is not uncommon to restrict the program to full-time personnel who are likely to remain with the company for an indefinite period. This, in turn, suggests that a minimum service, a minimum age, and/or, perhaps, a maximum age (although for a different reason) requirement be stipulated, thereby tending to narrow the covered group and enabling the largest possible benefit for a given dollar amount of contribution.

Presently, the Internal Revenue Code allows a minimum service requirement of up to five years, and the Income Tax Regulations specifically sanction the use of reasonable age requirements. I am not necessarily suggesting that the requirements presently part of the code and regulations be those which should be established for the purpose of the bill, for there is some reasonable argument as to whether the IRS requirements are too stringent; however, it could also be argued, and perhaps more convincingly, that the maximum eligibility requirements proposed in the bill are far too liberal. I am of the opinion that a three-year service requirement, a minimum age 25 (or perhaps 30), and authority to impose a maximum age would be a realistic approach. The need for a maximum age is quite apparent, for otherwise, many employers would be inclined to adopt money purchase pension plans, rather than fixed benefit plans. This, undoubtedly, would serve to the disadvantage of most concerned.

In section 201 of title II, part B, a requirement is imposed applicable to the funding of "experience deficiencies" over a period of 5 years. In the case again of smaller employers, this may prove to be an undue burden and, therefore, it is recommended that such experience deficiency be satisfied within a 10-year period, and that the internal revenue code be modified to specifically accommodate deductibility with respect to such experience deficiency.

By strict reading of section 202 of title II, part A, it appears that the vested interest acquired after 8 years of "credited service under the plan" applies to an employee's total accrued pension. This presumably includes past service benefits, and if so, could create problems of material proportions, and thereby discourage the adoption of fixed benefit pension plans by existing corporations (where past service is significant), or, alternatively, induce such corporations not to give past service credits. The reason is that to vest an employee with an accrued pension which includes accrued past service benefits would require the corporation to continue to make contributions for a sincedeparted employee over an indefinite period of years. And this is because, almost invariably, the cost for past service benefit credits are amortized over an extensive period of years.

On the assumption that our interpretation is correct, it is recommended that the vesting requirements of section 202 be limited to apply only to future service credits, earned for service rendered subsequent to the adoption of the plan, even though adopted subsequent to the effective date of the act. To do otherwise would prompt most employers with limited means (which I submit includes most corporations) to adopt money purchase pension plans, or, alternatively, not give past service credits.

In section 211 of title II, part B, there is a requirement that the plan include a schedule of priorities, to be applied if the plan terminates. However, the priorities indicated, first, fail to give recognition

to beneficiaries of deceased employees, where the plan calls for a preretirement death benefit, and, second, is ambiguous with respect to what constitutes a "retired employee." This is because both priorities 1 and 2 deal with retired participants, but priority 3 refers to those individuals with a vested interest who have not attained their normal retirement date. Therefore, it is suggested that the priorities be restructured as follows: (1) beneficiaries of deceased employees and retired participants (including employees who have retired by reason of total disability and/or pursuant to the early retirement feature of the plan); (2) all employees who have attained their normal retirement date and could have retired, but elected not to do so; (3) employees who could have retired early, but elected not to; (4) employees who have acquired a vested interest, and (5) all other employees.

It should, however, be noted that the inclusion of a priority schedule (whether in the form made part of the bill or as is alternatively herein suggested) could cause a violation of the Federal income tax regulations, wherein certain restrictions apply to a premature termination of a retirement program (as therein defined) and the amount of benefits that, and to whom they, can be paid.

In section 402 of title IV, it is stipulated that no coverage be afforded to any participant who owns more than 10 percent of the employer's stock. I believe that this position is totally inequitable and discriminatory and should be discouraged; instead, perhaps the insurance should be made applicable to all persons up to a prescribed level, and that all participants, irrespective of ownership, be treated uniformly. It is difficult for me to understand why a 1014 percent ownership interest in an entity would deny one of a right which would be available to an individual owning but 934 percent of said entity.

It is occasionally deemed advisable to include in a pension or profitsharing plan a provision for complete forfeiture by an employee if he is discharged for defined "cause," or, if within a prescribed period and area, he enters into competitive employment with the company. I trust that the ultimate bill will specifically provide for the continuance of this practice.

Under the Internal Revenue Code, there is presently a restriction applicable to the amount of deduction the corporation is allowed for contributions intended to amortize initial unfunded liabilities (referred to as the "initial supplemental liability"), which limitation is expressed as 10 percent annually of said initial sum. In that we are dealing with present values and interest assumptions, a 10 percent maximum amortization rate means that no income tax deductions would be afforded an employer to the extent that he decides to amortize this initial liability over a period of fewer than 12 to 15 years, depending on the interest assumptions selected by the actuary. It is therefore recommended that the necessary changes be made in the income tax law so as to permit an employer to more rapidly amortize any such liabilities, and that any such contributions be fully and completely in

come tax deductible.

In arriving at an equitable and reasonable mandatory vesting schedule, it is respectfully suggested that the subcommittee not focus only on that one aspect of the plan, but instead view the aggregate of all frills and features that might be included as part of a retirement program, for only then could a meaningful decision be reached rel

ative to the presence or absence of a particular feature, and the cost and/or saving attributable thereto.

There are many features which, were they all incorporated as part of a pension plan, would yield highly desirable results. One such feature, of course, would be liberal vesting; others might include the presence of a survivorship feature, calling for a preretirement death benefit payable to an employee's spouse and perhaps other dependents. Then, too, there are features which contend with the threat of continued inflation, by, in one instance, gearing the benefits to a broad based equity portfolio and, in another, by calling for automatic adjustments in pension levels, based on a recognized consumer index, such as the consumer price index. Then, also, there are those voluntary actions taken by an employer to upgrade benefits for not only active, but retired employees as well, and a growing trend to employ a so-called final average compensation feature, which relates plan benefits to the highest level of earnings received by the employee from the employer.

Each of these features, undeniably, were they present, would enhance the value of the plan and, of course, each such feature has a cost associated with it. Thus, it is respectfully submitted that rather than focus on but one feature of a pension plan, namely that of mandatory vesting on a most liberal basis, instead a more reasonable vesting schedule be required, for otherwise compliance by an employer would be accomplished at the sacrifice of other features, which may have been equally valuable.

It must always be recognized that only so many dollars are available for retirement plans; to the extent that a portion of these dollars are allocated to the cost of one feature, fewer dollars are available for application to another. The ideal compromise would be to include as many features as possible, each of which would be designed within a framework of the cost that can be absorbed by an employer, and with respect to which, I am of the opinion that the vesting feature suggested by the administration, calling for an age-service combination of 50 is reasonable, and hopefully, it will be the decision of the subcommittee to modify its present posture and instead adopt the ruleof-50 concept.

To conclude on this point, I suggest that greater perspective be given to the total plan, rather than focus on a particular segment.

Then, too, it appears somewhat inequitable to require an employer offering a very liberal pension plan, with all of the frills included, to provide the same degree of vesting required of another employer offering a skeleton plan. Would it not be more equitable to limit whatever mandatory vesting is required to a prescribed, reasonable benefit, and that any benefits beyond such reasonable level be at the discretion of the employer? I believe that this approach would tend not to impede the adoption by employers of liberal benefits, which might be the case, were mandatory vesting required for the plan as a whole.

Finally, it is suggested that no action be taken on this bill, although in principle, I do support many of its features, until such time as the administration has had an opportunity to analyze data that the IRS is presently assembling on its new Internal Revenue Service form 4848 and 4849. This form has been newly devised by the Service for this purpose, and requests significantly more information than has ever previously been required.

In conclusion, I should like to restate my position, which is that any action taken by this committee which would be constructive and improve the pension system and the promise of payments to retired citizens should be supported, and I do support such action, provided, however, that any such legislation would not prompt employers to cut back on benefits under existing plans or fail to adopt new plans. I thank you.

The CHAIRMAN. Senator Taft.

Senator TAFT. You are a practicing actuary?

Mr. SAVITZ. That is correct.

Senator TAFT. What requirements are there for being an actuary today?

Mr. SAVITZ. Well, in some States there has been legislation enacted setting forth what an actuary is. In other States, there are no requirements as to what constitutes an "actuary."

Senator TAFT. So somebody can move in from some other occupation and the next day purport to be an actuary?

Mr. SAVITZ. Presumably so. I think that in that vein I would like to submit that to my knowledge I have seen no evidence that abuses exist. I have seen abuses in the areas of portability of benefits, lack of vesting, fiduciary responsibility, and perhaps misuse of trust assets. I have never heard of an incident in which an alleged actuarial certification was given by a person who did not have sufficient competence. But your point is well taken.

Senator TAFT. You mentioned no regulation of the various professions of similar nature. Security dealers are regulated under SEC. Mr. LIPPMAN. In response to the last question, there is a danger in giving the Secretary the broad power relative to certification without any exacting standards or safeguards. We have situations where people have practiced actuarial science successfully for 10, 15, and 20 years, who perhaps might not meet the Secretary's standard or pass an academic examination. There are many competent lawyers and competent doctors who on any given day could not pass a State examination. Therefore, it seems to me that in delegating this responsibility to the Secretary, if that is the mind of the committee, there ought to be some safeguards for professionals who have established practices and who are highly regarded as actuaries and enjoy the confidence of their clients and have the respect of the profession. It is lack of safeguard which I think is quite troublesome.

Senator TAFT. When you talk about priorities, restructuring of them, are you talking about 100 percent priority or are you talking in effect about a marshaling of priorities?

Mr. SAVITZ. My reference to the term priority is within the framework of the bill, which deals with a 100-percent priority. As structured the bill gives the highest priority to retired employees, and then lesser priorities to persons falling within other categories, such as, early retirement, disability, and vesting. Each person falling within a preferred category is fully vested in his accrued benefit, that is to say that there would be 100-percent vesting of his accrued benefit. Senator TAFT. There have been some plans that have been terminated on other bases.

Mr. SAVITZ. Yes; there are other approaches in use, particularly common among relatively small employers; however, the use of a prior

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ity system is widespread among larger employers. It is to be noted, of course, that, in the case of Studebaker-Packard, a priority system was in effect, under which certain employes were more fully satisfied with respect to their accrued benefits than others.

Senator TAFT. I think those are the only questions I have.

The CHAIRMAN. Thank you, Senator Taft. I just have one concern: Your suggestions to us that we consider changing the vesting approach, S. 3598, to the rule of 50. What are the considerations that lead you to the acceptance and advocacy of that approach?

Mr. SAVITZ. I think that the starting point must necessarily be the dollar sum that the employer can afford to contribute to a plan. This dollar amount will be sufficient to buy only so much in plan benefits. Within this framework it occurs to me that a priority should be given to the reasonableness of the benefits. Secondly, we should consider the potential erosion that inflation will have on this benefit amount, and the plan should be designed with this threat in mind; then consideration should be given to the presence of such other features as, survivorship benefits, early retirement benefits, and desirability benefits, and finally after we are reasonably satisfied with the presence and adequacy of each of the foregoing, consideration should be given to the presence of vesting. However, in my judgment, vesting takes the last of the various priorities which I have set forth. It should also be observed that a completely new problem is introduced were the vesting feature to be liberalized, which concerns the assumptions made by the actuary in developing his calculations applicable to employee turnover, for if vesting is introduced on a liberal basis, the turnover assumption must be modified or completely eliminated. This means that a given contribution will purchase smaller benefits than would otherwise be the case were a turnover assumption present. The absence of a turnover assumption results in the use of more dollars to provide fewer benefits. My preference would be to see a plan under which a given dollar of allocation would produce a reasonably adequate retirement benefit and for the plan to include reasonable provisions for death, early retirement and disability. Then, to the extent that additional dollars are available, greater attention would be given to vesting. If, however, I had unlimited dollars, then, and only then, would I feel completely comfortable in fully supporting the committees' liberal vesting feature.

The CHAIRMAN. Very clearly stated, and I appreciate it.

Senator TAFT. One other question. I think you mentioned a minimum wage requirement. I am troubled by this. We had one witness I think who had money paid in over a period of almost 15 years and with termination of the plan, those older had been in a much shorter period, paid in less or paid in less on their account, and benefited in termination to some extent from the plan, whereas he was cut off without anything. You really discriminate against the younger workers when you do that.

Mr. SAVITZ. Viewed somewhat differently, we must consider the fact that there are only so many dollars present in the plan at the time of termination. These dollars will either be used exclusively for the benefit of the old or exclusively for the benefit of the young or alternatively equitably prorationed among all individuals. My preference would be to first consider the plight of the aged, in that these