Mr. CLAY. Thank you. Our first witnesses today consist of a panel, Amy Shannon and Jack Guildroy. Oh, I'm sorry, I'm sorry; the first witness is Frank Swain, the chief counsel for advocacy, U.S. Small Business Administration. Good morning and welcome to the committee. Without objections, your entire statement will be included in the record. You may proceed as you desire. STATEMENT OF FRANK S. SWAIN, CHIEF COUNSEL FOR ADVOCACY, U.S. SMALL BUSINESS ADMINISTRATION Mr. SWAIN. Thank you, Mr. Chairman. Good morning. As you indicated, I have a detailed statement, which I'll attempt to summarize. In terms of an introduction, I appreciate the invitation to appear before the committee. This is the first time I've appeared before your subcommittee, Mr. Chairman. And as the chief counsel for advocacy of the Small Business Administration, I'm charged by law and by the President with representing the concerns of small firms and, of course, in the case of pensions, small employers before parts of the Government, both the Congress and the executive branch, where key decisions are being made. So, I do appreciate the invitation. Our statement includes a disclaimer. Of course, the official Administration policy on any of these issues, technically, pension issues, is always provided by the Labor Department and the Treasury Department. Nothing that is in my statement is in conflict, as far as I know, with their policies. But obviously they will be working with the committee as you advance the legislative progress on it. I'd like to make a couple of general statements about policy issues, and then point to four or five specific observations. And I'll be quite brief. I think that the committee and the legislation, both H.R. 3594 and H.R. 3098, addressed two very key questions, which is how we go about expanding, as a policy matter, the occurrence of retirement coverage among employers, and specifically how to best do that among small employers. The statistics that we detail in our statement tell a story that large business in this country has been fairly successful in providing retirement coverage, some aspect of retirement coverage for most of their employees. In businesses employing over 500 workers, 86 percent of the employees in those firms are covered by some sort of pension or retirement coverage. However, in firms with 25 or fewer employees, only 19 percent of the workers in those firms are covered. That is to say that most people that work for small firms aren't currently covered by any king of retirement coverage. And that's not to say that small busi ness community has a significant interest in ensuring the integrity of the private pension system. Small businesses are competing with large businesses, providing employees with employee benefits, because they're competing with large businesses for skilled employees and for capable employees. And any package of benefits that an employer, large or small, can offer to an employee I think is very important. We have found through our research that the biggest obstacle to greater small business coverage of employees in pension plans is one that, of course, the committee can't in, and of itself, remedy, and that's the basic profitability issue, that many small firms simply don't have the cash-flow, the profits to direct funds to pension plans. The second reason consistently cited by small firms is the high administrative cost associated with maintaining a retirement plan. Simply stated, if the administrative costs are fairly fixed in setting up a retirement plan, and one only has 10 employees as opposed to another firm that has 100 employees, the per employee administrative cost is going to be much larger in a small firm. Finally, I should mention-and this is something that we've been hearing a great deal of in a current series of White House conferences on small businesses that are going through the States-is the deep antipathy of the small business community to frequent changes in the law, both-especially in the tax laws. Every time the tax and labor laws are changed, small businesses have to spend a disproportionate amount of money, I think, to bring their plans into compliance. And we've-particularly after the recent tax law changes, it's not so much the subject matter of the changes, but just the fact that the rules are being rewritten one more time. Many people have expressed a tremendous amount of frustration, that they don't want to go ahead with retirement plans, not because of the cost of setting up the plan and funding the plan, but because of the cost of compliance with the frequently changing law. So, in considering legislation affecting employer maintained retirement plans we think that it's important that you try to keep the administrative burdens as low as possible. One other point on what small firms generally utilize. Those small firms that have plans generally have defined contribution plans. That should come as no surprise, obviously, to this committee. Defined contribution plans are generally simpler to set up and more predictible in their funding. A lot of-there seems to be, from time to time, a dispute within the pension community as to what kind of plans are good, better, and best for any particular kinds of employers. It's been our experience, working with small firms, that they are very dependent on defined contribution plans. Their funding costs are more certain. And, basically, they're simpler to set up. Now, in the context of RIPA legislation, first of all, I'd like to congratulate the committee. They have been very open in developing the legislation in both the legislation and the Retirement USA We've appreciated the ability to discuss the matter with the members of the committee and the staff, and we hope to continue to do so. A few specific reactions to specifics in the legislation. First of all, I think it's an important goal that RIPA substantially increase pension benefits or plan formations in small firms. I'm not sure that it's really going to achieve that goal in and of itself. The increasing regulation of pension plans not only heightens barriers to new plan formation, but also may increase the likelihood of terminations of existing plans. It's just any kind of new legislation of a regulatory nature is just one more barrier. We do know positively that H.R. 3594 provides for deferred effective dates, which I think is very important. We're now seeing in the present tax bill the fact that the effective dates are immediate if not retroactive. It's really causing a major problem. We think it would do the same in the pension area. And, so, we appreciate the fact that the effective dates would be deferred. The second point, I think, that the committee has to hash through with some degree of care is the overlap or the interplay between current top heavy rules, which affect the majority of small plans, and similar requirements that would be a part of RIPA. It's unclear I think-at least it's unclear to us how these would interplay, whether they would be duplicative and unnecessarily burdensome. Even Senator Heinz, in his introductory statement in the Senate, said that the fact that RIPA would come on down on top of the current top heavy plans would create an awkward situation. I think that situation has to be straightened out. I think that the top heavy plans, changes in top heavy plans affected a lot of small firms' plans. And I'm not saying that those were bad changes. But to bring down another series of regulations it's sort of going the same direction, but are obviously, many times, different on the details. I think there's a fair amount of complexity for most small firms to absorb. And I would encourage the committee to pay a particular amount of attention to that issue. The third point I would like to make-and I think it is good that the committee attempts to distinguish in its bill between moneys set aside for retirement as opposed to moneys for other purposes. I think that if the key element in making that distinction is a tax penalty, as included in the bill, and as included in the current tax bill which was passed by the House, then I think that we-the burden should not be so much on the employer to provide administrative fixes, because the key burden is going to be on the employee, if they take the money out too early to pay a tax penalty. The distinction, of course, is that before an employer can maintain a nonretirement plan under RIPA it must first maintain a retirement plan with a minimum level of benefits or contributions. The concern that we have, is that in practice, the distinction may be of little utility to small businesses, which typically only maintain one benefit plan already. And especially if the small employer's one benefit plan that they currently maintain is a profit-sharing plan in years where the profits are thin or nonexistent. They Would that mean that if they were to set up a second plan, in those years where they don't make any contributions to the profitsharing plan because the profits are nonexistence, would likewise the tax deferral be lost on the secondary nonretirement plan. It's a tough issue. And I think that we-the committee need to take a look at it. A fourth item that I'd like to point out is that we don't agree at all with the RIPA proposed prohibitions against lump sum distributions of any amount to workers before they reach age 592. We don't have any problem with the increase in tax penalty. That seems to be consistent with the policy approach that's being taken across the board by the Congress and the administration. But the outright prohibition of lump sum distributions I think would force, in many times, an unnecessary administrative burden on the employer to go and set up an IRA. And then, of course, the employee, the day after the IRA was set up could take the money out of the IRA in the first place and pay the tax penalty. So, why not just go with the tax penalty approach rather than requiring the employer to set up an IRA? Why not just allow the rules to continue as they are now, where there is an option for lump sum distribution for the amount of $3,500 or less? Particularly important to small firm employers because many times they don't build up very much money in these pension plans. And all the statistics show that small firms-the workers move in and out of those firms much, much more frequently. There's a much higher degree of turnover. So, you're apt to have a lot more plans with just a little bit of money in the plan. And we can-we ought to stay away from creating administrative burdens for the employers to keep track of these short-time employees. Finally, we note that the provisions encouraging simple SEP's are a step in the right direction. Again, we're not sure that they'll solve all the problems of all the people. But we certainly think that the SEP approach is a positive approach for small firm employers. And we also think that the Retirement USA approach, which is obviously aimed at a no cost administrative approach, is a very good idea. As I indicated earlier, second only to the basic issue of profitability in deterring small plan establishment, is the issue of retirement costs-administrative costs. And if the Retirement USA can authorize the complete assumption of all administrative responsibilities by an intermediary, then that's obviously a positive approach from the perspective of the small employer. Mr. Chairman, I want to commend you and the members of the committee and the staff for spending a lot of time on this issue. It's a complicated issue. We think that it can do good things for small employers. So, we hope that in the context of writing a bill you don't overregulate them and unintentionally discourage more small firms from setting up plans or discourage them from retaining their plans. Thank you for your invitation. I'll be happy to take any questions. PREPARED STATEMENT OF FRANK S. SWAIN, CHIEF COUNSEL FOR ADVOCACY, U.S. SMALL BUSINESS ADMINISTRATION Mr. Chairman: Thank you for providing me with the opportunity to present my views on two important pension bills, H.R. 3594, the Retirement Income Policy Act of 1985 (RIPA) and H. R. 3098, the Retirement Universal Security Arrangements Act of 1985 (Retirement U.S.A.). Each of these bills has as an express goal to expand pension coverage in small business. The Office of Advocacy of the U.S. Small Business Administration was created by Congress in 1976 to advocate the interests of small business before the Congress and Federal agencies. Thus, my views are not necessarily those of the Administration; the Department of Labor and Department of Treasury represent the Administration on employee benefits and tax issues respectively. My role today is to discuss the impact of these proposals on small business, particularly the tendency of the legislation to promote pension coverage of workers in small firms. I. The Role of Small Business in the Economy and in the First, I would like to put my statement in context by describing small business' role in the economy and the |