S. HRG.

110780

SAVING SMARTLY FOR RETIREMENT:

ARE AMERICANS BEING ENCOURAGED TO BREAK
OPEN THE PIGGY BANK?

HEARING
BEFORE THE

SPECIAL COMMITTEE ON AGING

UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION

WASHINGTON, DC

JULY 16, 2008

Serial No. 11032

Printed for the use of the Special Committee on Aging

(
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SPECIAL COMMITTEE ON AGING

HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon
GORDON H. SMITH, Oregon
BLANCHE L. LINCOLN, Arkansas
RICHARD SHELBY, Alabama
EVAN BAYH, Indiana
SUSAN COLLINS, Maine
THOMAS R. CARPER, Delaware
MEL MARTINEZ, Florida
BILL NELSON, Florida
LARRY E. CRAIG, Idaho
HILLARY RODHAM CLINTON, New York
ELIZABETH DOLE, North Carolina
KEN SALAZAR, Colorado
NORM COLEMAN, Minnesota
ROBERT P. CASEY, Jr., Pennsylvania
DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri
BOB CORKER, Tennessee
SHELDON WHITEHOUSE, Rhode Island
ARLEN SPECTER, Pennsylvania
DEBRA WHITMAN, Majority Staff Director
CATHERINE FINLEY, Ranking Member Staff Director

(II)

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CONTENTS
Page

Opening Statement of Senator Herb Kohl .............................................................

Opening Statement of Senator Gordon H. Smith .................................................
PANEL

OF

1
2

WITNESSES

Statement of Christian E. Weller, Ph.D., Associate Professor, Department

of Public Policy and Public Affairs, University of Massachusetts Boston;
and Senior Fellow, Center for American Progress Action Fund, Washington,
D.C. ........................................................................................................................
Statement of J. Mark Iwry, Principal, The Retirement Security Project, Nonresident Senior Fellow, The Brookings Institution; and David C. John,
Principal, The Retirement Security Project, Senior Research Fellow, The
Heritage Foundation, Washington, D.C. ............................................................
Statement of Gregory T. Long, Executive Director, Federal Retirement Thrift
Investment Board, Washington, D.C. .................................................................
Statement of John Gannon, Senior Vice President, Office of Investor Education, Financial Industry Regulatory Authority, Washington, D.C. ..............
Statement of Bruce R. Bent, Founder and Chairman of The Reserve, New
York, New York ....................................................................................................

34
66
72
80

APPENDIX
Statement submitted by Pension Rights Center ...................................................
Statement submitted on behalf of Hewitt Associates LLC, Alison Borland
and Frank McArdle ..............................................................................................
Letter and information submitted by Mercer ........................................................

103
107
120

(III)

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ARE AMERICANS BEING ENCOURAGED TO

BREAK OPEN THE PIGGY BANK?
WEDNESDAY, JULY 16, 2008

U.S. SENATE
SPECIAL COMMITTEE ON AGING
Washington, D.C.
The committee met, pursuant to notice, at 10:35 a.m., in room
SD562, Dirksen Senate Office Building, Hon. Herb Kohl (Chairman of the committee) presiding.
Present: Senators Kohl, Salazar, McCaskill, and Smith.
Also Present: Senator Schumer.
OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

The CHAIRMAN. Good morning to one and all, and we thank you
all for being here today.
This morning we are going to talk about saving smartly for retirement. Less than 30 years ago, Congress created a new type of
savings plan, the 401(k), to help ensure Americans have adequate
income in retirement. However, increasingly we are seeing 401(k)
funds being treated as rainy day funds, as participants take out
withdrawals and loans. Today, we will learn more about the financial repercussions of this practice and examine policies that can
best promote the original purpose of 401(k)s, namely the retention
and the growth of retirement savings.
First, let us look at the numbers. According to the Employee
Benefit Research Institute, nearly one in five 401(k) plan participants do have an outstanding loan. We will learn from Dr. Wellers
testimony that loans and withdrawals are not only increasing in
number, but that loan amounts are growing substantially as well.
We can only expect that these trends will worsen as more people
face economic hardships due to the housing and credit crises and,
over the long term, contribute to Americas already poor record on
savings.
We need to be clear that we are not saying that all 401(k) loans
and withdrawals are a bad thing. Research has shown that making
loans and withdrawals available for legitimate purposes can help
encourage people to participate in 401(k) plans. However, loans and
withdrawals can be ill-advised for several reasons, and we believe
that participants should be aware of the negative consequences
they may have on their retirement savings.
Frankly, I believe that there are some ways of using 401(k) savings that are patently bad, such as the 401(k) debit card. By offering a 401(k) debit card, plans send the message that it is OK to
use retirement savings for everyday purchases despite the fact that
(1)

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2
the high fees associated with its use will drastically diminish savings. When a participant can use his or her 401(k) plan to make
casual, everyday purchases, like even buying a cup of coffee, clearly
that is a gross distortion of the plans intended use.
We are also concerned about the high fees many plans charge
their participants. These fees can significantly reduce the amount
of savings Americans have when they retire. Last fall, I held a
hearing to consider the impact of these 401(k) fees and promote
their disclosure. Following the hearing, I introduced a bill with
Senator Harkin that would require all 401(k) plan managers to reveal to both the employers and workers how much they charge in
administrative fees.
Considering the impact fees can have on savings over time, I am
concerned about recent advertising campaigns that encourage Federal employees and retirees to move their retirement accounts out
of the Federal Thrift Savings Program and into higher-fee accounts. The TSP has the lowest administrative costs of any retirement program in the country, and I believe that these misleading
ads are a disservice to hard-working public servants. Therefore,
yesterday I sent letters to the companies that we know are running
these advertisements asking them to reexamine this practice.
In just a moment, we will hear from several experts and industry
officials about how loans and withdrawals can be used more responsibly. We will also hear from the manager of the largest retirement savings plan, the TSP, about their policy on loans and withdrawals. Following todays hearing, I plan to introduce a bill with
Senator Schumer that will prohibit the use of 401(k) debit cards
and to set a limit on the number of loans a participant can take.
In closing, the bottom line of todays hearing is that 401(k) and
similar defined contribution plans were created to ensure that people would have adequate savings for retirement, not as a source of
credit to use casually. The Federal Government provides $325 billion in tax benefits over the next 5 years to encourage retirement
savings each year. I believe we have a duty to make sure that they
are used properly so that all Americans can have a secure retirement.
Let me turn now to Ranking Member Senator Gordon H. Smith
for his comments.
[The prepared statement of Senator Kohl follows:]
OPENING STATEMENT OF SENATOR GORDON H. SMITH,
RANKING MEMBER

Senator SMITH. Thank you, Mr. Chairman. Ladies and gentlemen, all of you, thank you for being here today and to our witnesses, we appreciate the contribution you are making by your testimony here before this committee.
These are tough times for American families. Gas and food prices
are at record highs, and this makes it difficult for many families
to fill up their cars and pay for essential groceries.
The current economic environment also makes it difficult for
many families to pay their bills on time, or at all. Many people are
faced with missing one or two payments that they have every intention of making up the next month, but the next thing you know,

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3
they are in a hole trying to dig their way out of debt and just do
not have the cash to do it.
Given how common this scenario has become, I am not surprised
that many Americans are looking to their retirement savings to
help them make ends meet. Fidelity has seen an increase of 16 percent in 401(k) hardship withdrawals in comparing the first quarter
of 2007 to 2008.
And according to a survey released in February by the Transamerica Center for Retirement Studies, at the end of last year, 18
percent of workers had loans outstanding from their plans, up from
11 percent in 2006.
Although I understand the reasons, this trend concerns me and
us as tapping into 401(k) savings today can have a significant impact on ones level of income at retirement age.
According to Vanguard, an employee who takes out two loans totaling $30,000 from their 401(k) and pays them back in 5 years will
have almost $40,000 less in their 401(k) after 30 years than an employee who takes no loans. Considering the median 401(k) account
balance in 2006 was about $66,000, $40,000 is a lot of money.
This leads me to my final point, one I have made many times before: Americans need to save more for retirement. For most of us,
our 401(k)s will be our primary source of retirement savings, and
$66,000 is certainly not enough money to retire on, especially if you
take out another $40,000.
I have been working over the past few years on ways to help
Americans increase their retirement savings. I am pleased that
Mark Iwry and David John from the Retirement Security Project
are with us today to share their perspective and ideas on this topic.
Mark and David came up with the concept of the automatic IRA,
which Senator Bingaman and I then developed into legislation. Our
auto IRA bill would allow those employees not covered by a qualified retirement plan to save for retirement through automatic payroll deposit IRAs. The auto IRA bill is currently under consideration by the Senate, and I hope my colleagues will join me in pushing for its much needed passage.
Again, I thank you all for being here and look forward to this
hearing.
Thank you, Mr. Chairman.
[The prepared statement of Senator Smith follows:]
The CHAIRMAN. Thank you, Senator Smith.
At this time, we are pleased to welcome our panel.
Our first witness will be Dr. Christian Weller. Dr. Weller is a
Senior Fellow at the Center for American Progress and an Associate Professor of public policy at the University of Massachusetts
in Boston. He is an expert on retirement income security and his
work has been featured in numerous academic and popular publications.
Next we will be hearing from two witnesses who will share the
joint time: Mark Iwry and David John. They are both principals
with the Retirement Security Project.
Mr. Iwry is also a Senior Fellow at The Brookings Institution.
Previously Mr. Iwry served as the Benefit Tax Counsel at the U.S.
Treasury Department between 1995 and 2001 where he was re-

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sponsible for tax and regulations relating to tax-qualified pension
and 401(k) plans.
Mr. John is a Senior Research Fellow at The Heritage Foundation where he has written and lectured extensively on the importance of reforming our Nations retirement system.
Next, we will be hearing from Gregory Long. Mr. Long is Executive Director of the Federal Retirement Thrift Investment Board,
and he serves as the managing fiduciary of the Thrift Savings
Plan, or TSP. The TSP is the largest defined contribution plan in
the world, serving over 3.7 million current and former Federal employees and uniformed service members with over $200 billion in
assets. Previously Mr. Long worked for CitiStreet and Putnam Investments.
Our next witness will be John Gannon. Mr. Gannon is the Senior
Vice President for Investor Education at the Financial Industry
Regulatory Authority, or FINRA. Previously he served as the Deputy Director of the Office of Investor Education and Assistance at
the U.S. Security and Exchange Commission.
And finally, we will be hearing from Bruce Bent. Mr. Bent is the
founder and Chairman of The Reserve and its sister company, Reserve Solutions. The Reserve manages over $120 billion in assets,
making it the third largest family owned asset manager in the
United States.
We welcome you all. We look forward to hearing from you and
we would appreciate it if you would hold your testimony to 5 minutes. Mr. Weller?
STATEMENT OF CHRISTIAN E. WELLER, PH.D., ASSOCIATE
PROFESSOR, DEPARTMENT OF PUBLIC POLICY AND PUBLIC
AFFAIRS, UNIVERSITY OF MASSACHUSETTS BOSTON; AND
SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS ACTION FUND, WASHINGTON, DC

Dr. WELLER. Thank you very much, Chairman Kohl, Ranking

Member Smith, for inviting me here to talk about 401(k) loans and
trends in those loans and the causes of those loans.
I will make the point that demand for 401(k) loans is largely
driven by economic necessities. The economic necessities are unemployment, bad health, and home ownership, especially during the
housing boom. Now, as the housing crisis grips the country, more
and more individuals are tapping their 401(k)s to help smooth over
the troubled economic times. But this means that families leveraged their retirement security to ease their present financial insecurity.
To counter this trend, policymakers must reduce the need for
people to borrow. This will require substantial improvements to income growth for American families and a commitment to providing
health and unemployment insurance to citizens who experience unexpected health expenditures and job loss.
Let me give you a little bit of background on 401(k) loans. When
families encounter rising demands on their budgets such as medical emergency, a spell of unemployment, or higher cost for necessary items, including housing, they often turn to consumer loans
to help them smooth over a rough patch. Workers who are covered
by a 401(k) can borrow from their own savings. An account holder

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may borrow up to half of his or her retirement savings with no penalty as long as the loan is repaid within 5 years. The interest rate
is low, typically 1 to 2 percent above the prime interest rate, but
there are clear drawbacks. Once the money is out of the retirement
account, it does not earn a rate of return. The low interest rate also
means that you get low additions to retirement savings, and if you
do not pay the loan, there are substantial penalties.
The impact of the 401(k) loans can be severe. We calculate in our
paper that we are releasing today with the Center for American
Progress some hypothetical examples. We find that if you take out
$5,000 in loans as a typical worker, in the first 5 years of having
such a loan, you can reduce your retirement savings by the end of
your career by up to 22 percent depending on the various assumptions. That is a substantial reduction in retirement savings.
This reduction in retirement savings comes typically at a time
when other retirement income is also going down. This is the case
right now. Housing values have fallen at the fastest rate in more
than 3 decades and financial markets have been in turmoil for a
year now decimating existing retirement savings. At the same
time, families are increasing their borrowing from 401(k) loans due
the growing economic hardships.
We also find that 401(k) loans generally add to the total debt
burden the families have. They do not substitute for other loans.
401(k) loans grew in total amount to $31 billion in 2004, the last
year for which we have data, up from $6 billion in 1989, an increase of almost 400 percent. This reflects just simply the fact that
more people have loans and have the access to those loans.
But it also means that borrowers are tapping out on other loans.
What we find in particular is the 401(k) loan holders have typically
median debt payments relative to income of 22.5 percent of their
income, substantially higher for those who do not have those loans,
18 percent. This would not be the case if 401(k) loans substituted
for other forms of debt.
There have been a number of important shifts in terms of demographic characteristics of who is taking out the loans. The differences between minorities and whites have been shrinking,
meaning whites have been taking out loans faster than minorities
over time. 401(k) loan holders also have gotten younger and they
have also become more educated over time. So this is becoming increasingly a middle class phenomenon, if you will.
The reason why people borrow is because they have to. The primary reason we find is bad health. A spell of bad health increases
having a loan by more than 50 percent. Also, home ownership, especially during the housing boom, has forced people to borrow more
from their 401(k) loans. However, that comes at a cost. We find
that home owners who have a 401(k) loan typically have higher
mortgage payments, less equity, and are more likely to have an adjustable rate mortgage. That means basically home owners who are
financially tapped out otherwise are now borrowing from their
401(k)s to basically just afford the down payment in the housing
boom period.
So the solution here for us at least is that we need to find ways
to keep people from borrowing, from tapping into retirement income security. That means we need to strengthen income growth,

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but we also need to create a stronger social safety net so that people do not have to use their 401(k) plans as supplemental unemployment insurance or health insurance.
Thank you very much.
[The prepared statement of Dr. Weller follows:]

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34
The CHAIRMAN. Thank you for your testimony, Mr. Weller.
Mr. Iwry, Mr. John?
STATEMENT OF J. MARK IWRY, PRINCIPAL, THE RETIREMENT
SECURITY PROJECT, NONRESIDENT SENIOR FELLOW, THE
BROOKINGS INSTITUTION; AND DAVID C. JOHN, PRINCIPAL,
THE RETIREMENT SECURITY PROJECT, SENIOR RESEARCH
FELLOW, THE HERITAGE FOUNDATION, WASHINGTON, DC

Mr. IWRY. Mr. Chairman, Senator Smith, I am Mark Iwry with

The Brookings Institution. This is my colleague, David John with
The Heritage Foundation. We are both principals of the nonpartisan Retirement Security Project, and we are pleased to appear
together essentially as a single witness before you today to emphasize the importance in this area in particular of an approach that
transcends traditional partisan and ideological divisions.
We would like to present our views jointly on savings, including
the automatic IRA proposal that you, Senator Smith, and Senator
Bingaman have introduced as the lead cosponsors, and on the leakage issue that is the main topic of this hearing.
Senator Smith, you have already described the problem of inadequate saving, as have you, Mr. Chairman. We recognize that adequate retirement security and adequate saving require not only increasing saving, which David John will discuss in connection with
the automatic IRA, but preserving savings that have already been
done so that they do not leak out of the pension system by being
consumed prematurely.
Often the discussion of pension leakage focuses on loans and
hardship withdrawals. But in a system that is increasingly dominated by 401(k) plans that are funded by voluntary employee contributions, many people may be reluctant to contribute unless they
know they can have at least limited access to their savings if they
have a critical need. And the employer that is sponsoring the
401(k) traditionally has had an interest in encouraging those voluntary contributions and therefore an interest in allowing loans
and hardships as a kind of liquidity carrot for people to participate
in the plan because broad participation enables the employer to
pass the nondiscrimination standards and enables the top people to
contribute more to the plan.
Things are changing. 401(k)s are coming of age. Sponsors are no
longer uniformly interested in getting rid of accounts for terminated employees. And automatic enrollmentthat is, putting people in the plan automatically unless they opt outis transforming
the 401(k) landscape in a way that is very potentially relevant to
this leakage issue. This may mean that plan sponsors, because
they have higher participation through automatic enrollment, will
be less concerned about using access to savings as an inducement
to broader participation and can sponsor K plans that limit leakage, that use automatic or behavioral strategies to reduce the occasions when people take lump sums from the plan in particular
after they leave employment.
Accordingly, at least as a first step, it may be worth exploring
whether sponsors are willing to engage in a best practice of allowing lump sums on termination of employment only if they are directly rolled over to another employer plan or IRA or the departing

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35
employee has reached a specified age, such as 55 or 65 unless the
employee can demonstrate a hardship and a need for the immediate access to the funds, such as extended unemployment. This
would fall between the defined benefit approach to post-employment leakage and the current 401(k) practice. We would be happy
to discuss our specific proposals, including the need for a leakage
policy after retirement, that is, more annuities and lifetime income
in 401(k) plans during your question and answers.
David?
Mr. JOHN. The other source of leakage that should concern both
this committee and the Nation as a whole is the money that never
got put in the plan in the first place. And this comes basically from
two sources. One is the fact that roughly 78 million workers are
employed in the U.S. by a company that does not offer any form
of retirement savings plan at all, and other workers will have employment with these companies maybe as an interlude between
jobs with companies that do offer this sort of retirement savings
plan.
In response, as Senator Smith has mentioned, Mark and I developed the automatic IRA. The automatic IRA would probably affect
roughly 40 million out of the 78 million workers. It is designed as
a simple, low-cost, low-burden option for the employer and a simple
low-cost savings option for the worker. It is crafted to discourage
employers from moving from a 401(k) plan down to an auto IRA.
As a matter of fact, it is actually crafted exactly the opposite: to
encourage people to start with an auto IRA and move up to a simple or a 401(k).
I will close by citing a study by Prudential Insurance Company.
They found that 8 in 10 employees were very interested in the auto
IRA, and they said, In fact, the more employees learned about the
auto IRA, the more they were interested in it.
Now, this same study also surveyed about 200 smaller employers, the ones who had offered this, and they found that 8 in 10
businesses believed that the design overcomes their concern and
support the adoption of the auto IRA. Again, the more they heard
about it, the more they liked it.
Further, they discovered that roughly 54 percent of eligible employees would be creating new savings rather than moving savings
around.
We think that leakage is a very serious problem, and we appreciate the fact that you are addressing that in this hearing. But at
the same time, we need to look at both sources of leakage, both out
of existing plans and, as I say, the money that never got there in
the first place.
Thank you.
[The prepared statement of Mr. Iwry and Mr. John follows:]

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66
The CHAIRMAN. Thank you, gentlemen.
We would like to hear from Mr. Long at this point.
STATEMENT OF GREGORY T. LONG, EXECUTIVE DIRECTOR,
FEDERAL RETIREMENT THRIFT INVESTMENT BOARD, WASHINGTON, DC

Mr. LONG. Chairman Kohl, Ranking Member Smith and members of the committee, my name is Greg Long. I am the Executive
Director of the Federal Retirement Thrift Investment Board and,
as such, the managing fiduciary of the Thrift Savings Plan for Federal employees. I welcome the opportunity to appear before your
committee to discuss the TSP loan and in-service withdrawal programs.
I commend the committees efforts to focus public attention on
protecting and strengthening retirement savings programs, especially with regard to those participants who might engage in unnecessary borrowing or indiscriminate early withdrawals. The
boards own experience over the past 20 years shows that a close
attention and a willingness to adjust in these areas is critical to ensure a good balance between the goals of achieving participants
long-term retirement goals and meeting their short-term needs.
In 1988, TSP participants who contributed their own funds were
first permitted to borrow for four specific purposes: medical expenses, education, financial hardship, or to purchase a primary residence. Documentation to demonstrate the loans purpose was required. Participants could have a maximum of two loans outstanding. Like 401(k) plans, TSP loans were subject to restrictions
found in the Internal Revenue Code and in regulations issued by
the IRS. As with similar loan programs in 401(k) plans, our loan
is intended to encourage employees to voluntarily contribute their
own funds by allowing limited access to those funds when necessary.
After 8 years of administrative experience, the board identified
three areas that required improvement. First, the four purposes
were viewed by some as overly restrictive. Second, the documentation process, which for a worldwide plan like the TSP, was of necessity conducted over long distances by mail, was administratively
difficult. Finally, some participants with financial difficulties were
already overwhelmed by debt. They required debt relief in order to
get their heads above water.
The board worked with the Congress and Senator Ted Stevens
in particular, who is widely regarded as the father of the TSP, to
resolve these issues in legislation. As a result of the Thrift Savings
Plan Act of 1996, the board was permitted to offer general purpose
loans requiring no documentation. Additionally, in-service withdrawals for financial hardship and for those who attained age 59
and a half were allowed for the first time.
As expected, loan activity increased. Between 1997 and 2003, the
number of participants with loans increased from 219,000 to
554,000. Although we cannot demonstrate any direct connection,
the FERS participation rate increased from 82.9 to 86.9 percent
during the same period.
The TSP loan program was again modified in 2004. The need for
this change was identified a year earlier when the board imple-

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mented a new daily valued record keeping system. A relatively
small number of participants were found to be borrowing slightly
larger amounts over and over again in an apparent attempt to supplement their basic pay. A review of this practice found that one
participant had used the program to borrow 31 times.
As the board was implementing a new record keeping system in
2003, this serial borrowing caused significant administrative problems. In July 1904, after careful study and a review of private sector practices, the board implemented three changes: a $50 loan fee,
a 60-day waiting period between loans, and a limit of just one general purpose and one primary residential loan at any time.
We view these changes, which we continue to employ today, as
highly effective. A total of 353,000 new TSP loans were disbursed
during 2003. In 2005, that number dropped to 192,000. The overall
number of loans, which was rapidly approaching 1 million, has
steadily declined.
Meanwhile, the total average monthly contribution per participant has continued to steadily increase, from $432 per month in
2005 to $497 per month in 2008.
Unlike the changes that characterize the 20-year history of the
TSP loan program, the in-service withdrawal program, which first
became available in 1997, has had only one major change. Originally, like loans, hardship required documentation. As with loans,
the board found this requirement to be administratively burdensome. Therefore, with the introduction of the new record keeping
system, participants were permitted to self-certify their hardship
conditions. However, I would like to point out that in addition to
the tax consequences, participants are also restricted from making
employee contributions and therefore from receiving matching contributions for 6 months after taking a financial hardship withdrawal. Therefore, there are deterrents built into the program.
Finally, I have also provided the committee with copies of our
2008 edition of Highlights, which is our newsletter. The feature article of this newsletter, which is published on our website, is being
sent to participants. The key article is called Look Before You
Leap. I would like to explain why I found it necessary to issue
such a caution to participants.
Earlier this year, I stepped out of the boards office in downtown
Washington and I saw a bus stop billboard that urged Federal employees to transfer their old TSP accountsI put that in quotes
to the advertising sponsors IRA. Shortly thereafter, a second advertising campaign, which is similarly targeted, told readers that
their TSP accounts would retire.
I am here today to advise that after 21 years, the TSP is still
young and vigorous. It is not getting old and it does not intend to
retire. Thanks to the wisdom of Senator Stevens and other congressional authors, it will continue to follow the timeless principle of
tracking broad market performance while adding value for participants via very low administrative expenses.
And our participants recognize the value of the TSP. Last year,
over 20,00 checks came in for a total of $478 million rolled into the
TSP from private sector 401(k) and IRA accounts.
Thank you for the opportunity to testify. I would be pleased to
respond to any questions.

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[The prepared statement of Mr. Long follows:]

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72
The CHAIRMAN. Thank you very much, Mr. Long.
Now we will hear from Mr. Gannon.
STATEMENT OF JOHN GANNON, SENIOR VICE PRESIDENT, OFFICE OF INVESTOR EDUCATION, FINANCIAL INDUSTRY REGULATORY AUTHORITY, WASHINGTON, DC

Mr. GANNON. Mr. Chairman and members of the committee, I

am John Gannon, Senior Vice President for Investor Education at
the Financial Industry Regulatory Authority. As the largest non
governmental regulator for the countrys securities firms, FINRAs
top priority is to ensure fair markets for American investors.
On behalf of FINRA, I would like to thank you for the opportunity to testify on such an important topic. You have my written
testimony, so this morning I would like to highlight what we at
FINRA view as emerging threats to a secure retirement.
For todays investors, especially those close to retirement, the
number of hurdles on the road to financial security is growing
every day. The cost of living is up. Home prices are down, and credit has dried up. Financial institutions that once seemed invincible
have failed or are in trouble.
The Washington Post reports that nearly three out of five middle
class retirees will likely run out of money if they do not change
their spending habits. Supporting that is a recent AARP study citing the personal bankruptcy filings for middle-aged Americans has
risen by more than 50 percent since the 1990s.
When people feel pinched for cash, they often choose risky ways
to make ends meet. In fact Fidelity, T. Rowe Price, and Vanguard
have reported significant increases in 401(k) hardship withdrawals
since last year. A recent Wall Street Journal Harris Interactive
Survey found that about one-quarter of adults actively planning for
retirement have prematurely withdrawn money from their retirement investments.
Also feeding into this anxiety or unscrupulous financial professionals, many of them unregistered. They push investments that
promise security, but too often they end in financial ruin.
At FINRA, we believe that the first line of defense for every investor is education. That is why we are focused on teaching investors about the importance of retirement savings and the consequences of early withdrawals from 401(k)s. FINRA is focused in
two ways to help protect investors and teach them in these uncertain times. First, we use surveillance and enforcement tools to detect and deter abusive sales practices. Second, we do everything we
can to educate investors to help them make the best financial decisions.
I would like to highlight two areas of concern today: early retirement scams and 401(k) debit cards.
As you know, section 72(t) of the IRS Code permits penalty-free
early withdrawals from company-sponsored plans before the age of
59 and a half. Some financial advisors tout 72(t) as a loophole that
allows investors to retire early by withdrawing assets and reinvesting them. Investors are often promised unrealistically high returns, but are rarely told about the down side of those investments.
One case in particular comes to mind. A few years ago, a 57year-old retiree from Belton, MO was promised that his 72(t) in-

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73
vestment would earn 9 percent. He was persuaded to invest $1 million in retirement savings into two variable annuities, and 7
months later, $225,000 of his principal was gone. But that was just
the beginning. Eventually he lost over $450,000 due to the negligence and fraud on the part of his broker.
More recently, FINRA sanctioned two securities firms, Citigroup
and Securities America, for misleading investors in this way. They
were fined $5.5 million and ordered to pay $26 million in restitution to hundreds of former Bell South and Exxon Mobil employees.
In both cases, the firms were onsite targeting employees at their
work places. Given the aging U.S. demographic, we are likely to see
even more investors victimized in this way. FINRA will continue to
take action where investors are treated improperly.
Another potential threat to a secure retirement is the relatively
new 401(k) debit card. In May, FINRA published an investor alert
outlining the dangers of 401(k) debit cards, and we hope investors
heed our warnings.
Investors can use a debit card to borrow directly from their
401(k) account for any purpose, but as they spend it, they may
wipe out a good portion of their retirement savings. Taking money
out of your retirement savings, even for a short period of time, can
be disastrous.
FINRA has developed a number of tools that focus on building
and protecting retirement savings.
First, we have our 401(k) Learning Center on our website,
finra.org. Here we explain everything from 401(k) enrollment to the
risks of cashing out before retirement.
FINRA has also teamed up with the Retirement Securities
Project and AARP to establish Retirement Made Simpler, an effort
to use automatic features such as automatic enrollment, to increase
participation in 401(k) plans.
We issue investor alerts, warning about early retirement pitches
and products that could be harmful and we offer online tools to
help employers check out early retirement sales people and avoid
potential scams.
Mr. Chairman, FINRA appreciates the opportunity to testify. We
look forward to working with the committee, the SEC, and other
regulators to expand Americans financial knowledge and to help
them build a secure retirement. I would be happy to answer any
questions.
Thank you.
[The prepared statement of Mr. Gannon follows:]

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80
The CHAIRMAN. Thank you very much, Mr. Gannon.
Finally, we will hear from Mr. Bent.
STATEMENT OF BRUCE R. BENT, FOUNDER AND CHAIRMAN
OF THE RESERVE, NEW YORK, NY

Mr. BENT. Chairman Kohl, Ranking Member Smith, and distinguished members of the committee, my name is Bruce Bent. I am
the Chairman of The Reserve, the leading cash management specialist for institutional and individual investors. I am also Chairman of Reserve Solutions, a sister company. Reserve companies
currently manage over $125 billion.
The Reserve is best known as the creator of the money market
mutual fund. We wanted a product that would provide a return
that reflects actual money market interest rates while providing
safety of principal, liquidity, and a high degree of safety. As we all
know now, the money market fund has been extremely successful
with nearly $4 trillion invested in it. I say that for purposes of
identification.
I am here today to discuss ReservePlus, the qualified pension
plan administrative services that we provide. ReservePlus was created to help address the challenges of increasing participation by
lower income and younger workers who traditionally do not participate because they feel they cannot afford to lose access to their
earnings.
To begin, ReservePlus does not approve loan requests, establish
or interpret loan policies, and is not a plan fiduciary. We are simply a software processor. Our service is made available only to participants who have been directed to us by plan administrators in
accordance with their employers policy. Once a participants request has been approved, they direct the plan administrator to
transfer their money into a loan account within their plan. The
amount in that account is then invested in a Reserve money market mutual fund. Participants may then access the amount of their
account using checks or a debit card.
Each ReservePlus participant is provided with materials containing a description of the service, its operation, and associated
charges. The committee has been provided with copies of these disclosures.
The account opening fee averages $75 and the subsequent annual maintenance fee ranges from $25 to $50, charges that typically apply to both conventional loan programs and ReservePlus
and are paid to the plan administrators, not Reserve. As is usual
with plastic-based transactions, there is a $2 fee for cash advances
but no fee for purchases by check or card. In addition, the plan participants pay themselves an interest rate of the prime rate and a
service fee to ReservePlus which ranges from 2.9 to 3.25 percent
on loan balances actually utilized.
The average loan balance for participants in plans utilizing
ReservePlus is approximately 35 percent less than the average loan
balance for all plan participants, specifically $4,800 versus $7,200.
Our default rate is 2.2 percent, and we have been unable to determine what the industry average default rate is.
ReservePlus is different from traditional loan programs because
participants may establish an account without actually with-

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81
drawing funds. A traditional loan actually forces money out of a
plan by requiring a participant to withdraw the entire amount approved immediately in a lump sum. With ReservePlus, the participants funds remain within the plan, continuing to earn sheltered
investment returns until the participant withdraws them. The participant may withdraw as little or as much as needed at any time,
up to the amount approved by their employer. There is no lump
sum withdrawal requirement. When participants know they have
access to their money, they contribute more into the plan and take
less out of the plan. At the end of the day, participants accumulate
greater overall retirement savings using ReservePlus services over
conventional loan processing.
Participants with ReservePlus services are also less likely to default on their plan loans when they leave the job. Industry practice
for traditional loans requires them to be repaid through payroll deductions. As a result, employees that are terminated, resign, or retire are no longer able to continue repaying their loans via payroll
deductions. In these circumstances, plans utilizing traditional loan
processing typically give a participant only 90 days or less to repay
all outstanding loans.
A participant who is unable to repay the outstanding balance
will incur a taxable distribution, subject to regular city, State, and
Federal income taxes, and an additional 10 percent penalty if they
are under the age of 59 and a half. Obviously, the participants retirement savings will also be reduced by the amount of the default.
This instant repayment requirement in traditional plans is a significant deterrent to employees joining a plan because it comes at
a time that the participants are least able to afford it. This is not
so with ReservePlus.
Unlike traditional loan programs, ReservePlus is not dependent
on payroll deduction and allows participants to continue making
their regular payments even after they leave their employer. Given
the increasingly mobile workforce, this feature of ReservePlus
helps safeguard participants retirement savings. ReservePlus also
allows participants to prepay in advance, in whole or in part, at
any time and to reduce the amount available in their loan account
at any time, unlike traditional loan processing through payroll.
We designed ReservePlus with several concrete advantages to
plan participants over traditional loans. I share your concerns for
Americas seniors and for hard-working Americans like my parents,
a postal employee and a school cafeteria worker. I am very proud
of the innovations ReservePlus offers to participants in overcoming
many shortcomings of the prevailing practices that encourage
workers, regardless of income level, to participate in retirement
plans to the maximum level as soon as they are eligible.
Thank you for your time. Again, I am happy to answer your
questions.
[The prepared statement of Mr. Bent follows:]

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88
The CHAIRMAN. Thank you very much, Mr. Bent.
We will turn now to my colleague, the ranking member, Senator
Smith, for his questions, and then we will turn to Senator Salazar
and Senator McCaskill. Senator Smith?
Senator SMITH. Thank you, Mr. Chairman. Gentlemen, all of you,
your testimony has been excellent.
I wonder, Mark and David, as you have gone out with your very
bipartisan proposal on automatic IRAs, I think you both commented that the more people know, the more they warm up to it.
I assume I heard you correctly.
Mr. JOHN. You did, yes.
Senator SMITH. You know, obviously we are here because we
have a real dilemma. We have a national savings problem. We
have a demographic bubble with the baby boom generation getting
ready to retire and insufficient preparation for retirement. We are
looking for what we can best do to facilitate the retirement of elder
Americans.
I am wondering in your opinion, any of you, which is worse? Plan
loans or hardship withdrawals? What is the most destructive thing
that could be done to ones 401(k) plan?
Mr. IWRY. Senator Smith, the loan at least is repaid. The withdrawal is not generally repaid.
And worse than either of those, if I may, is actually the lump
sum that is distributed or offered to a participant each time they
change jobs, leaving a 401(k) plan. We probably have more leakage
coming from lump sums paid out between jobs than we do from the
more restrictive loan and hardship withdrawal regimes that apply
while the person is employed. So that is the area that I think we
need to question as the highest priority. Do we really want to be
offering the money to a participant every time he or she changes
from one 401(k) sponsor to another rather than having an affordable, seamless savings system?
Senator SMITH. Clearly, plan loans and hardship withdrawals are
designed to provide liquidity as an inducement for people to enroll
in the first place. I think you have all made that clear. But if you
go to an automatic enrollment system, do we need those kinds of
inducements? Where do we draw this line? That is really what I
am getting at.
Mr. IWRY. I think it is a great question. It is a balancing. The
employer is trying to induce participation by offering enough liquidity so people feel they can get that money if they really desperately need it. But we should leave that door open only a crack,
and an automatic enrollment plan gets that kind of participation
probably with less need for liquidity as an inducement. Therefore,
the employer should feel freer and we would hope policymakers
would feel freer to narrow that opening to reduce the access because we do not need it as much in the modern auto enrolled
401(k) universe. So I think your policies of restricting leakage, as
I understand them, looking carefully at whether we can restrict
leakage some more, are timely.
Senator SMITH. Several of you have commented that the more
people know, the more comfortable they are. Are we at the Federal
Government level, the Department of Labor, Department of the

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Treasury doing enough to educate people so that they understand
and feel they can get involved?
Mr. GANNON. Senator, there is always more that can be done
with educating investors about 401(k)s and other retirement savings vehicles. We are constantly trying to strive to get the information that is out there into as many hands as we can. I mean, that
is why we work through the FINRA Financial Investor Education
Foundation to give grants to organizations such as libraries so that
the information can get into every community. There needs to be
much more done with that.
Also, information has to be available at the time that people need
it. So that means when they are going to get a loan from their
401(k), is the education available at that point? Is it available
when they are taking a hardship withdrawal? Is it available when
they are making financial decisions with respect to their financial
savings?
Senator SMITH. The last question, Mr. Chairman. It seems that
in Congress we like to speak and act as though the cycles of supply
and demand do not exist, and we can repeal them, that market corrections and cycles in our economy, we can somehow control. We
have never been able to do that. But that certainly has been the
history in Congress. As much as we would like times always to be
good, we have had bad times in the past since the introduction of
the 401(k). Is this down cycle different in terms of the leakage you
are seeing?
Dr. WELLER. So far the data is not out. We will not firmly know
until next year when we get the new data from the Federal Reserve.
It does not look at all that different from what we have seen
from the recent surveys. It does not look all that different. We expect the numbers to increase, the loan amounts, the number of people who have those loans, but those are clearly tied to both the
availability of health insurance and the availability of unemployment insurance and other savings. And in that regard, the current
downturn is different because people now have much more debt
than they used to.
Right now for the first quarter of 2008, with a record amount of
132 percent of disposable income, that is the highest number we
have ever seen. Personal debt to income has risen four times faster
than it did during the 1990s. So now there is less fall-back position
for families. So that makes it different, but generally I think the
factors that drive people into a loan are not that different from previous loans. Again, it is the lack of savings to smooth you over a
rough patch, either health insurance or unemployment insurance.
Mr. IWRY. Senator, obviously, we trust this too will pass, but in
the meanwhile, we should be doing everything we can to help people keep their savings for the long term when better times are
here.
Senator SMITH. Thank you, Mr. Chairman. I would be pleased to
be added as a cosponsor of your bill.
The CHAIRMAN. Thank you very much, Senator Smith.
Before I turn it over to Senator Salazar, I just want to make one
statement and ask a single question for all of you. Companies like
Karsten Manufacturing, which is the maker of the Ping golf prod-

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ucts, which we all familiar with, do not allow any loans on their
plan and still they boast a 92 percent participation rate, significantly because they have a very generous matching fund provision
in terms of company contributions.
So if we have generous matching funds and if we have automatic
enrollment and we do not allow people to opt out, in many ways
is that the most desirable kind of a plan that we would like to see?
What do you think, Mr. Weller?
Dr. WELLER. There is a number of ways of, obviously, increasing
both participation and contributions. Matches are a big part in
terms of at least increasing contributions. They do not do that
much in terms of participation. But automatic enrollment is certainly one way of going.
I also want to add something to the liquidity option that was discussed here. Yes, the evidence from the past shows that if you have
the loan option, hardship withdrawal option, it does increase contributions, but over time, the evidence seems to suggest that that
effect has diminished, at least according to our research.
So I think that other factors such as automatic enrollment and
employer matches are a much better way of increasing participation and to wealth and ultimately that goes in line with what Mark
said in terms of restricting the access to loans.
Mr. JOHN. For us, the short answer is yes, and when it comes
right down to it, education is a key, but plan design we have found
actually is much more of a determinant of success. And I think this
is one case where that shows that.
The CHAIRMAN. Mr. Long and then Mr. Bent.
Mr. LONG. I have viewed loans as a necessary evil, necessary to
encourage participation. As automatic enrollment becomes more
popular and at some point used within the TSP and as matching
becomes more lucrative, the necessity of loans starts to decrease.
The CHAIRMAN. Mr. Bent?
Mr. BENT. Several weeks ago I learned of a person that resigned
from their job because they had no access to their 401(k). An example of unintended consequences of restricted access. So maybe a little bit more flexibility would be helpful.
The CHAIRMAN. Mr. Gannon?
Mr. GANNON. Well, to give you an example, obviously we believe
strongly in auto enrollment, auto escalation because we work with
the Retirement Securities Project to promote those efforts with medium-sized employees. To give you an example, at FINRA we established auto enrollment in 1997. Our participation rate went from
75 percent to over 97 percent, and you see that time and time
again when employers move to auto enrollment and auto escalation
features. There is little down side to using those features.
I am concerned about loans. I am even more concerned about
debit cards because I believe they will lead to current consumption.
You should not be using your 401(k) to buy pizzas and lattes, and
that is the only reason I think you would use a plastic card.
The CHAIRMAN. Thank you, Mr. Gannon.
Senator Salazar?
Senator Salazar. Thank you very much, Chairman Kohl, and
Ranking Member Smith, for holding this important hearing, Saving

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Smartly for Retirement. That is a very important subject and something that I am glad Senator Kohl has decided to put a focus on.
What I would like you to comment on for me is the current economic circumstance and what you might paint out to be what could
be a parade of horribles happening with peoples retirement accounts and 401(k)s. We all know the statistics related to what is
happening with fuel and $4 a gallon gas. We know the hardship
that people are facing with respect to home ownership, given the
housing crisis that we are seeing across America. We know what
is happening with the huge escalating costs in higher education,
and we know what is happening with health care costs for Americans. People may disagree whether we are in a recession or not,
but I do not think there is any disagreement that there are a lot
of Americans who are facing tremendous hardship.
So when you have that kind of hardship and you are feeling that
kind of economic pain, you start looking to those potential assets
that you have to help you through these hard times. And so whether it is taking loans from your 401(k) or maybe taking an early
withdrawal from your 401(k), what is the parade of horribles here?
If the economic times continue to be as painful as they are, I think,
in the last several months, if they continue to exacerbate, what is
going to happen to the saving smartly for retirement?
Dr. WELLER. Well, I think when it comes to the current economic
situation, it is important to understand that the down turn in the
housing market and the stock market has made a bad situation
worse. It was not like we had this wonderful economy before 2007
and everything was going well. On the contrary. The labor market
was weak. People had to borrow a lot of money. That made them
very vulnerable to the current economic downturn, and that is exactly what we are seeing at this point. People already had very few
savings. They were highly leveraged. So they are losing their
homes. Their home equity is dropping. At this point, people own
the smallest share of the homes that we have on record; 46 percent
of their home is actually their own.
So I think the parade of horribles at this point means we are
going to see more foreclosures. We are going to see more bankruptcies. We have seen an 80 percent increase in the bankruptcy
rate, 90 percent in bankruptcy filings since 2006. So that is the
first line of defense. We are going to see massive foreclosures and
defaults and that is going to continue.
The second part is we are going to see people struggling with
higher costs of living and that ultimately means less retirement
savings. And on top of that, because we are in a weak economy,
employers are cutting back on the benefits that people have traditionally relied on to make ends meet just as in retirement savings
and health insurance.
So ultimately what that adds up to is that we see a big drop
down in financial security and ultimately in retirement income security. Again, it is a little too early at this point to come up with
complete numbers, but we already saw a big drop in retirement income security from 2001 to 2004, and we expect that to continue
as we get the new data for 2007.
Senator SALAZAR. Let me ask you this question and the other
panelists may follow up on that. Given that reality which you de-

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scribed I think very well, what then should we in the U.S. Senate
be thinking about doing to deal with some of the consequences of
the economic hard times that we are in?
Dr. WELLER. Well, I think you need to think about three things.
The first one is to increase incomes where we can through improved earned income tax credits and other measures along those
lines, promote savings through a saver credit, refundable saver
credit preferably, along those lines, to have a real wealth-building
strategy, and ultimately what I call an efficiency policy to shelter
families from the effects of rapidly rising prices, for instance, for
health care, for our energy, and other things. That means broader
energy efficiency, more efficiency in the health care system. I think
those are the general three directions to go in in terms of policy.
Senator SALAZAR. Mark or David?
Mr. IWRY. Senator, we can very much focus on the fact that this
downturn will not last forever, and it will not be the last downturn
that we will see. So I think one of the things that the Senate
should do is keep the Nations eye on the long term and focus on
the solutions to the potential parade of horribles, ways to prevent
it.
I think Mr. Weller put it well. We need to make it easier for people to save and to not make it too easy for them to withdraw their
money. Expanding the savers credit, making it refundable, is key.
The automatic IRA proposal that Senator Smith and Senator
Bingaman have been lead cosponsors on is key. There is a reason
why that has been endorsed by both a former chairman of the
Council of Economic Advisers for President Reagan and for President Clinton, Marty Feldstein, Laura Tyson, respectively, why it
has been endorsed by the New York Times on its editorial page and
by the Washington Times chief political correspondent, and other
bipartisan endorsements.
And we need to make sure that the parade of horribles does not
include easy access to carefully built-up retirement savings through
a flood of things like debit cards or other devices that make it overly easy for people to undo all the hard work they have done in
building up their savings.
Senator SALAZAR. I have about 50 seconds here. So does anybody
else want to comment?
Mr. GANNON. Yes, Senator. More than 10,000 Americans are
turning 60 every day and I think that is the difference with the
economic down-climb we are seeing now, is that people are needing
their money from their retirement savings. If you are 25 and there
is an economic downturn, time is on your side to recover from that,
but if you need to take withdrawals today for the near future, it
is a much more difficult situation for you. Either you are going to
have to continue working or you are going to have to live on less
income.
And we need to address better ways to make sure that people
understand how to withdraw money from their retirement savings.
There is much investor education that has been done about saving
for retirement. There has been little done to teach people about
what are the best ways to withdraw, how to use annuitization to
enhance your ability to keep that money for your entire retirement
period.

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Senator SALAZAR. Thank you very much.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much, Senator Salazar.
Senator McCaskill?
Senator MCCASKILL. Thank you, Mr. Chairman.
I come from a State where one of our most treasured values is
common sense, and it defies common sense that giving Americans
plastic is a way to increase savings. It just does not make sense
to me, Mr. Bent.
I would like to ask you about your relationships with the employers in these plans. Your debit cards are around because they are
profitable, I assume, for your company.
Mr. BENT. Not yet, but one would hope so, yes.
Senator MCCASKILL. And how long have you been doing this?
Mr. BENT. I guess we have been working on this for about 7
years now.
Senator MCCASKILL. 7 years? And your company has not been
profitable yet?
Mr. BENT. No, it has not.
Senator MCCASKILL. I assume that the reason the employers
your testimony was that you really are like a passive processor.
Mr. BENT. That is correct.
Senator MCCASKILL. That these people are being directed to you.
Mr. BENT. Correct.
Senator MCCASKILL. Well, what is the motivation of these fiduciary employers to direct people to you? Why would they want to
do that?
Mr. BENT. Because it encourages people to come into the plan.
It encourages people to stay in the plan if they loose their job.
Senator MCCASKILL. And they are making money.
Mr. BENT. I am sorry?
Senator MCCASKILL. And they are going to make money.
Mr. BENT. Who is going to make money?
Senator MCCASKILL. The employer gets part of the money. Right?
Mr. BENT. No, no, no.
Senator MCCASKILL. They do not get anything?
Mr. BENT. Of course, not.
Senator MCCASKILL. I thought I heard in your testimony that
they get part of the fees.
Mr. BENT. No, no, not at all. Not at all. That is the plan administrator.
Senator MCCASKILL. OK. Well, so what you are saying is the fiduciary duty that these plans havethey see giving their participants a debit card to access the money as within their fiduciary responsibility, and that is why they are turning to your
Mr. BENT. What we are finding statistically is more people are
willing to participate because they feel they will have access to
their money in time of need. In fact, what we are seeing is that
there is less money being borrowed through our program than
there is through a conventional program. In a conventional program, what you have to do is anticipate an entire need and you
take all that money out of the plan at one time. That is not the
case with us.

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Senator MCCASKILL. OK. Well, I know you have testified that
when they have a debit card, they contribute more into the plan
and take less out of the plan.
Mr. BENT. Correct.
Senator MCCASKILL. I would sure like the backup for that.
Mr. BENT. Fine.
Senator MCCASKILL. That is hard for me to believe.
And you are saying that they are accumulating greater overall
retirement savings by having a debit card that they can go and buy
a latte with it?
Mr. BENT. I think that is a gross exaggeration. If you look at the
data that is provided by the other people on the panel, irresponsible loans amount to very little of the whole thing, of all the loans
that are taken from the plan. So I would not extrapolate some gratuitous comment from some other commentator up here on that.
It is psychological. When we started the money funds, we went
to the brokerage houses and we said to them, we want you to take
your clients balances and give them to us, put them in a money
market fund. And the reaction of the brokerage houses was, you
are out of your mind. That is the essence of profit that comes to
the brokerage house.
As a result, we had to fight to get into the brokerage houses.
Today there is over $3 trillion that is invested in money market
funds from brokerage houses because, in fact, the clients of the brokerage houses leave more money there because they know they
have access even though they dont use it.
The second step we took in the money market funds is by opening checking accounts against the accounts. So then the brokerage
houses said to us, you are truly out of your mind because this way
they are going to take the money out of here and it will not be
within the brokerage house. What happened is more money came
into the plan.
Finally, a debit card was attached to the access of money market
funds within brokerage houses, and indeed, more money came in.
So it is a psychological thing. It is not a question that people use
it. It is a question that they know that they can get to it.
Senator MCCASKILL. Well, I have just got to tell you I am not
aware that the advantages of credit cards and debit cards have led
to savings. Every experience I have had in my life is counter-intuitive to that. And I would like the backup for these claims
Mr. BENT. I would be more than pleased to do that.
Senator MCCASKILL [continuing]. That people are saving more
because they can charge.
Now, let me ask you a specific question, and if it is your testimony that the plans have no profit motive whatsoever to turn people to your program and that you are just a passive processor, I
am assuming you are out selling this concept to people.
Mr. BENT. We try.
Senator MCCASKILL. Let us assume hypothetically that somebody
takes out $7,000 worth, which is the average amount of a loan that
is being taken out right now. Let us assume someone owes you
$7,000 on one of these debit cards and they lose their job. What is
the interest rate they are going to pay on that right now?

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Mr. BENT. They pay 7.9 percent, 5 percent of which goes back to
their plan, 2.9 percent is paid to The Reserve.
Senator MCCASKILL. Total.
Mr. BENT. Total.
Senator MCCASKILL. So you are only collecting 2.9 percent on
this debt.
Mr. BENT. That is correct.
Senator MCCASKILL. Well, you are never going to make money.
Mr. BENT. Bless you.
Senator MCCASKILL. So it is not prime plus 2.9.
Mr. BENT. It is prime plus 2.9.
Senator MCCASKILL. What is the total amount of interest they
are paying right now?
Mr. BENT. 7.9 percent. I think what you are missing is the fact
that it is their own money. So what I am doing is I am administering the loan. I am not lending money to them.
Senator MCCASKILL. But I am talking about if they owe the
money, if they have spent the money, what are they paying?
Mr. BENT. They owe it to themselves. They are paying 7.9 percent.
Senator MCCASKILL. And how long will it go before they get a
penalty from the IRS for using that money or have to pay extra
taxes?
Mr. BENT. Well, if they do not use ReservePlus and they go to
the conventional
Senator MCCASKILL. I understand. If they use ReservePlus I am
asking.
Mr. BENT. If they use ReservePlus, they can stay there for 5
years and pay back their loan.
Senator MCCASKILL. What happens in 5 years if they have not
paid it back?
Mr. BENT. The same as what happens under a conventional loan.
Senator MCCASKILL. I understand. But instead of having a deadline of 90 days, they always have the 5-year deadline which they
have with your money with the debit card or they have with a conventional loan. It is a 5-year limit.
Mr. BENT. Correct.
Senator MCCASKILL. And do you think they all understand that
clearly?
Mr. BENT. It is the same as it is with a conventional loan. There
is nothing different.
Senator MCCASKILL. Well, I understand, but with most credit
cards you do not have to pay them back in 5 years.
Do you think that most people understand that on that amount,
the total is going to go significantly up in 5 years?
Mr. BENT. Senator, I think you are confusing credit cards and
this access to your savings.
Senator MCCASKILL. I think the consuming public is going to
confuse credit cards and access to these savings because it feels
and walks like a duck.
Mr. BENT. My apologies for not being able to convey this to you,
but it is their money. It is not my money. I am not lending them
money. Whether they go through The Reserve plan or a traditional
plan, if they default on the loan, what happens is that then they

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will pay taxes on it. I am not changing the law. That is not within
my power.
Senator MCCASKILL. I understand.
Mr. BENT. I am strictly an administrator.
Senator MCCASKILL. Thank you, Mr. Bent.
The CHAIRMAN. Thank you, Senator McCaskill.
Before we turn to Senator Schumer, one question for you, Mr.
Long. You testified that you were concerned about recent ads urging TSP participants to roll their accounts over into higher fee
IRAs. I agree with your concern, and I am calling on these companies to stop running ads that portray TSP as irrelevant or outdated.
Can you share with us why you think these ads are misleading
and why most participants would want to stay in the TSP?
Mr. LONG. The ads that I saw, one of which suggested that you
should leave when you are retired or when your TSP account retires, or the other one was referring to your old TSP accounts. TSP
accounts are not old and TSP accounts do not retire. People who
leave the Federal service are welcome to leave their retirement
funds with us and we actually encourage them to do so because the
TSP has one very big advantage over virtually all private sector
plans, that is, a tremendously attractive fee structure. And so, yes,
I was not pleased when I saw ads that suggested that TSP was old
or retired.
The CHAIRMAN. Thank you very much.
Senator Schumer?
Senator SCHUMER. Thank you, Mr. Chairman. I appreciate your
letting me attend this hearing because this is an issue I have been
involved with for a long time.
In the 104th Congress, whenever that waswhat are we now?
The 110th? So about 12 or 13 years ago. Anyway, I was in the
House, so it was before 1998. I read about a bank doing this. I
think it was BankOne. And I was really upset because I think that
savings is so important and there is so much pressure on people
in todays society to spend, spend, spend and not to save. And here
we had set up in Congress this great device, the 401(k), which encourages people to save, and to allow you to just go with your debit
card and take money out of your 401(k) was a big mistake, given
everything that has happened here.
And you can make the arguments, as Mr. Bent ably does, about
the free market and all of that, but you know, we are not in the
1890s anymore. I think doing things to encourage people to save
for their future makes a great deal of sense.
Anyway, I introduced the legislation then, and much to my surprise, BankOne withdrew the product. So I figured this issue was
over. And when you called this hearing, I was not even aware that
Mr. Bents bank was doing this. I said, I am coming and I am going
to introduce legislation with you, Mr. Chairman, to deal with this
issue. And I appreciate your invitation and I appreciate we are
doing this because to me it makes a great deal of sense.
And, Mr. Bent, I know you say it is their money. It is their
money. There are penalties. But people scrounge to get that money
into the 401(k), whether it is theirs or their employers. It is hard
and we should not make it easy to take it out. I mean, there are

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unusual circumstances. God forbid a terrible illness. No one would
say wait for your retirement if you need money for a terrible illness. On the other hand, if there is an impulse to buy a flat screen
TV and take many out of your 401(k), I think there should be barriers, and there certainly are not barriers with an ATM card.
So I am supporting this legislation.
I missed your testimony, Mr. Bent, but do you have another argument other than, It is their money? What about savings? What
about the idea that it is easy in this society to have short-term
gratification patterns and hard to have long-term gratification patterns? We provide other incentives for people to save either for
their retirement or other things. It is not a flat tax code that says
consumption and savings get the same. I for one would like to see
greater incentives for people to save.
Just give me your general view. And I understand your right as
a capitalist to go ahead and do this
Mr. BENT. Thank you.
Senator SCHUMER [continuing]. In free market America. You understand our right to say this is bad policy andno offense to
you
Mr. BENT. Absolutely.
Senator SCHUMER [continuing]. We ought to change it.
But just give me your view a little bit about what I said, about
the difficulty for people saving in todays society, that one of the
great problems with America is we do not save enough, that we
should have incentives for savings and not to simply consume.
Some would argue that we are in the present recession because we
like to stuff our face. We export less than we import. We save less
than we borrow. We consume more than we produce.
And it is one of the great problems in America. And in a small
way, what you are doing here would exacerbate that. Tell me what
you think.
Mr. BENT. I think you are wrong. We are in a situationyou
asked.
Senator SCHUMER. I do not mind.
Mr. BENT. We are in a situation where lots of people who are
younger and lower income do not participate in the 401(k). The
idea of having to opt out of an automatic enrollment is great. We
put that in in our plan as soon as it was possible.
But that being said, you still have a situation where people want
to have access to their money. My argument, that it is their money
and they should have access to it. But I am not talking about that.
I am talking about encouraging people to come into the plan and
save more and borrow less because of the access. It is psychological.
They do not use it, as evidenced by the fact that our average loan
is lower. It is 35 percent lower than a traditional loan.
And the clincher with our program.
Senator Schumer. You are saying your plan encourages savings.
Mr. BENT. That is correct. It encourages participation and it encourageshow can you argue against that? If they are taking less
money out
Senator SCHUMER. Because you are making the argument that if
your plan was not available, people would go into their 401(k)s in
another way, and that is just not going to be the case. Practical

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logic tells you when you can just use it as a credit card or debit
card, it is a lot different than if you have to go through a whole
lengthy process to do it.
Lots of people buy on impulse and regret buying what they
bought on impulse the next week.
Mr. BENT. If you would like to go to Fidelity right now and you
want to take out a conventional loan, you go click, click, click, click.
The check is in the mail.
Senator SCHUMER. Maybe we should not allow that either. That
is not a good argument. I mean, to say other people do something
that is not good
Mr. BENT. No. What I am saying is that you are trying to paint
my product as something evil. It is not. It encourages people to participate in 401ks and we do not alter borrowing restrictions.
Senator SCHUMER. I am not saying it is evil. I am saying it discourages savings, encourages consumption.
Mr. BENT. We can debate it forever but the facts are it does not.
The final thing is when someone loses their job, under a conventional plan they have to pay their money back in 90 days. That is
not the case with ReservePlus. You can continue to make payments
for 5 years. It is a major advantage.
Senator SCHUMER. But every withdrawal is a new loan, each one
with its own fees and everything else. Right? So in other words, if
you got one big loan of $5,000 or you used your credit card and did
10 different withdrawals of $500 each, would you not pay many
more fees in your situation?
Mr. BENT. No, not at all. If you go back to BankOne, in the
BankOne situation where they had the 401(k) access, the money
came out in a lump sum. It was immediately outside the plan, and
therefore, any interest that the people earned on that money before
they actually consumed it was outside of the plan. So one, conventional plans incent people to take out monies in a lump sum. Mine
does not. Because conventional plans force people to anticipate
needs and withdraws lump sums so that any interest that they
earn on the money they take out, would be taxed immediately.
Under ReservePlus it is not the earnings remain tax deferred within their plan.
Senator SCHUMER. But there are new fees under yours each time.
Mr. BENT. No, no, no. I am working up to it.
What we do is we move from the conventional corpus of the fund,
your retirement fund, which is stocks, bonds, although that has not
been a great place over the last 8 years, and you go into a money
market account. The money market account is within the plan. So
I have $50,000 in the plan and I think I am going to need $5,000
it moves from the stock and bonds, into the loan part of the plan,
which is invested in a money market fund. But it is still within the
plan. You pay no fees. You pay a fee if you want to sign up for the
loan, but that goes to the TPA administrator. That is true whether
it is a conventional loan or ReservePlus processing.
So you are now into the money market account. Let us say, you
access $50 at a time or $500 at a time. There are no additional
fees. Nothing. Effectively you pay
Senator SCHUMER. What if you increase the money in that money
market fund by $500 at a time? You say you take $5,000. You have

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set aside $5,000 out of your $50,000. What if you only set aside
$500 and then you set aside another $500 and you set aside another $500?
Mr. BENT. No fees.
Senator SCHUMER. No?
Mr. BENT. Not from me, no. Not at all.
Senator SCHUMER. I am not sure that isOK. That is not my understanding.
Mr. BENT. Well, your understanding is wrong.
Senator SCHUMER. OK.
How about Mr. Iwry? Do you have something to say here?
Mr. IWRY. Yes. I think you are right, Senator. An individual can
take out more than one loan.
Senator SCHUMER. Right.
Mr. IWRY. And the limits on the total amount of loans do look
to how much you have outstanding on a look-back basis, but that
does not mean that you cannot take out what you need
Senator SCHUMER. Another loan with additional fees.
Mr. IWRY [continuing]. Then take another loan out. Right.
Senator SCHUMER. Is he wrong?
Mr. IWRY. So you can do that
Mr. BENT. Oh, he is right. He is agreeing with me, not you.
Senator SCHUMER. No, he is not.
Mr. BENT. Yes, he is.
Senator SCHUMER. Who are you agreeing with, Mr. Iwry?
[Laughter.]
Mr. IWRY. I am agreeing with you, Senator.
Senator MCCASKILL. Smart guy.
Mr. BENT. What did I say that was wrong? I am sorry. I misunderstood what you said then.
Mr. IWRY. The Senator I think is making the point that a person
who does not have a credit card or a debit card access to loans can
also take out only as much as she might need, and if she needs
more, can then take out another loan for an additional amount.
Mr. BENT. But there are fees charged for each time you do it
under the TPA fee structure right now. That is what his question
was. I do not have those fees. So you are wrong.
Senator SCHUMER. OK. Let me go on here.
Let us a do a comparison here. Maybe this will bring some of this
to light, although this is a slightly different issue.
You contain a comparison because you talk about the average
loan amount of a Reserve loan compared to a regular loan, and you
say the average amount is different. Right?
Mr. BENT. Correct. Lower.
Senator SCHUMER. But to compare the products, we need to
make a different comparison. So let us take two people with the
same income and a plan balance who each take out $8,000. OK?
Now, the first person takes out $8,000, puts the money in a bank,
and spends $2,000 each quarter for a year, and then repays the
loan within 5 years. The second person puts $8,000 in a
ReservePlus account and withdraws $2,000 each quarter for a year
and then repays the loan within 5 years. So that is the apple-toapple comparison. Fundamentally, these people are the same.

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Now, but because each withdrawal under your plan is considered
a separate loan with a separate fee, plus the setup fees, is the second person not worse off, or are they the same?
Mr. BENT. No. They are better off with mine.
Senator SCHUMER. Why?
Mr. BENT. Because, No. 1, there are additional fees for each advance because there is only one loan.
No. 2, with a conventional loan you take the money out and you
put it in a bank and any interest you earn you pay taxes immediately.
Senator SCHUMER. So you are saying a person in your Reserve
account just pays one fee.
Mr. BENT. Correct.
Senator SCHUMER. Mr. Iwry?
Mr. IWRY. Senator, if I may, the fees that would be charged on
a normal plan loan depend on the particulars of that plan.
Senator SCHUMER. Of course.
Mr. IWRY. And in many cases, there would be very little fee
charged by the plan. There are lots of large 401(k) plans in which
there is only a nominal fee that is charged.
Senator SCHUMER. Is your fee nominal?
Mr. BENT. My fee is nonexistent. It depends what the TPA
charges.
Senator SCHUMER. No. But you did say you charge a fee.
Mr. BENT. No. The fee is for the amount that is utilized. So there
is no fee for opening up a loan account.
Senator SCHUMER. Opening up that money market account.
Mr. BENT. Correct.
Senator SCHUMER. That is what you said. But there is a fee each
time you borrow against the money market account.
Mr. BENT. No, no.
Senator SCHUMER. No fee at all.
Mr. BENT. No.
Senator SCHUMER. So this is fee-free?
Mr. BENT. It is fee-free relative to what you are saying, and in
addition
Senator SCHUMER. But is it fee-free, period? What fees do people
pay?
Mr. BENT. They pay the TPA, the plan administrator. They pay
himI think we saidaverage $75. That does not go to me. It goes
to the plan administrator. If the plan administrator sets up
Senator SCHUMER. And you get no fee at all. Your company gets
no fee for any of this, aside from your annual? I am talking about
fees each time they take out a loan.
Mr. BENT. No, there is not. Plus, what he ignored was the fact
Senator SCHUMER. I think we have a
Mr. IWRY. Senator?
Senator SCHUMER. Let Mr. Iwry. Go ahead.
Mr. IWRY. Senator
Mr. BENT [continuing]. The interest that is earnedam I speaking or is he?
Senator SCHUMER. Mr. Bent and then Mr. Iwry.
Mr. BENT. OK. The interest that is earned when the money
comes out in a conventional loan is taxed immediately. With

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ReservePlus it is not. Under the scenario that you outlined, the
person is better off under my plan than they are in a conventional
plan.
Senator SCHUMER. Go ahead, Mr. Iwry.
Mr. IWRY. Mr. Bents written statement says that the plan participants pay a service fee to ReservePlus, which ranges from 2.9
percent to 3.25 percent.
Senator Schumer. Yes. What is that?
Mr. IWRY. On loan balances actually utilized.
Mr. BENT. Exactly.
Senator SCHUMER. But that is what we are saying.
Mr. BENT. It is not a transaction fee.
Senator SCHUMER. OK, but they pay a fee.
Mr. BENT. Of course. [Laughter.]
Of course. There is a difference. There is a substantial difference.
The CHAIRMAN. Senator Schumer, you have done great.
Senator SCHUMER. Thank you, Mr. Chairman. Thank you.
The CHAIRMAN. Do you want to make a comment?
Senator MCCASKILL. Well, I wanted to ask a question.
I am confused. If anyone is not confused at this point, they have
not been listening. [Laughter.]
What I do not understand is how you have the ability to call this
fund still as part of the fund. What you are saying is legally they
are setting aside part of their money and putting it on one of your
money markets.
Mr. BENT. Which they can do in a conventional plan today.
Senator MCCASKILL. I get that. I get that. But you are saying the
difference is it is still part of the fund.
Mr. BENT. Correct.
Senator MCCASKILL. And that there are no penalties that inure
to them, none of that.
Mr. BENT. Absolutely.
Senator MCCASKILL. Then why is it that you get 5 years if they
quit and the loans only get 90 days? You are saying that if they
leave their job, they do not have to repay it in 90 days. You are
saying that if they leave their job, they do not have any penalty.
They have up to 5 years to pay themselves back without having to
endure the penalties.
Well, if it is still part of the fund, if you are still considering this
part of their fund, what is the legalmaybe it is not an artifice.
It feels like an artifice. What is the legal artifice that allows you
to remain part of that of fund for purposes of a 5-year payback and
not have the 90 days?
Mr. BENT. Take the 401(k) fund. Divide it into two parts. In the
fund you have a conventional investment fund and you have the
part the beneficiary has decided that they want to have that as an
access loan fund for them. It is within the plan. If they leave their
employer tomorrow and they have not used anything in that loan
fund, no harm, no foul. Zero. They do not owe anything to themselves. They do not owe anything to me. There is no fee. There is
nothing. It is all within the plan.
Senator MCCASKILL. But what if they do owe? You have testified
that the benefit of your plan over a conventional loan is the reason
everyone is dying to get these debit cards because they are going

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to bethey are saving money moneyis because they do not have
to worry about the 90- day payback. What legal basis are you using
to say you do not have to pay it back in 90 days?
Mr. BENT. You have fund A and fund B within the retirement
plan. One is conventional, stocks, bonds. The other one you have
designated as a loan fund. It is all within the plan. You have not
used any of it.
Now you use some of it. Arbitrarily you use $5,000. OK?
Senator MCCASKILL. Right.
Mr. BENT. You now have the $5,000 out. It is a loan. You have
used it for whatever you use it for
Senator MCCASKILL. Right.
Mr. BENT [continuing]. Medical expenses, so on and so forth.
You then lose your job.
Senator MCCASKILL. Right.
Mr. BENT. Under a conventional loan policy, tradition if you will,
you have 90 days to pay it back to your fund. The employer could
choose to have it paid back over 5 years, but they do not. Traditionally they do not because they want to get it off their books.
Under my program, what I will do is I will accept payments from
those people to pay back their loan to themselves, and they do not
have this cataclysmic event of losing their job and having to pay
the loan back in 90 days.
Senator MCCASKILL. I understand. So this is the choice, a business choice, of your company. There is no legal requirement they
pay it back to their fund. Their employer just wants it back that
quickly. And you do not care if they take longer.
Mr. BENT. Paraphrasing, yes, correct.
Senator MCCASKILL. Thank you, Mr. Chairman.
The CHAIRMAN. Well, we thank you. Senator McCaskill, Senator
Schumer, and all the members of the committee. I believe we have
again brought to the surface the importance of retirement programs, and the importance of the 401(k). We need to shore it up,
and to be certain that it is used for the right purposes, this is important to our country. And we will be following up with you and
with legislation toward that end.
You have been very good today. Your testimony has really advanced, I believe, the cause, and we appreciate your being here. We
appreciate all of you for being here today.
And this hearing is adjourned.
[Whereupon, at 11:55 a.m., the hearing was adjourned.]

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