement income system, and we have given them tools that will help them build a secure retirement.

Our private retirement system promotes trust in the security of the funds set aside for retirement because, without that trust, workers will lack a critical incentive to set aside funds for retirement. However, if we begin to say, as a matter of public policy, that it is okay to use retirement savings for purposes for which they are not intended, then our efforts to expand retirement savings will surely be undermined. Any amendment that would undermine this policy by permitting workers to borrow against, and, in many cases thereby reduce their retirement savings, would undercut this system. Permitting workers to dissipate their retirement funds prior to retirement would be inconsistent with the basic design of our private retirement system. Therefore, we strongly oppose any amendment to the Bankruptcy Code which would permit the waiver of protection for retirement funds.

MAKING PENSIONS MORE PORTABLE

Moreover, Congress and the Administration have sought to make pensions more portable so that they can stay with the worker in retirement savings form. By expanding pension portability, we are sending a consistent message that funds contributed for retirement benefits should remain dedicated to retirement purposes. This policy is intended to recognize fundamental changes in the economy as well as the current preferences of workers and employers. The movement from a manufacturing-based to a service-based economy, the growth in the number of families with two wage earners, the increase in the number of part-time and temporary workers in the economy, and the increased mobility of many workers have led to changes in the needs and interests of both employers and workers. Many workers and employers would prefer that workers take their pensions with them when they leave a job. In the case of an employer which terminates its plan, or for assets which an employer may require a worker to take (amounts below $5000), a worker will not have the option of leaving amounts in the plan.

Currently, there is no assurance that an employee will be able to transfer a pension from a former job to a plan with another employer. The employee may not secure employment, or may act as an independent contractor. Even if the employee finds another job, the new employer may not have a plan or the plan may not accept transfers. An IRA may be the only tax-exempt vehicle that will accept amounts an employee does not leave in his or her former employer's plan. A creditor should not have any greater access to amounts in IRAs if we want to eliminate artificial distinctions between the funds in an employer-sponsored plan and an IRA. However, the Bankruptcy Code amendment may expose funds in an IRA to creditors, while the same funds would be protected if they had remained in an employer-sponsored plan. The consequences of this amendment would not encourage portability and would, in this regard, be inconsistent with other provisions of the bill which are designed to encourage portability. Moreover, this amendment could saddle retirement plans with the substantial administrative burden of many small, inactive accounts on their books. Finally, it would create a potential pitfall which could rob less sophisticated workers who have transferred their accounts to IRAs of a comfortable retirement.

RETIREMENT SAVINGS AND BANKRUPTCY

The efforts of Congress and the Administration in recent years to encourage Americans to save more for retirement are complemented by current laws which largely protect retirement savings from being spent for other purposes. This includes the payment of creditors in bankruptcy.

Under the Bankruptcy Code, as interpreted by the Supreme Court in Patterson v. Shumate, assets in "ERISA-qualified" pension plans are not part of the bankruptcy estate and may not be reached by creditors. (Section 541(c)(2)) As the term "ERISA-qualified plan" is not defined in ERISA or the Code, later decisions by lower courts have differed when determining whether interests in different types of retirement vehicles would be excluded from a worker's bankruptcy estate under section 541 (c)(2). We believe that, at the very least, Patterson v. Shumate made clear that section 541(c)(2) protects plans that are ERISA employee pension benefit plans which are required to contain anti-alienation clauses.

Fortunately, the Bankruptcy Code, as currently written, protects assets held in other retirement savings vehicles, such as IRAs and Roth IRAs, which are not required to contain antialienation provisions, by allowing debtors to exempt these assets from their bankruptcy estate. (Section 522(d)(10)(E)). It is important to recognize that although these vehicles may not be ERISA plans themselves, in many cases the assets they contain represent years of retirement savings that have been transferred from ERISA plans. The Section 522 exemption would also allow debtors to protect retirement savings in other plans that are not pelion plans under ERISA, such as state government and church employee retirement plans.

Taken together, these provisions of the current law preserve retirement savings, however those savings are held, to support individuals and their families in the future when they can expect to have reduced income. Moreover, the Administration has joined many in Congress, including the leadership of this Committee, in advocating changes to the Bankruptcy Code that would clarify these provisions. These changes have been incorporated in the provisions of H.R. 833, the Bankruptcy Reform Act of 1999, as passed by the House of Representatives and the Senate. We recognize that a fresh start is not meaningful if it requires the debtor to accept an impoverished retirement. However, a debtor should not be able to inappropriately shield resources from creditors, including Federal, state, and local governments, in the form of retirement savings. It is very troubling that the amendments to the Senate version of H.R. 833 would permit debtors to waive important protections for their retirement savings, because they run counter to a number of actions taken by both Congress and the Administration. These actions are contrary to the overwhelming public policy of, and support for, preserving assets for retirement.

The benefits community is justifiably concerned that the amendment included in the Senate-passed bill would permit individuals to waive these retirement savings protections by contract with creditors at any time prior to a bankruptcy proceeding. If this amendment is enacted, creditors could treat an applicant's retirement savings, which may have been accumulated over decades prior to signing a waiver, as security against the debtor becoming bankrupt. The fine print in consumer credit applications could routinely waive the applicant's retirement savings protections, and be a trap for the unwary consumer. It is likely that few would understand the implications of signing such a waiver. Moreover, such practices will disproportionately affect people who lack an understanding of financial principles or who are in financial distress. The Administration is seriously concerned that allowing individuals to place their future security at risk by using their retirement savings essentially as collateral to secure consumer credit would undermine our decades-old policy of preserving retirement assets, and hurt those least able to recover from financial problems in their retirement years.In addition to these fundamental concerns, enacting the waiver provision would likely result in significant administrative expenses for affected plans, expenses that may well have the effect of reducing benefits to other plan participants. These plans would be burdened with verifying and processing paperwork regarding requests by creditors to reach retirement assets exposed by waiver. Participants and beneficiaries would have to be notified and given the fight to contest waivers. Resolution of disputes would doubtless often require legal proceedings in which plans may need to participate.

CONCLUSION

In conclusion, I appreciate this opportunity to testify regarding the importance of protecting retirement savings, and the potential threat to those savings posed by the waiver provisions that were incorporated in the Senate amendments to the Bankruptcy Code. I would like to compliment the leadership of this Committee in focusing attention on these provisions in our effort to promote benefit security for the retirement savings of American workers. I look forward to answering your questions.

END

LOAD-DATE: April 15, 2000