[30] course, be financed where the $7,500 annual contributions are made for a greater number of years or the interest earnings are higher than in the above example.

Portability. Ours is a highly mobile economy and employees frequently transfer from one job to another, particularly in their early years. As a result, employees frequently acquire vested rights to pensions under a number of different retirement plans established by previous employers. In view of the fact that some of the retirement rights will generally have been acquired many years before the employee retires, he may forget to claim all his retirement benefits. In addition, in such cases, the plans involved may not be able to locate the employee to pay him his retirement benefit. Moreover, although this is not a matter of major concern, it probably is preferable from the standpoint of the employee to receive his retirement benefits in one. check rather than in a number of separate payments from different plans.

The committee has adopted provisions to ameliorate these problems. The Pension Benefit Guaranty Corporation which is established to administer the termination insurance program established by the bill is also authorized to establish a central portability fund to receive deposits of sums representing the present value of an employee's vested rights when he is separated from the firm prior to reaching retirement age. The employee's interest in the portability fund could then either be transferred to his next employer's retirement fund or retained in the portability fund until he retires when it would either be paid out to him or used to purchase an annuity from an insurance company for

him.

The payments made out of this central portability fund to the employee or his beneficiaries will be taxed in the same manner as payments made to such individuals by qualified retirement plans (except that no special tax treatment will be available for lump sum distributions). However, the committee has specifically provided that the transfer of amounts representing the employee's interest in a retirement plan to the central portability fund as well as transfers from the central portability fund to the plan of a new employer are not to give rise to tax liability. The former provision is essential since, under present law, such transfers would probably be taxable, making the central portability fund unworkable.

The transfer of amounts representing vested rights to pensions to, or from the central portabality fund will be entirely voluntary. Former employers can, if they choose, make termination payments directly to the fund, or to the employee, who then can, within a limited period of time, transfer the payments to the fund. It also will be up to the employee and the new employer whether the amounts involved are left in the central portability fund or transferred to the retirement plan. of the new employer.

After careful consideration, the committee decided to make the use of the central portability fund optional rather than mandatory because it believes that a clearinghouse system of this kind would not be workable on a mandatory basis. For example, it often would be difficult to place a specific value on the vested rights of an employee in a fixed benefit pension plan in view of the fact that the formulas

[31] under which benefits are computed, as well as the actuarial assumptions used, vary widely. Also, the compulsory transfer of funds representing an employee's vested rights from an employer's pension plan to the central portability fund would raise further difficulties where the pension plan is not fully funded since the transfer of funds under such circumstances might be considered detrimental to the remaining covered employees in the pension plan.

In order to encourage the development of portability arrangements, it is expected that the corporation administering the central portability fund provided in the legislation will provide assistance to employer-employee organizations, trustees and administrators of pension plans in such matters as the development of reciprocity arrangements between plans in the same industry or area and the development of special arrangements for portability of credits within a particular industry or area.

The committee has also made it possible for the voluntary transfer of sums of money representing an employee's vested rights from one pension plan to another directly without the use of the central portability fund. Also permitted under certain circumstances are transfers from a qualified pension, etc., plan to an individual retirement account, a new retirement savings provision added by the bill which is explained below. In both of these cases the tax laws are amended to make it clear that such voluntary transfers are to be nontaxable, subject to specified conditions designed to prevent abuses.

Finally, in order to insure that employees will actually receive the pension benefits to which they are entitled when they retire, the Social Security Administration will keep records regarding the vested rights of employees which will be sent in to the Social Security Administration by employers at the time that employees terminate their employment. The Social Security Administration will then furnish this information regarding vested employee rights to individuals both on request and at the same time that official information is supplied to the employee or his beneficiary regarding social, security benefits. Fiduciary responsibility.-Employees have a right to expect that trustees and administrators will handle the funds of employee benefit plans properly for the purposes for which they are intended and will not neglect their duties in this regard or divert the funds to improper uses. Unfortunately, instances have arisen in which pension funds have been used improperly by plan managers and fiduciaries. The committee believes that this situation should not be permitted to continue and has adopted measures designed to reduce substantially the potentialities for abuse in this regard.

The committee bill establishes fiduciary standards for trustees and other parties in interest of private employee benefit plans. It also prohibits individuals who have been convicted or imprisoned for certain specified serious crimes from serving as an administrator or employee of employee-benefit plans for a period of 5 years after conviction. Penalties, including fines of up to $10,000 or imprisonment for up to one year, are provided for willful violations of this prohibition. Fiduciaries are required to discharge their duties solely in the interest of participants and their beneficiaries and in a manner which will not jeopardize the income or assets of the fund. They are also spe

[32] cifically prohibited from engaging in actions where there would be a conflict of interest with the fund, such as representing any other party dealing with the fund. Any fiduciary who breaches any of the responsibilities imposed on him by the committee provision is personally liable to make good to the pension fund any losses resulting from his failure to comply with the fiduciary standards. To enforce these obligations, the Secretary of Labor or a participant or beneficiary of a plan is authorized to bring a civil action in the courts for appropriate relief to redress or restrain any violation of the fiduciary standards. The committee bill also completely changes the method of enforcing the prohibited transaction rules governing plans qualified under the tax laws. For violating the prohibited transaction rules the bill imposes an excise tax on the fiduciaries and parties in interest who have engaged in the prohibited transaction. This is in contrast to the present situation, where the trust loses its tax exemption upon engaging in a prohibited transaction, thereby imposing a sanction on the employer but also imposing one on the employees as well. In addition, the committee bill establishes new rules that define the transactions that are prohibited, substantially strengthening these rules.

Under the bill, parties in interest and fiduciaries who engage in prohibited transactions will be subject to a two-level excise tax on the amount involved in the prohibited transaction. The first level tax generally will be 5 percent of the amount involved; if the transaction is not corrected to make the trust whole, a second level tax of 100 percent will be imposed. These taxes will not be deductible. Since payment of the 100 percent tax would be more expensive than restoring the amount involved to the trust, it can be expected that the trust will be the ultimate beneficiary of these sanctions.

The new rules specifically prohibit a number of transactions between employee trusts and certain specified parties in interest. Currently, transactions are prohibited generally when the dealings involved are on other than an arm's length basis. However, arm's-length standards require substantial enforcement efforts, resulting in sporadic and uncertain effectiveness of these provisions. A similar problem was faced by the Congress in 1969 when it acted with respect to prohibited transactions involving private foundations. At that time the Congress concluded that the arm's-length standards did not preserve the integrity of private foundations and amended the definitions of prohibited transactions to eliminate the problems involved. The committee's bill generally follows the solution that was developed in 1969, establishing definitions for prohibited transactions that will make it more practical to enforce the law. The committee's definitions of prohibited transactions, and the exceptions from these transactions, also take account of the unique situation of employee benefit trusts.

The committee also concluded that it is not in the best interest of covered employees to permit the assets of a pension plan to be invested in the stock or securities of the employer. Even where the employer's stock generally constitutes a high grade investment, the purchase of employer stock by a pension plan adds a substantial risk factor from the standpoint of the employees since in the event the firm's fortunes decline, they may lose not only their jobs but their pension benefits as

[33] well. For this reason, the committee bill specifically prohibits qualified pension plans from investing in the securities of the employer after August 21, 1973. However, pension plans are not specifically prohibited from retaining indefinitely employer securities purchased before this date in order to avoid hardship and to preclude the possibility that the forced sale of such securities might have a disruptive effect on the

market for them.

Since profit-sharing and stock-bonus plans are intended to a large extent to serve as an incentive to employees by allowing them to participate in the profits of the company, the committee bill generally places no restriction on the purchase of employer securities by such plans. However, where the employer securities are not readily tradable on an established securities market (exchanges or over-the-counter markets) the bill limits the investment in employer securities by profitsharing trusts to 10 percent of their assets. Where the securities involved are not readily marketable, large investments in employer securities would involve considerable risk.

In order to prevent hardship, appropriate transition rules are provided for trusts that have entered into transactions which are not prohibited under present law but would be prohibited under the committee bill.

Enforcement.-The committee bill relies heavily on the tax laws in order to secure compliance with the new requirements that it imposes on pension plans. Plans, for example, are required to comply with the new coverage, vesting, and funding standards in order to qualify for favored tax treatment under the Internal Revenue Code. In addition, excise taxes are imposed for failure to meet the funding standards and in cases where there has been a prohibited transaction. As a result, these substantive pension provisions would be administered by the Internal Revenue Service.

The committee believes that primary reliance on the tax laws represents the best means for enforcing the new improved standards imposed by the bill. Historically, the substantive requirements regarding nondiscrimination which are designed to insure that pension plans will benefit the rank and file of employees have been enforced through the tax laws and administered by the Internal Revenue Service. As a result, the Internal Revenue Service is already required to examine the coverage of the retirement plans and their contributions and benefits as well as funding and vesting practices in order to determine that the plans operate so as to conform to these nondiscrimination requirements. Also, the Internal Revenue Service has administered the fiduciary standards embodied in the prohibited transactions provisions since 1954.

The committee believes that the Internal Revenue Service has generally done an efficient job in administering the pension provisions of the Internal Revenue Code. The very extensive experience that the Service has acquired in its many years of dealing with these related pension matters will undoubtedly be of great assistance to it in administering the new requirements imposed by the committee bill.

However, because the bill increases the administrative job of the Service in this respect, the committee believes that it is desirable to add

[34] to its administrative capability for handling pension matters. For this reason, the committee bill provides for the establishment by the Internal Revenue Service of a separate office headed by an Assistant Commissioner of Internal Revenue to deal primarily with pension plans and other organizations exempt under section 501 (a) of the Internal Revenue Code, including religious, charitable, and educational organizations. In order to fund this new office, the bill authorizes appropriations equal to the sum of (1) a tax of $1 per participant per year covered by a qualified retirement plan, and (2) one-half of the revenue raised by the present 4 percent excise tax on private foundations. It is intended that the Internal Revenue Service obtain from all appropriate pension administration sources annual statistical data to indicate the operations of the private retirement system for the purpose of evaluations and public information.

In addition to providing additional opportunities for redress in case of disagreement with the decisions of the Internal Revenue Service on pension matters, both employees and employers will be allowed to appeal determination letters issued by the Internal Revenue Service to the Tax Court after exhausting their remedies under the Internal Revenue Service administrative procedures. Employees are also given the right to submit disputes with pension plan administrators to the Labor Department for decision. It is anticipated that this will provide employees with a ready and efficient procedure to resolve disputes involving such matters as whether a particular employee has qualified as a participant under the pension plan in the light of the particular facts, whether he is entitled to a benefit, and the size of the benefit to which he is entitled under the plan provisions.

Lump-sum distributions under qualified plans. Prior to the Tax Reform Act of 1969, lump-sum distributions made by qualified pension plans were generally taxed as long-term capital gains. Such capital gains treatment, however, had the disadvantage of allowing employees to receive substantial amounts of deferred compensation in the form of lump-sum pension distributions at more favorable tax rates than other compensation received currently. The 1969 Tax Reform Act sought to ameliorate this problem by providing that any part of such lump-sum distributions which represented employer contributions accrued in plan years beginning after 1969 was to be taxed as ordinary income rather than as capital gains. In addition, the 1969 Act provided a special 7-year averaging procedure for the portion of the lump-sum distribution taxed as ordinary income.

However, while the 1969 provisions were intended to provide more equitable treatment for such lump-sum pension distributions, they have not achieved their purpose. The Treasury has had great difficulty in providing regulations to carry out this provision. Problems have arisen both in determining the amount of the ordinary income element of a distribution and in determining the precise amount of tax imposed on account of the "ordinary income" element. Moreover, in practice the new proposed regulations have proved to be very complex and it is frequently maintained that individuals receiving lump-sum distributions have been unable to compute their taxes and that