Mr. CLAY. Mr. Naughton. STATEMENT OF JOHN M. NAUGHTON, EXECUTIVE VICE PRESIDENT, MASSACHUSETTS MUTUAL LIFE INSURANCE CO., REPRESENTING THE AMERICAN COUNCIL OF LIFE INSURANCE Mr. NAUGHTON. Mr. Chairman and members of the subcommittee, I am Jack Naughton, the executive vice president of the Massachusetts Mutual Life Insurance Co. I am here today as chairman of the American Council of Life Insurance Pension Committee. I'd like to take this opportunity to commend you for the outstanding effort and perspective that is found in your proposed legislation. We in the employee benefits community appreciate the time and effort you've taken to address the major issues facing both Congress and employers in the coming years. Your bills are a welcome relief from the piecemeal approach and the short term perspective of recent legislation. In contrast, your bills represent a thoughtful starting point to strengthen the retirement income system. And the ACLI stands ready to work with this subcommittee to develop a comprehensive package of retirement income legislation. I believe that we share the same goals. We need to preserve and encourage the current voluntary system of employer sponsored plans. We need a flexible system which promotes employee savings for retirement. We need a coherent law which does not create unnecessary distinctions between similar plans. Finally, we cannot forget that curtailing tax advantages for qualified plans threatens this basic source of retirement security both for those now covered and for those in need of coverage. Our specific comments on RIPA's provisions are as follows. We are enthusiastic about your innovative approach to tying the dollar limit on contribution and benefits to the Social Security wage base. If Social Security benefits deserve an upward adjustment, a comparable change in private sector benefits is certainly also merited. We are opposed, however, to any further lowering of the contribution and benefit limits from current levels. We believe that the erosion of the dollar limits since 1982 has reduced the retirement income for workers at all income levels and not just the highly compensated. We are encouraged that you have recognized the value of 401(k) and thrift plans in developing policy. Such plans are the only source of retirement income for some workers, and an important source of supplemental retirement income for many other workers. Your supportive approach to the 401(k) plans, however, is undercut by permitting a cash or a deferred arrangement only if it is a, quote, retirement plan. By characterizing a 401(k) arrangement as a retirement plan, it would be subject to RIPA's provisions on cash withdrawals. As a practical matter, a 401(k) plan can only work if the plan provides some opportunity for limited preretirement withdrawals. This is especially true for lower paid employees, who would be un lars without some recourse in case of emergency or financial hardship. We recognize the desire of this committee to accelerate vesting schedules. More rapid vesting will undoubtedly result in additional benefits to short service workers. However, we're concerned that such an increase in benefits for short service employees will ultimately cause a reduction in benefits for long service employees. Therefore, the ACLI might be willing to consider some form of more rapid vesting as part of a comprehensive retirement benefit reform package. The distinction between retirement and nonretirement plans is an interesting approach. But it is not one that the ACLI is willing to support at this time. We suggest you take another look at the treatment of nonretirement savings plans. These plans serve, primarily, retirement purposes. They can also provide protection against large, unexpected, or financially burdensome expenses that arise before retirement. The premise of RIPA seems to be that profit sharing, 401(k), and thrift plans are second best in the overall employee benefit schemes, a conclusion at odds with the great public enthusiasm for these plans. Profit sharing, 401(k), and thrift plans are the only plans which many financially weak or unstable employers are able or willing to establish. We think more incentives to expand coverage and less restrictions on savings plans are needed. Finally, there is an overlap between the vesting minimum benefits and includable compensation limits of RIPA in the top heavy rules. Consideration should be given to synthesizing these rules or repealing the top heavy requirements. With regard to distribution, the ACLI is in favor of retaining the 10-year averaging for lump-sum distributions. For a variety of legitimate reasons, health, immediate financial need, or just the desire to start a new venture during retirement years, a life annuity may not be the best retirement choice for a given individual. The 10-year forward averaging offers employees the flexibility that is one of the strengths of the private retirement system. Further, RIPA would replace the mechanical percentage coverage test. RIPA would also eliminate the fair cross section test. There is general agreement that the real problem of coverage today lies in creating plans where they do not currently exist, particularly for employees of small service firms. Rigid coverage rules alone will not accomplish the goal of increasing coverage under private retirement plans. The ACLI has great difficulty with the proposed coverage rules. Plans which cover a broad range of employees will no longer be able to satisfy the coverage requirements because legitimate distinctions, like job classifications, are not taken in to account. Finally, frequent changes in employee benefit laws have become a disincentive to the establishment and maintenance of retirement plans. RIPA's effective dates, frankly, are an enlightened approach to an increasingly serious problem. The long lead time necessary to employers need breathing room to cope with the wide ranging changes already required by TEFRA, DEFRA, and REA. And we are especially appreciative of RIPA's deferred effective dates. I would like to use my remaining time to comment on the Retirement USA bill. The ACLI enthusiastically supports the objectives of expanding pension coverage, providing a new form of retirement portability, and preserving pension asset accumulations for payment at retirement. Furthermore, the concept of a prototype defined contributions plan sponsored by asset managers is an impressive effort to deal with weaknesses in the current retirement system. We are especially enthusiastic about a private-sector approach to the concept of a central pension clearinghouse. While we need additional time to study the bill, we would like to share with you some initial reactions. The fiduciary and the SEC registration provisions we believe merit further study. Additionally, we urge that the default investment option, certainly in the case of an insurance company asset manager, be a guaranteed investment contract. Finally, the sponsors of the bill may have underestimated the administrative costs involved in running a program of this nature. For this reason, asset managers may need reasonable required minimum accounts for portability accounts. The ACLI appreciates the opportunity to testify before the subcommittee. And certainly I'll be happy to answer any questions you may have. Mr. CLAY. Thank you. [Prepared statement of John Naughton follows:] PREPARED STATEMENT OF John M. NAUGHTON, EXECUTIVE VICE PRESIDENT, MassaCHUSETTS MUTUAL LIFE INSURANCE CO., on Behalf oF THE AMERICAN COUNCIL OF LIFE INSURANCE MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE: My name is John M. Naughton and I am Executive Vice In the President, Group Pensions, at the Massachussetts Mutual Life In my comments I will focus first on H. R. 3594, the Retirement RIPA COMMENTS The Retirement Income Policy Act of 1985 represents a thoughtful attempt to grapple with several important issues confronting our nation's retirement system. The ACLI fully supports the basic premise of RIPA i.e., that the current voluntary system of employer-sponsored retirement plans should be retained, and that the growth and development of such plans should Moreover, the ACLI concurs with RIPA's preamble be encouraged. where it notes that: 1) Current incentives for pension plan formation are -2 2) The rules governing employee pension benefit plans lack consistency and coordination; 3) Continuous, costly legislative changes have discouraged the growth and development of employee pension benefit 4) The lack of an articulated national retirement income policy has encouraged frequent and piecemeal legislative changes. The life insurance industry would welcome an end to the flood of revenue-driven, legislative tinkering in the pension area. Constant changes in the laws governing qualified retirement plans discourage employers from implementing new plans or enriching existing ones. This is particularly true with regard to small employers where, historically, pension coverage has been the weakest. If new pension rules are to be adopted in this session of Congress, they should be carefully considered, thoroughly debated and offer a constructive, long-range, and stable retirement policy. In this regard, many aspects of RIPA represent just such an attempt. RIPA addresses retirement issues in a considered fashion with policy rather than revenue the guiding concern. By contrast, we find the pension provisions of another major piece of proposed legislation H.R. 3838, the Tax Reform Act of 1985 far less satisfactory in that they focus almost exclusively on revenue concerns. Moreover, in our view, the revenue-driven press of tax reform provides a wholly inappropriate forum for discussion of long-range issues affecting the retirement security of millions |