ticipating. W. L. Gardner & Associates, Inc., is a pension consulting firm in Baltimore. It helped establish, services and administers the Pension Program of Associated Builders & Contractors, Inc., along with approximately 150 other Pension Programs, whose annual deposits are in excess of $1,000,000.

Rather than discuss each of the bills listed above, along with the bills that have been submitted in the Senate in detail, we believe it would be more appropriate to discuss the major points of all of these bills, together with our general impression of legislation affecting the private pension system.

It would seem that the three major issues encompassed in the pending bills are (1) the strengthening of the protection provisions for participants and beneficiaries of pension and welfare plans, and (2) establishing minimum standards for vesting and funding, and (3) the provisions for an insurance program guaranteeing plan termination protection. We would like to discuss these three points separately.

(1) PROTECTION PROVISIONS FOR PARTICIPANTS AND BENEFICIARIES

OF PENSION AND WELFARE PLANS

We support wholeheartedly the attempt to strengthen the provisions of the present Welfare and Pension Plans Disclosure Act, and believe that more rigid supervision of investment procedures, together with a more orderly reporting system, is warranted.

We do question the advisability of limiting the investment of plan funds in an employer's business to the degree that is proposed, particularly when the same restriction is not placed on profit-sharing plans. There are ample safeguards under the Internal Revenue Department information returns now existing with regard to such investment of plan funds in the employer's business. We do not believe further restrictions along this line are necessary.

If it is deemed that further restrictions are necessary, it would seem more important that they be placed upon profit-sharing plans than on pension plans. The very nature of the profit-sharing plan makes gains or losses due to investments inure to the benefit of the participant. The basic reason of prohibiting or limiting such investments should be the protection of the plan participant. In a pension plan, where the limitation is proposed, the employer has assumed the risk of investment loss, rather than the plan participant and, hence, if proper supervision of funding procedures were adopted, no loss would occur to the participant and, hence, we see no need for the limitation.

While we have stated we are in support of the general principle of the strengthening of these disclosure provisions, we do not think any of the proposed bills will do the job they are supposed to do. Rather, we believe more emphasis should be placed on enforcement, than on additional requirements. It is our opinion that if the present Disclosure Act were properly enforced, it would have more effect than the proposed additional requirements.

(2) ESTABLISHING MINIMUM STANDARDS FOR VESTING AND FUNDING

We agree that there should be some minimum vesting requirement but are definitely opposed to full vesting at the end of ten years. If we are interested in the success and future of the private pension system, we cannot insist upon full vesting after this short period of time. The cost of such a proposal would be prohibitive, both to the employer and to those participants who spend all or most of their working lifetime with one employer. It is the long service employees who would sacrifice most, if the full vesting provision were enforced. We realize that mobility of a labor force is good from certain aspects, but from an economic standpoint, there are many disadvantages. It is submitted that we must take a position that we will allow mobility, but we will not reward it. This is just what full vesting after ten years would doencourage and reward termination of employment. Many companies prefer to pay vested benefits in cash upon termination of employment as it is too costly to retain vested interest until Normal Retirement Date. We hope you agree that this does not serve the intended purpose of a private pension system. We stated that the long service employees will bear the cost of full, early vesting. In most instances, benefits to be provided under a pension plan are dictated by their costs, either through the budget of the employer or by union negotiations. If, for example, an employer can afford, or the union agrees, that 25¢ per hour is the amount that can be allocated toward pension plan costs,

it is our opinion that the major portion of this money should go toward funding benefits for those people remaining in the service of the employer. If we provide high, early vesting, we must then reduce the pension benefits at Normal Retirement Date for those who remain, in order to provide for the higher cost of the early vesting.

As we previously indicated, we are not against heavier vesting requirements, however, we believe that full vesting after 20 years of service, coupled with a minimum age of 50 or 55, will certainly be adequate.

With reference to the minimum standards for funding, we believe further provisions are totally unnecessary. Opinion #8 of the Accounting Principles Board, together with the present Internal Revenue Service requirements, seem completely adequate to cover this situation. If anything, the I.R.S. regulations should be broadened, not to allow slower funding, but to allow more flexibility in funding.

(3) PROVISIONS FOR AN INSURANCE PROGRAM GUARANTEEING PLAN TERMINATION PROTECTION

With regard to the insurance program guaranteeing plan termination protection, it is our opinion that this is not only totally unnecessary, but completely erroneous in concept. First, we say it is unnecessary because if the presently required disclosure and information reports and returns were revised so as to avoid duplication and overlapping of agency responsibility, and if these reports were adequately reviewed and enforced, there will be no need for such an insurance program. If these provisions are not made and are not properly enforced, a 1% charge on existing plans will not be nearly enough to do the job. A proposal such as this seems to me to be either a complete waste of time as far as the good it will do, or an attempt to eventually set up a totally new and separate social security system. There seems to be no possibility that it could result in anything in between.

In addition to this, we object strongly to the establishment of a third agency to deal with the private pension system. The Internal Revenue Department, the Labor Department and, now, a separate pension insurance organization.

In addition to the above comments with regard to the specific provisions of the bill, we would like to make a few further remarks regarding the general approach to the problem. First of all, we must assume that Congress feels that the private pension system is worthwhile. We believe this should be stated emphatically in any legislation that is passed, and that it should be reemphasized from time to time because if this is not done, small bits of legislation and executive and regulatory decrees from all sources will gradually eat away and erode the private pension system as we know it today.

To this end, we believe that major legislation should be enacted to establish one body, either under the Internal Revenue Department, the Labor Department or, most probably, the Health and Welfare Department, to review, administer and supervise all pension and profit-sharing programs. There is much duplication of effort, of reporting forms, of information, and no one correlating body to which the employer or administrator may go for help or clarification. There are so many conflicting areas now, that it is a serious handicap to both those employers who wish to establish a retirement plan and to those agencies who are attempting to assist. Let me give you one example. If I am an employer with the major portion of my work force members of a union operating under a bargaining agreement, I may not be able to put in a pension plan for all or any part of my employees. If the bargaining agreement does not provide for a pension plan, I cannot give those members a plan without obtaining a consent decree from the union, as this will be considered in violation of my labor contract. Further, I cannot put a pension plan in for those employees of my company who are not members of the union, as this would be considered discriminatory in the eyes of the Internal Revenue Department, even though the union has been requested and has refused to grant a consent decree.

This is but one example of the conflicting situations that arise when we are dealing with more than one governmental agency, i.e. the Labor Department and the I.R.S.

It would seem that the private pension system with its 200 billion plus dollars and the potential benefit to its millions of plan participants would be a substantial enough force, both from a social standpoint and from an economic

standpoint, to warrant an agency that would approve or disapprove, supervise, set guidelines and enforce those guidelines regarding Retirement Programs.

It is our hope that none of these bills will be reported out of committee as they are currently written, but will be sent back to the executive branch with a request to come up with good, sound, comprehensive reform in this area for the next session of Congress. As we have indicated before, these individual bills, hitting one or two points, are going to eat away and erode our entire pension system and make it not only unattractive, but so impossible to understand and administer, that the growth of the system is going to be drastically hampered.

In summary, we favor certain provisions in the pending bills, but we are opposed to the format that extends the multiplicity of agencies involved, some of the unnecessary aspects contained in the proposed legislation, together with the duplication of reports and authority, which tend to limit the extension of the private pension system.

STATEMENT OF ASSOCIATION OF AMERICAN RAILROADS

This statement is filed on behalf of the members of the Association of American Railroads in opposition to the proposals contained in H.R. 1045, H.R. 1065, H.R. 2080, and H.R. 10551.

The Association takes no position with regard to the bills which would amend the existing reporting requirements for private pension and other benefit plans, and would establish federal fiduciary standards for plan administrators and trustees, such as H.R. 1046, H.R. 6024, and H.R. 16462, despite the additional burdens which are thereby imposed on the administration of plans and the obligations already imposed on administrators and trustees by the laws of the states.

The railroad industry was in the forefront of the establishment of private pension plans in this country, and has a great many such plans in existence today. A digest of representative plans was printed for the use of the Subcommittee on Railroad Retirement of the Senate Committee on Labor and Public Welfare in 1961, containing detailed analyses of twenty-eight plans, including those of many major railroads.

An examination of these sample plans would show wide variation with respect to their provisions. A similar reexamination of the plans as they exist today would show many changes from 1961. Nor did these plans spring into existence in the form in which they existed as reported in 1961.

Pension plans in the railroad industry, as in all industry, are the product of a continuing process of growth and change, which varies from industry to industry and from company to company, depending on numerous factors which include the financial condition of the employer, the needs and desires of the employees covered, and the varying priorities of such needs and desires.

Thus, when a plan is first established, the primary concern is normally the need to provide for the pensions of those older employees who are at or approaching retirement age. The funding at that time may be directed to ensuring the pensions of these older workers, leaving such other benefits as may be needed or desired for later consideration. When a plan is well established to meet the first priorities of the older workers, consideration may then be given and frequently is-to adoption of vesting and other provisions for the benefit of younger employees in service. Even so, choices may frequently be required between the additional benefits of vesting, disability benefits, or other features deemed desirable, since all such provisions increase pension costs appreciably.

H.R. 1045 and the other bills which would set standards of vesting and funding would have a very serious effect on the private pension plans because they would destroy the flexibility and pattern of growth and development which has heretofore characterized such plans.

As indicated, many private pension plans have had modest beginnings. What this proposed legislation would in effect do would be to require, at the very beginning of a private pension plan's existence, the institution of plan features. which no matter how desirable they may be, create a high level of initial costs. These standards would have a similar effect on many existing plans. Even plans which are substantially funded for present benefits would find

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that the early vesting proposed in these bills would increase costs substantially and thus preclude adoption of other more desirable benefits.

In our view, therefore, the effect of enactment of such rigid standards would be to inhibit or stop the spread and development of the private pension plan system. Such additional government regulation as is proposed would be a first step, and a major step, toward a government-imposed system of pensions supplemental to the Railroad Retirement and Social Security benefit systems. A few specific comments must be made with regard to the proposals for early or immediate vesting of pension benefits, for funding, and for reinsurance of pension benefits.

The vesting proposals are based on the theories that there must be mobility in the labor force and that pensions are "earned" by the employee with each hour's work performance. This view is obviously at odds with the theories upon which employers acted when pension plans were first adopted, namely, that employees becoming superannuated in their service were deserving of and entitled to retirement benefits, and that a good pension system would help to hold employees and limit costly employee turnover. Thus, the private pension system would become, under government supervision and regulation, an instrument for the achievement of social and economic purposes diametrically opposed to the purposes of those by whom it was devised and established. Nor can it be said that the original purposes of the private pension system are outmoded and harmful to the economy. The railroad industry-and this is no doubt true of many others-embraces employees with skills which require substantial periods of training and experience for effective use, and the loss of trained manpower through increased ease of mobility could have a substantial effect on the efficiency and costs of operation of the railroads.

So far as proposed rigid standards of funding are concerned, we believe that their adoption would strongly deter the institution of new plans, the change-over of existing pay-as-you-go unfunded plans to a funded basis, and might well result in discontinuance of some existing plans or limitations on benefits available under existing plans. The availability of moneys to meet such rigid standards is a matter which these bills seem to take for granted, but on the contrary many employers would be hard-pressed if the present flexibility in funding of plans were eliminated, and except where plans are already substantially funded, would be sure to take a new hard look at existing or proposed plans and benefits. The railroad industry, in particular, is in no position to accept the added financial burdens which such rigid vesting and funding standards would impose.

Our industry strongly opposes the reinsurance proposals. We consider that in addition to the effect of the additional costs involved-which would eat into the moneys available for plan benefits-this simply amounts to a proposed national tax on all employers with benefit plans for the benefit of those who become bankrupt, or close plants, or whose benefit funds suffer losses through decline in the value of fund assets. Such an imposition would be discriminatory and unreasonable.

It is also submitted that regulation of private pension plans should remain in the hands of the Internal Revenue Service, which now exercises major regulatory powers in this area. The penalty of disqualification of a plan under IRS regulations is certainly sufficient to ensure compliance with requirements adopted by Congress with regard to benefit plans. We can see no real advantage in fragmenting such regulation between Government departments or in the creation of a new agency in this field.

Although the unfunded, pay-as-you-go plans would not be subject to IRS penalties, it is clear in our view that such plans should remain totally outside the area of regulation. They are generally noncontributory employeradopted plans, outside the realm of collective bargaining, which employers have reserved the right to terminate at will. Regulation of unfunded plans, even to the limited extent contemplated by H.R. 1045, would undoubtedly result in the termination of many such plans. Certainly the railroad industry is in no position to meet the costs of funding and vesting such plans.

In summary, the railroad industry opposes H.R. 1045 and similar bills imposing added regulation on private pension plans because it is believed that such Congressional action would weaken or even destroy, rather than strengthen, a system which all recognize to be important to national welfare, not only as a supplement to the Federal Social Security and Railroad Retirement systems, but also as a source of capital for productive investment in the nation's industry.

NEW YORK STOCK EXCHANGE,

New York, N.Y., December 10, 1969.

Hon. JOHN H. DENT,

Chairman, General Subcommittee on Labor. Committee on Education and Labor, U.S. House of Representatives, Washington, D.C.

DEAR CHAIRMAN DENT: Enclosed is a statement of the New York Stock Exchange on H.R. 4160-the Welfare and Pension Plans Act-which is subImitted in connection with the current Hearings by the General Subcommittee on Labor on that bill.

In brief, the Exchange statement offers no comment on the general aims or provisions of the bill. We are concerned, however, at the effect of Section 14 of the bill which, if enacted, will prohibit loans from an employee benefit plan to the employer firm. A number of member firms of the New York Stock Exchange have, in the past, used loans from a benefit plan as a source of capital. There have been no defaults and, in view of the limited sources of capital available to the firms and the Exchange's supervision in this area, we question the desirability of legislation which would prohibit such loans.

The Exchange, therefore, suggests in its statement three amendments to Sections 14 (e) and (f) of H.R. 4160 which, in our opinion, would permit the administrators of member firm pension and profit sharing plans to continue the practice of making loans to the member firms which contribute to those funds. We suggest that the three amendments be adopted by the Committee. Very truly yours,

DONALD L. CALVIN.

STATEMENT OF THE NEW YORK STOCK EXCHANGE

The New York Stock Exchange has reviewed the purposes and text of H.R. 1046. We have no comment on the general objectives of the bill, but we would like to suggest that consideration be given to amending two sections: (1) Sec. 14 (e) which prohibits loans from employee benefit plans to the sponsoring employer, and (2) Sec. 14(f) (4) which permits employee benefit plans to invest up to 20% of their assets in the employer's "securities" as defined by the Securities Act of 1933.

Section 14(e)-Prohibition of Loan to Employers by Employee Benefit Plans

Unlike most other enterprises, member organizations of the New York Stock Exchange are not free to raise capital from anyone willing to provide it. Because of the public interest in the securities industry, Exchange rules restrict capital sources available to member organizations. Loans from their employee pension and profit sharing plans are one source of capital available to member organizations of the New York Stock Exchange. To prohibit loans from employee plans to Exchange member organizations would needlessly eliminate a source of capital at a time when additional funds are unquestionably needed by the Exchange community to accommodate the dramatic increases in public and institutional participation in our securities markets. As drafted, H.R. 1046 would impliedly repeal Sec. 503 (i) of the Internal Revenue Code, which recognizes the special circumstances applicable to the securities industry by exempting loans of up to 25% of an employee fund assets from Sec. 503 (c). Sec. 14 (e) of the bill prohibits all loans from any employee benefit fund to the parent employer organization, regardless of the nature of the business or industry. The importance of borrowings from employee plans to New York Stock Exchange member organizations can be understood in light of the fact that the securities industry expects to be faced with a need to double its capital investment in the next decade. Indications are that substantial amounts in new capital will be needed within the next few years (1) to finance new and growing businesses through underwritings; (2) to improve our service to the public by establishing and furnishing new offices; and, (3) to establish and maintain markets in securities of new and seasoned companies.

The Exchange requires its member organizations to meet strict capital requirements. As noted, the Exchange imposes specific limitations on the sources of capital available to member organizations doing business with the public. For example, member organizations may not obtain subordinated capital from banks, insurance companies, other securities firms, or officers and employees thereof. However, subordinated borrowings from employee benefit plans are considered "good" capital when properly documented.