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services provided by the Council. Fiduciaries who ignore activities like these may think they are limiting themselves to essential investment activities when they are in fact doing precisely the opposite.

Chairman PICKLE. Mr. Feldman.


Mr. FELDMAN. Thank you, Mr. Chairman. I am pleased to be here today, and I appreciate the opportunity to participate in these proceedings.

I am David Feldman, corporate vice president-investment management, for AT&T. I am speaking here today as chairman of the Financial Executives Institute's Committee on Investment of Employee Benefit Assets [CIEBA], as it is called.

ČIEBA is an association of corporate benefit plan sponsors with 40 regular members and about 150 advisory members. We manage more than $450 billion in assets to secure retirement income for more than 6 million plan participants. Our perspective is that of those charged with fiduciary responsibilities under ERISA.

My remarks, and our more detailed written testimony, focus on how LBO's and other similar investments work as a part of a pension investment portfolio, and why they can be prudent and advantageous investment choices for our plan participants.

We believe that recent evidence speaks well for the private retirement system as it is currently structured: Benefits are quite secure in the aggregate, and the pension system, including both private and public plans, has become a significant source of institutionalized savings.

We don't believe that there is a problem on the investment side of the private pension system that needs to be fixed, with regard to LBO or any other investments.

First, corporate plan sponsors already operate within an effective framework of legal oversight and economic checks and balances.

Second, investments are diversified across a wide variety of asset classes in order to be well-positioned for and protected against as many economic circumstances as possible.

And third, pension investments in LBO's, the focus of the discussion here today, do not endanger benefit security. While individually these are higher-than-average-risk investments, they also provide a high level of expected return. As a small proportion of a well-designed portfolio, they generally serve to increase the overall return to the fund without inordinately increasing the overall level of risk.

A recent survey of our membership found that only 1 percent of total assets are invested in LBO-type funds. Even total losses in all such investments would not jeopardize benefit security. Our survey also found that only 1.3 percent of total assets are invested in publicly-traded high-yield bonds.

Opinion is divided within CIEBA as to a broader view of the economic implications of LBO's, but we are generally united on two fronts.

First, individual fiduciary decisions about whether or not to invest in LBO's are carefully and thoughtfully made. Considerations include: Fit with the existing portfolio, the prospects for the

particular investment being considered, and the fiduciary's views about the broader and longer-term implications of the individual investment or the investment class as a whole.

We do our best to focus on the overall balance of outcomes as they affect the security and earning power of our investments. We believe that focusing only on shorter-term gains would be a disservice to our fiduciary duties over the long term. We are long-term investors.

Second, we believe that LBO's are only one manifestation of more fundamental economic trends in the country today. The issues are extremely complex, and more time is needed for the underlying economic forces to surface. We urge extreme caution in crafting any legislation. Inadvertent side-effects could have serious and far-reaching impacts on our economy.

Moreover, legislation carries with it the added risk of creating distortions in the markets and hampering their ability to selfadjust which, we feel, has already begun to happen.

We also believe that the investment flexibility provided under ERISA is vital to ongoing success. This flexibility allows investment policies to evolve with the markets rather than prescribing a stagnant list of approved investment options. Freedom of action is essential if we are to successfully compete in today's rapidly changing worldwide markets.

Thank you.

Chairman PICKLE. Thank you, Mr. Feldman.

[The statement of Mr. Feldman follows:]





April 27, 1989


These observations are presented by the Committee on Investment of Employee Benefit Assets (CIEBA), which is a committee of the Financial Executives Institute (FEI).

The FEI is an association of approximately 13,000 financial executives representing some 7,000 American corporations. CIEBA itself has 40 regular members and approximately 150 advisory members, all of whom are corporate ERISA-governed benefit plan sponsors with collective assets that total more than $450 billion.

The corporations represented in CIEBA cover a broad range of industry groups and asset size. However, it is important to note that CIEBA members - who manage their plan assets on behalf of more than 6,000,000 union and non-union plan participants speak from the vantage point of those charged with fiduciary responsibilities under ERISA.

These comments are presented to the Subcommittee not to address the specifics of potential legislation, but to provide some background on the investment of pension fund assets and to comment on related issues under investigation by the Subcommittee. Although there are tax policy issues currently being debated that cause us concern, owing to their potential impact on the capital markets, we defer in those discussions, to the extent that they are not related to pension funds, to others with more expertise in tax policy. (The FEI has two such groups, the Committee on Taxation and the Committee on Corporate Finance.)


We believe that, as currently structured, operated, and regulated, the retirement system in the U.S. has been on balance quite successful in securing retirement income for U.S. workers. It has remained healthy through the best and the worst of times in the financial markets and in the world for fifty years and more, in some cases, and benefits are more secure today than ever before. It is estimated that the aggregate private plan asset to liability ratio stood at 1.38:1 in 1987, and only about 17% of private plans are estimated to have been funded at less than 1:1 in that year.


This mark of success can be attributed to a number of factors: tax law which allows assets to accumulate without a tax burden; healthy financial markets over the past several years; and prudent asset management and funding strategies on the part of plan fiduciaries, working under the governance of ERISA since 1974. Besides establishing standards for investment practices, ERISA wisely, in our opinion, gives plan sponsors the flexibility to have investment policies that can evolve with the markets, subject to prudent expert tests. As a result, sponsors have been able to enhance fund returns and improve diversification by investing in a broad range of financial instruments and investment opportunities, some of which did not exist in 1974 when ERISA was crafted.

In addition to its achievements in securing benefits, the pension system, including both private and public sector retirement plans, has become the single largest source of institutionalized savings in the U.S. today. Despite a savings rate in the U.S. that compares unfavorably with other industrialized nations, the pension system has continued to be a growing and dependable source of capital for investment in the economy.

Few countries in the world place the retirement income burden so heavily on the private sector as does the U.S., and thus far, the results speak eloquently for caution in considering any changes. We urge the

Source: Employee Benefits Research Institute


Subcommittee to proceed with that thought in mind, and to be alert in addressing broader revenue or tax policy questions to the unintended implications for pension funds, in terms of both benefit security and general economic efficiency. Particular care should be taken to guard against unintended consequences or hardships for defined benefit plans, which are generally held to be most beneficial to participants.



Corporate plan sponsors operate within a system of economic checks and balances that goes beyond the essential legal framework. It is created by the economic nature of the pension system itself. Corporate plan sponsors understand that economic prudence, not just legal prudence, on behalf of both the plan participants and the corporate shareholders, requires a careful and continuous assessment of the tradeoffs between the opportunity to reap investment gains and the risk of loss.

In defined benefit plans, the sponsor has a legal obligation to deliver a promised level of benefits to the participants. These benefits are paid for by a combination of corporate contributions and the earnings on the investment of those contributions, although the obligation to pay benefits is independent of the level of fund assets and earnings thereon. Employees generally do not make contributions to defined benefits plans. In 1987, defined benefit plans comprised approximately 27% of private plans, but accounted for 66% of trusteed private plan assets and, in 1985 (the most current data available), covered 72% of private plan participants."

The plan participants and the corporate shareholders both benefit from investment policies aimed at maximizing pension fund returns subject to prudent risk-taking. For participants, higher fund earnings increase the security of benefits, and create less reliance on the corporation's ability to make future contributions. For shareholders, higher earnings reduce the amount they will ultimately have to pay to support a given level of benefits, and increase the dollars available to reinvest in the company's growth or to pay dividends. This, in turn, can help American companies in the aggregate be more competitive globally.

Similarly, participants and shareholders alike have a stake in controlling pension investment risk. If the value of contributed assets is decreased by investment losses, the participants will have to depend more heavily on future corporate contributions to secure their benefits. The shareholders will be required to pay more to deliver promised benefits, possibly detracting from the company's competitive position. Ultimately, it is the corporation and thus the shareholder not the participant who bears the risk of inadequate returns or investment losses in a going concern's defined benefit plan.

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Many companies provide both defined benefit and defined contribution plans; some offer only one or the other. In a typical defined contribution plan, both the plan sponsor and the plan participants contribute specified amounts to the pension fund, and the earnings on those contributions are the only additional funds available for paying benefits. The participant, therefore, again stands to benefit from investment strategies aimed at maximizing return and controlling risk. The shareholder, although he has a less direct stake in a defined contribution plan than in a defined benefit plan, has an interest in prudent asset management because significant losses or relative underperformance would undoubtedly cause problems with employee welfare, morale, and productivity.

Aside from these economic considerations, which provide the strongest incentive for prudent asset management, it has been our experience that the overwhelming majority of pension plan managers live responsibly within the rules of all applicable laws and standards. In addition, through organizations such as CIEBA, most pension fund managers are proactive in their efforts to foster and maintain ethical standards. Since the enactment of ERISA, abuses by corporate sponsors have been rare.

ERISA is the major form of legal oversight for private pension funds. ERISA is jointly enforced by the DOL and the IRS, and is explicit in its requirements for prudence in asset management. In Section 404, the prudent

Source: Employee Benefits Research Institute

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