APPENDIX

STATEMENT OF AMERICAN LIFE CONVENTION, HEALTH INSURANCE ASSOCIATION OF AMERICA, AND LIFE INSURANCE ASSOCIATION OF AMERICA

The American Life Convention, the Health Insurance Association of America, and the Life Insurance Association of America have an aggregate membership of 485 insurance companies. These companies hold 99 percent of the reserves of insured pension plans in the United States and provide about 95 percent of the coverage of insured employee welfare plans. We appreciate the opportunity to express our views on the private welfare and pension plan legislation which is presently pending before this Subcommittee.

The legislation which is the subject of the current Subcommittee hearings can be broken down into two major categories:

(A) Legislation with the objective of protecting the interests of pension and welfare plan participants and beneficiaries through increased disclosure, broader Government investigatory and enforcement powers, and the establishment of a fiduciary responsibility standard accompanied by specific prohibitions as to certain acts on the part of fiduciaries. The principal bills in this category are H.R. 1046 (introduced by Chairman Dent) and H.R. 16462 (introduced by Mr. Ayers and embodying the Administration's recommendations).

(B) Legislation to establish minimum standards for vesting and funding of private pension plans and to provide a program guaranteeing benefits on plan termination. The principal bill in this category is H.R. 1045 (introduced by Chairman Dent).

Our statement is divided along similar lines and includes general observations on both categories. In addition, we have included several specific suggestions on the bills included within the first category. As indicated in more detail in the body of our statement, we believe it is premature to go into the details of the legislation in the second category.

But as to both categories of legislation, we believe it is important that they be considered in the perspective of the substantial contribution that employee benefit plans are making to the welfare of employees and their dependents as well as to the economy as a whole. As of the end of 1968, insured welfare plans provided life insurance protection to almost 70 million employees, hospital expense protection to nearly 147 million individuals, and disability income protection to over 35 million employees. Private pension plans covered 28 million active workers and 4 million retired individuals. During 1968, about $17 billion in benefits were paid by employee benefit plans, including $2.4 billion in life insurance and death benefits, nearly $10 billion in health benefits, and $4.6 billion in retirement benefits. With respect to the economy as a whole, private pension plans are an important source of investment capital which will be needed-in increasing amounts-if our economy and productivity are to grow in the years ahead. As of the end of 1968, approximately $115 billion of savings had been accumulated under these plans.

We firmly believe that no legislation should be enacted which will impede the ability of employee benefit plans to perform these vital functions within the economy. This is not to say that faults should not be corrected and improvements should not be made. However, each legislative proposal should be scrutinized in the context of the desirability of its objective as weighed against the effect it will have on the growth of employee welfare and pension plans. I. H.R. 1046 and H.R. 16462

These two bills would substantially revise the existing Welfare and Pension Plan Disclosure Act for the purpose of further protecting the interests of employees and their beneficiaries in employee benefit plans. In general, we support such legislation and believe that either bill would serve as an appropriate vehicle for congressional action on this matter. In certain instances, we prefer a provision of one bill over that of the other, and in some areas, we

believe changes are needed in both bills. These items are discussed in the following material.

(a) Government Investigation and Enforcement

H.R. 1046 (section 9(d)*) would retain the existing requirement that the Secretary of Labor may make a detailed investigation of a plan only if he has reasonable cause to believe that it will disclose violation of the law. However, the existing law would be expanded to permit periodic examinations to be made of any welfare or pension benefit plan without a prior showing of cause, subject to the limitation that a plan may not be so examined more than once a year. We agree that the Federal Government should be authorized to make such spot checks and believe that the limitation as to frequency provides an adequate safeguard on misuse of this power. As we construe the provision in H.R. 1046, the Secretary of Labor would be required to show reasonable cause before being able to expand his examination into a detailed investigation. We think this too is an important safeguard.

On the other hand, the corresponding provision in H.R. 16462 (section 9(c)) does not contain comparable safeguards either as to the frequency of permissible spot checks or as to the circumstances under which the examination may be turned into a detailed investigation. We believe these are important defects and urge, therefore, that the approach contained in H.R. 1046 be adopted.

In addition, as an overall matter, every effort should be made under either bill to avoid duplicating existing enforcement activities of other agencies. (b) Disclosure of Information

(1) Relevance and Detail of Reporting. As a general matter, we support legislation designed to assure that employee benefit plans will disclose useful information regarding their operations, including eligibility requirements and vesting and funding provisions. However, if such legislation is to achieve its objective, it is important that the reporting and disclosure requirements be confined to data that is meaningful to plan participants. Requirements to report irrelevant material complicate the disclosure procedure and detract from its usefulness by obscuring the really pertinent information. Such requirements also add unnecessarily to the costly and burdensome task of collecting and filing annual reports. Accordingly, we recommend that

(i) The existing reporting requirements that would be continued under the proposed legislation be carefully reexamined to eliminate all items that are not clearly helpful in terms of the objectives of the Act. In this regard, it is important to consider that the proposed independent audit, the proposed broad investigatory powers, and the suggested new fiduciary standards and enforcement machinery contianed in both H.R. 1046 and H.R. 16462 will, in themselves, serve to greatly increase the protection of plan participants, thus, making it both feasible and desirable to eliminate the reporting of information currently required which is either unnecessary or of marginal use.

As an example of data which must presently be reported although they do not provide information that is useful to pension participants concerns the detailed calculations required of insurers by regulation in reporting "the remainder of such premiums." This item, which has been in the law since its inception (section 7(d) (2) of existing law) and which would be continued under section 7(d)(2) of H.R. 1046 and H.R. 16462, is part of the information which an insurance company must report to administrators of welfare and pension plans. The law currently requires, and both bills provide, that reports include premiums, claims, dividends, commissions, and amounts held to provide benefits after retirement. The "remainder of such premiums" originally required to be reported was the excess of premiums over these other items. We do not question reporting annually this figure. A few years ago, however, the Labor Department revised its annual Report Form (D-2) to require an extensive list of additional items which were characterized as being components of the "remainder of such premiums." This requirement seems based on the erroneous concept that the policyholder is depositing his money in a fund administered by a fiduciary from which benefits and expenses and other charges are payable if money is available and for which an accounting should be made. In fact, requiring insurance companies to report items which are components of their costs produces figures

*All section references in this statement are references to sections of the substantive law as set forth in the relevant bill and not to sections of the bill itself.

that are of no more significance to policyholders than details concerning costs of labor and the various other cost components would be for the purchasers of, say, automobiles. The consumer is concerned with the net cost of the productin this case, the premium paid to the insurer, reduced by any dividend or rate credit, rather than the details of how the cost was arrived at. Accordingly, we recommended that it be made clear that annual reports for insured plans should not be required to include cost details labelled as a breakdown of the "remainder of premium".

(ii) Furthermore, we recommend that any new legislation be specific with respect to any information to be reported and not delegate broad authority to the Labor Department in this regard. In our opinion, H.R. 1046 is satisfactory on this point. On the other hand, we believe that H.R. 16462 would be materially improved by deleting the provision in section 5(a) allowing the Secretary to specify the "detail" with which the specified information must be reported.

(2) Overlapping Reporting Systems. Both H.R. 1046 and H.R. 16462 would require the filing of annual reports with respect to a separate account maintained by an insurance company if such account includes funds under an employee benefit plan subject to the Act. (Section 7(f) (1) (G) of H.R. 1046 and section 7(b) (8) of H.R. 16462.) Life insurance companies already prepare information with respect to their separate accounts for an annual statement which is filed with the state. We urge that any new federal legislation indicate that information on separate account business may be reported under the Federal Disclosure Act in the form used for the state annual statements prescribed by the National Association of Insurance Commissioners. The information would be reported for each separate account, and not simply by filing a copy of the NAIC annual statement, which shows figures on a combined basis for all separate accounts of a company. This procedure will obviate the necessity for insurance companies having to establish whole new systems for producing the information.

(3) Information Concerning Plan Participants, Funding, Benefits, and Reserves. Section 7(f) (2) of H.R. 1046 and section 7(e) of H.R. 16462 list the information as to plan participants, funding, benefits, and reserves which must be included in annual reports filed with respect to employee pension plans funded through insurance contracts. (As a matter of organization, section 7(e) of H.R. 16462 also applies to non-insured plans, whereas H.R. 1046 covers noninsured plans under a separate provision.) As concerns insured plans, for the following reasons, we strongly prefer the provisions in H.R. 1046 which, in essence, represent a continuation of present law.

First, H.R. 16462 would require the reporting of a considerable amount of new information which appears unrelated to the objective of the disclosure provisions. For example, while both bills would require reporting as to the amount of liabilities under the plan, H.R. 16462 would require that this information be separately determined for vested benefits and for all other benefits. Similarly, H.R. 16462 would require the reporting of information as to the number of employees who terminated service during the year, whether they had vested rights to any benefits, and the value of their total accrued benefits as compared to the value of any forfeited benefits. There is no comparable requirement in H.R. 1046 or present law.

This additional information is not of practical use to insurance companies or their policyholders and is, therefore, not produced by existing systems. It would require costly changes to produce these figures as a matter of routine for all pension plans having to file annual reports. Moreover, it would not seem to represent information that will be useful to employees in protecting their interests under the plan. Instead, the additional reporting seems to be intended as a vehicle for gathering information concerning the need for (and cost of) compulsory vesting and funding standards. In view of the administrative burdens and costs involved, we believe that it would be preferable and considerably more economical to develop this type of data from a sample of plans instead of through the much broader disclosure procedures. It is also important to note that utilizing the disclosure procedures would not produce data representative of the private pension system as a whole since they would not encompass plans exempt from the disclosure provisions because of their size. This could result in a serious bias in the data. A sampling technique would seem far better suited to the goal since it could cover a representative cross section of all plans-both large and small.

A second undesirable aspect of section 7(e) of H.R. 16462 is that it would require reporting as to the amount of accrued liabilities and the amount of reserves even in cases where the benefits are completely guaranteed by the insurance company. This information appears directed at testing the funding adequacy of the plan. Where the insurance company guarantees the benefits, it is committed to use its surplus, if necessary, to meet its promise so that a comparison of liabilities to reserves seems irrelevant. H.R. 1046 does not require such reporting in the case of guaranteed benefits.

In summary, therefore, we urge that any new legislation reject the additional reporting which would be required under section 7(e) of H.R. 16462 and, for insured plans, adopt, instead, the substance of section 7(f) (2) of H.R. 1046.

(4) Terminal Reports. Section 5(b) of H.R. 16462 authorizes the Secretary of Labor to require the filing of special terminal reports in the case of an employee benefit plan which is winding up its affairs, so long as moneys or other assets remain in the plan. Neither H.R. 1046 nor present law contains a comparable provision. It is not clear just what additional function such terminal reports would serve that is not already performed by the annual reports. We believe that such a provision should either be excluded from the legislation or should be clarified so as to specifically set forth the nature of the new information which is to be included.

(5) Technical Drafting. Finally, as regards the disclosure requirements, we believe that the technical drafting of H.R. 16462 is somewhat confusing in delineating the provisions applicable to insured plans. In order to clear up this confusion, we would suggest that, if this bill is to form the vehicle for new legislation, it be amended to provide that paragraphs (2) through (7) of section 7(b) are applicable only to plans funded through the medium of a trust. With such a change, paragraph (8) of section 7(b) (as presently drafted) would provide the rules for separate accounts of insurance companies. This is the format followed in section 7(f)(1) of H.R. 1046 and appears to represent the intent of the drafters of H.R. 16462.

(c) Publication of Plan Descriptions and Annual Reports

Present law (section 8) requires employee benefit plan administrators to: (1) file a copy of the plan description (D-1) and a copy of each annual report (D-2) with the Labor Department;

(2) make a copy of the plan description and of the latest annual report available for inspection by the plan participants or beneficiaries at the principal office of the plan; and

(3) if so requested by a participant or beneficiary, mail to him a copy of the plan description and an adequate summary of the latest annual report. These procedures of existing law have two major drawbacks. First, the plan description (as defined) must include a copy of the "plan or of the bargaining agreement, contract, or other instrument, if any, under which the plan was established and is operated." This usually involves voluminous documents (especially when, as is often the case, there have been many amendments) which not only must be drafted and delivered to the Department of Labor, but which also must be furnished to a participant if he so requests. We can see little, if anything, to be gained by requiring plans to so file or furnish these documents and believe that it is sufficient if they are on file and available for inspection at the plan's principal office. A second problem with the existing provisions is that they do not require a plan participant to reimburse the plan administrator for the cost of furnishing him copies of the plan description and its voluminous attachments. Since a participant has the right to inspect these documents at the plan's principal office, we think it is unfair to burden the plan as a whole with the expense of copying and mailing these documents to him if, instead of visiting the office, he chooses the convenience of having the documents mailed to him.

Operation of present law would be substantially improved by the adoption of the corresponding provisions in sections 6 and 8 of H.R. 16462. Under H.R. 16462, copies of the instrument under which the plan was established and is onerated would have to be available for inspection at the plan's principal office, but would not have to be filed with the Department of Labor. In contrast, H.R. 1046 would continue existing law in this regard. Furthermore, under H.R. 16462, a plan participant or beneficiary may request and receive, without charge, a fair summary of the current annual report. However, if he

desires a complete copy of the annual report or a copy of other documents, he may be required to pay the plan a reasonable fee to cover the costs of furnishing him the additional material. (In this regard, it would seem desirable to make clear that the participant may limit his request to only that portion of a document in which he is interested.) H.R. 1046 contains no such provision allowing the charging of a reasonable fee.

In connection with consideration of the provisions relating to information which must be furnished employees, consideration should be given to extending, from 30 to 60 days, the period in which the administrator must comply as set forth in section 9 (b) of both H.R. 1046 and H.R. 16462.

(d) Fiduciary Standards

Section 14(b)(2) of H.R. 16462 prohibits a fiduciary of an employee benefit fund from engaging in various transactions with an individual known to be a party in interest to such fund. The prohibited transactions include loans, leases, and sales and purchases of property. As defined in section 3(m), the term "party in interest" includes not only individuals closely connected with the operation of an employee benefit plan but also a relative of any such person. In situations when many employee benefit funds utilize a single separate account of an insurance company (which is a common occurrence), it may be impossible for the fiduciary with respect to that account to be absolutely sure that, in the course of the normal investment operations of the account, he is not entering into a transaction with, for example, a relative of one of the parties in interest of one of the pension plans using that account. However, as we read H.R. 16462, the fiduciary would be protected from any such inadvertent and harmless breach of the law by the requirement that the transaction, in order to fall into the prohibited category, must be made with a person "known" to be a party in interest. We believe that this is an important safeguard which should be included in any new legislation. In this regard, the corresponding provision in H.R. 1046 (section 14 (e)) does not include such a safeguard and should be amended accordingly if it is to be the framework for new legislation.

(e) Definitions

(1) Administrator. Under present law, as well as under both H.R. 1046 and H.R. 16462, the administrator of an employee benefit plan is the person responsible for carrying out the various disclosure requirements. Present law (section 5(b)) and H.R. 1046 (section 3 (14)) define the "administrator" in terms of the person who is responsible for the control, disposition, or management of the money received or contributed under the plan. When such person is not specifically designated in the plan or the collective bargaining agreement, there is often confusion as to just which person has the prescribed responsibility and, thus, must act as administrator. Thus, a more concrete definition is desirable. We believe that the definition in section 3 (o) of H.R. 16462 represents a preferable approach by designating particular persons rather than relying on a determination of who is assigned certain responsibilities. We recommend, therefore, that the H.R. 16462 definition be adopted.

(2) Accrued Benefit. Section 3 (u) of H.R. 16462 sets forth a definition of "accrued benefit" for use in preparing the report required to be furnished an employee under section 8(d). (There is no necessity to provide a definition of this term under existing law or under H.R. 1046.) Under the definition, in the case of plans other than those of the money purchase or unit benefit type, the method for determining accrued benefits is to be prescribed in regulations by the Department of Labor. We recommend that this aspect of the definition be amended to provide that the terms of the plan shall be relied on for purposes of determining an employee's accrued benefit and that the Department of Labor's rules shall apply only in instances where the plan itself is silent on this matter.

(3) Employee Benefit Fund-Separate Accounts. Subsections (a) and (b) of section 14 of H.R. 1046 define the "employee benefit funds" which are to be subject to the new fiduciary responsibility rules contained in that section. Subsection (a) provides a general definition, while subsection (b) enumerates specific exclusions from the fiduciary rules. It is understood to be the intention of the drafters of this bill to exempt from section 14 all types of insured plans except those utilizing separate accounts. The specific language, however, is somewhat ambiguous. The American Bankers Association has