were noted in the study reported in the July 1965 Monthly Labor Review article cited by Professor Schulz, as well as in each of our bulletins and digests dealing with pension plans.

We have been well aware of the importance of providing comparisons of the results of pension benefit formulas not only for formulas applicable to future service but also for those applicable to earlier periods of service for employees now retiring. Both types of comparisons are useful and within the limits set by available resources, we are planning to provide both types in the future. As a beginning, we have asked employers with plans included in our digest of 50 selected pension plans for salaried employees to give us, in addition to the usual illustrations of benefits based solely on future service, illustrative pension benefits for those currently retiring after 25 and 30 years of service using all applicable formulas. These illustrative benefits, which are subject to all of the limitations previously noted, will be published this year. Similar information will be provided for pension plans under collective bargaining, although in this case, it should be noted that most of these plans have only a single benefit formula, applied to both past and future service.

In our study of "Terminations of Pension Plans: 11 Years' Experience," to which Professor Bernstein referred in his testimony, we included all of the 8,069 qualified retirement plans that terminated during the 1955-65 period. It may be true, as was asserted at the hearings, that employee separations in some firms are particularly heavy for several years before plan termination. However, the conclusion that only a small fraction of all plan participants are in terminated plans, even allowing for heavy attrition in employment during the few years prior to termination, is inescapable. The fraction may, as Professor Bernstein points out, be more than .01 percent a year. All available data, however, point to a fraction substantially less than 1.0 percent.

Unfortunately, as indicated in the article, only the most fragmentary data are available on the extent of participant losses of expected benefits through plan terminations. Recognizing the need for some objective data on the frequency and magnitude of accrued benefit losses, we selected a sample of 100 terminated pension plans for which reports are filed under the provisions of the Welfare-Pension Plan Disclosure Act. This sample included about one-third of all pension plans terminated during the 1955–65 period that were required to file financial reports with the Department of Labor. Information about the potential participant losses, however, could be developed for only 26 of these plans.

The study pointed out that the general lack of pertinent financial information frustrates any effort to determine the value of benefits lost through plan terminations. Some evaluation, however, was made for the 26 plans for which data were available. That evaluation showed that 10 plans appeared to be fully or almost fully funded. Participants in the other 16 plans would have sustained a loss if their coverage had been discontinued on plan termination. In six of these cases, however, coverage was transferred to other plans. Thus those that transferred coverage did not sustain an apparent loss. They may, nevertheless, have sustained a loss in credits transferred or in other factors affecting their final benefit. As the study concluded, reasonably accurate estimates of the magnitude of benefit losses cannot be obtained from any government reporting system now in operation. Unless such reporting systems are changed, only a special survey program can produce more reliable data.

My staff and I are most interested in the work of the Special Committee on the Aging. Please do not hesitate to call on us if we can be helpful to the Committee in the future.

Sincerely yours,

GEOFFREY H. MOORE, Commissioner.

(Whereupon, at 12:30 p.m. the subcommittee adjourned, to reconvene for further hearing at 10 a.m. Wednesday, March 18, 1970.)

PRIVATE WELFARE AND PENSION PLAN LEGISLATION

WEDNESDAY, MARCH 18, 1970

HOUSE OF REPRESENTATIVES,

GENERAL SUBCOMMITTEE ON LABOR

OF THE COMMITTEE ON EDUCATION AND LABOR,

Washington, D.C.

The subcommittee met at 10:15 a.m., pursuant to recess, in room 2257, Rayburn House Office Building, Hon. John H. Dent (Chairman of the subcommittee), presiding.

Present: Representatives Dent, Hawkins, Esch, and Hansen. Staff Members Present: S. G. Lippman, special counsel, and Michael J. Bernstein, Minority Counsel for Education & Labor.

Mr. DENT. The General Subcommittee on Labor will now come to order for the purpose of holding hearings on H.R. 1045, H.R. 1046, and H.R. 16462, the recently introduced administration bill, and related bills dealing with private welfare and pension plans.

First of all, I want to apologize for being late, but I got stuck in Pittsburgh last night. That town is getting backed off the map. After 9 o'clock you have to stay in town. I am sorry to have had to hold all of you up.

The first witness this morning is H. C. Lumb, vice president of Corporate Relations and Public Affairs, Republic Steel Corp., representing the National Association of Manufacturers. He is accompanied by Mr. Kenneth Houck and Mr. Russell Hubbard.

Will you come to the witness table and bring anybody else that you have with you?

You may proceed in any fashion that you feel will give the committee the most benefit from your testimony. If you have a prepared statement and wish to summarize it and put the statement into the record in total, we will be happy to accept it in that fashion, or you may read it, whichever you desire.

STATEMENT OF H. C. LUMB, VICE PRESIDENT, CORPORATE RELATIONS AND PUBLIC AFFAIRS, REPUBLIC STEEL CORP., REPRESENTING THE NATIONAL ASSOCIATION OF MANUFACTURERS, ACCOMPANIED BY KENNETH L. HOUCK, ASSISTANT GENERAL COUNSEL, BETHLEHEM STEEL CORP.; AND RUSSELL HUBBARD, EMPLOYEE RELATIONS EMPLOYEE BENEFITS DEPARTMENT, GENERAL ELECTRIC CO.

Mr. LUMB. Mr. Chairman, Congressman Hansen, and Congressman Hawkins, I have a prepared statement. I think it might be expeditious if I read the bulk of it.

(Statement follows:)

STATEMENT OF H. C. LUMB, VICE PRESIDENT, CORPORATE RELATIONS AND PUBLIC AFFAIRS, REPUBLIC STEEL CORP. REPRESENTING NATIONAL ASSOCIATION OF MANUFACTURERS

My name is H. C. Lumb and I am Vice President, Corporate Relations and Public Affairs, Republic Steel Corporation with general offices in Cleveland, Ohio.

I welcome and appreciate the opportunity to appear before this Subcommittee on behalf of the National Association of Manufacturers. I serve NAM as a Director and as Chairman of its Industrial Relations Committee.

NAM member companies-large, medium and small in size-account for a substantial portion of the nation's production of manufactured goods, as well as for the employment of millions of people in manufacturing industries.

INTRODUCTION

The National Association of Manufacturers seeks to encourage the expansion and improvement of private plans which now have tremendous flexibility to adapt to the infinitely varied requirements of employers and employees. Private pension plans are making a significant contribution to the retirement security of millions of Americans, and they will continue to make an increasingly greater contribution unless hampered by unduly restrictive legislation. In addition, pension funds are an important source of the capital needed to sustain the continued growth of our national economy.

Voluntary private pension plans, both those unilaterally established by companies and those established as a result of the collective bargaining process, have made a contribution to the security of millions and to the economy of the United States to a far greater degree than many people may realize.

Benefits approaching $4 billion per year, and increasing each year, are being paid out to elderly or disabled persons. Estimates are that by 1980 private pension plans will cover over 42 million employees.

I will first direct my comments to H.R. 1046 relating to proposals on fiduciary responsibility and disclosure and, incidentally, to related provisions in H.R. 6204 and H.R. 16462.

FIDUCIARY RESPONSIBILITY

NAM strongly believes that administrators of pension funds should observe the highest standards of fiduciary responsibility. We therefore support the basic purpose of the proposed fiduciary responsibility provisions of the bill believing that such provisions could, in general, make a significant contribution. With respect to the proposed language of Section 14 of H.R. 1046, we do have some comments and specific recommendations as follows:

1. I would like to call your attention to the language in Section 14 (d) of H.R. 1046 that "Each fiduciary shall discharge his duties with regard to the fund with the same degree of care and skill as a man of ordinary prudence would exercise in dealing with his own property."

Language similar to that, the individual-trust prudent man rule, has been interpreted in various ways of various courts. A number of these interpretations would be altogether inappropriate for the kinds of trusts involved here. I understand that there is a so-called liberal interpretation, or Massachusetts rule, on the one hand, and a legal list, known as the New York Rule, on the other hand, and a number of variations in between. The likelihood of different interpretations of the bill's language would create confusion and uncertainty for trustees. Trustees operating in a sound manner and in complete good faith might incur liability under one of these rules relating to private individual trusts, which are foreign to the circumstances and objectives of a pension trust.

In the Law of Trusts and Trustees, 2nd Edition, Section 541, George G. Bogert and George T. Bogert outline the prudent man rule as follows:

"A trustee is required to manifest in all his management of the trust, the care, skill, prudence, and diligence of an ordinarily prudent man engaged in similar business affairs and with objectives similar to the trust in question." (Underlining added).

The language in H.R. 1046 seems more appropriate to a private individual trust than to a pension trust. Language, such as a provision that the trustee

will exercise the care required of one engaged in similar business affairs consistent with the objectives of the fund, would meet the objectives of the bill and would be more appropriate and less confusing.

I note that the bill introduced this week by the Administration, H.R. 16462, takes cognizance of this problem and contains a statement of the prudent man rule in Section 14 (b) (1) (B) which is more appropriate for employee benefit plan trusts.

2. Section 14 (d) of H.R. 1046 also provides that every person who receives, disburses, or exercises any control or authority with respect to any employee benefit funds is a fiduciary and correctly states that each fiduciary shall discharge his duties with regard to the fund with prudence. I mention this because it corrects a major deficiency in H.R. 6204 which was rewritten by this Subcommittee. H.R. 16462 also correctly provides, in Section 14(b) (1), that a fiduciary shall discharge his duties responsibly.

H.R. 6204 would have required that "each" fiduciary handle, manage, invest and expend the fund with prudence. This language is too broad. As this Subcommittee recognized, it could have been interpreted to include company employees who do not have any, or only minor, authority of responsibility insofar as the fund is concerned. In addition, not all fiduciaries exercise every fiduciary power covered by the bill.

3. H.R. 1046 correctly recognizes that the application of the prudent man rule makes it unnecessary to prohibit the sale or lease of property on fair and reasonable terms.

Again, I mention this because Section 14 (e) of H.R. 6204 would have prohibited any sale or lease of property of the fund to any employer of employees for whose benefit the fund is established. It would seem that if all terms of the transactions are fair and reasonable, in the best interest of the fund and its beneficiaries and include a desirable rate of return and adequate security, transactions involving sales, purchases, or leasing of property should be permitted, even if they are between the fund and employer or employee organization, subject, as I will mention later, to proper disclosure of party-in-interest transactions. We would have the same objection to Section 14(b) (2) (A) and (B) of H.R. 16462.

4. I will just note in passing that in drafting H.R. 1046 the Subcommittee has properly deleted the words "on the market" from Section 14(g) (4) (A) of H.R. 6204, so that a purchase of securities can be made directly from the issuer at a fair price not in excess of adequate consideration. The Subcommittee has also modified the provision in that Section which would have limited pension plan investments to 10 percent of the securities of an employer corporation. We doubt that any limitation is necessary in light of the prudent man rule, but if a limitation is needed, the 20 percent proposed in H.R. 1046 is reasonable. H.R. 16462 properly omits the words "on the market", but does contain the 10 percent limitation.

5. Section 14(g) of H.R. 1046 imposes a personal liability on any fiduciary who "breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this section. . . .'

As previously indicated, NAM believes that administrators of pension funds should observe the highest standards of fiduciary responsibility and does not condone a breach of a fiduciary's obligation. However, because of the nature of the duties imposed by the bill, there could be some unintentional and innocent violations. Since a fiduciary could face personal financial ruin through inadvertence of others, even while acting himself in good faith and with prudence, and since it is not the purpose of the act to discourage reasonable and honest persons from acting as trustees, we believe that fiduciaries should only be held personally responsible for willful misconduct or gross negligence on their own part.

We therefore recommend that the Section be modified to read: "A fiduciary who, through willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, breaches any of the responsibilities, obligations, or duties imposed upon such fiduciary by this Section shall be personally liable to make good to such fund any losses to the fund resulting from such breach and to restore to such fund any profits of such fiduciary which have been made through the use of assets of the fund by the fiduciary."