THE EXISTING LAW

The growth and development of the private pension system in the past two decades has been substantial. Yet, regulation of the private system's scope and operation has been minimal and its effectiveness a matter of debate. The assets of private plans, estimated to be in excess of $150 billion, constitute the only large private accumulation of funds which have escaped the imprimatur of effective federal regulation.

At the federal level, there are essentially three federal statutes which, although accomplishing different purposes and vested within different federal departments for enforcement, are all compatible in their regulatory responsibilities. These are the Welfare and Pension Plans Disclosure Act (29 U.S.C. Sec. 301 et. seq.), the Labor-Management Relations Act (29 U.S.C. Sec. 141, et. seq.) and the Internal Revenue Code (I.R.C. of 1954, Secs. 401-404, 501-503).

A complete description of the federal regulation affecting the administration of private plans can be found in Interim Report of The Private Welfare and Pension Plan Study, 1971, Senate Report No. 92-634 of the 92d Congress, 2d Session.

After a comprehensive investigation of abuses in the administration and investment of private fund assets, Congress adopted the Welfare and Pension Plan Disclosure Act in 1958. The policy underlying enactment of this Act was purportedly to protect the insterest of welfare and persion plan participants and beneficiaries through disclosure of information with respect to such plans. The essential requirement of the Act was that the plan administrator compile, file with the Secretary A Labor, and send to participants and their beneficiaries upon written res, est, a description and annual report of the plan. It was expected that the knowledge thus disseminated would enable participants to

ce their plans. The Act was amended in 1962 to make theft, embezZement, bribery, and kickbacks federal crimes if they occur in connection with welfare and pension plans. The 1962 amendments also conferred limited investigatory and regulatory powers upon the Secretary of Labor, and required bonding of plan officials.

Experience in the decade since the passage of the above amendments has demonstrated the inadequacy of the Welfare and Pension Fans Disclosure Act in regulating the private pension system for the purpose of protecting rights and benefits due to workers. It is weak in its limited disclosure requirements and wholly lacking in substantive fiduciary standards. Its chief procedural weakness can be found in its reliance upon the initiative of the individual employee to police the management of his plan.

The Labor-Management Relations Act, Sec. 302, provides the fundamental guidelines for the establishment and operation of pension funds administered jointly by an employer and a union. The Act is not intended to establish nor does it provide standards for the preservation of vested benefits, funding adequacy, security of investment, or fiduciary conduct.

Tax deduction benefits accruing to employers are prescribed by the Internal Revenue Code under which the employer is granted a deduction within certain limits for contributions made to a qualified plan, and the investment earnings on such plans are made tax-exempt. To attain "qualified status" under the Code, the plan must be (1) for the

exclusive benefit of the participants; (2) for the purpose of distributing the corpus or income to the participants; (3) established in such a manner to make it impossible for the employer to use or divert funds before satisfying the plan's liabilities; and (4) not discriminate in favor of officers, stockholders, or highly-compensated or supervisory employees.

The Internal Revenue Code provides only limited safeguards for the security of anticipated benefit rights in private plans since its primary functions are designed to produce revenue and to prevent evasion of tax obligations. The essence of enforcement under the Code lies in the power of the Internal Revenue Service to grant or disallow qualified status to a pension plan, thus determining the availability of statutory tax advantages. The Internal Revenue Service jurisdiction and enforcement capabilities are solely to allow various tax advantages to accrue to employers who establish and maintain pension plans which can qualify for such tax benefit privileges.

In the absence of adequate federal regulation, the participant is left to rely on the traditional equitable remedies of the common law of trusts. A few states, including New York, Washington, Wisconsin, Massachusetts, and California have codified existing trust principles and enacted legislation which requires in many instances a greater degree of disclosure than required by federal statute.

The fact that statutory rules exist says little as to their efficacy in adjusting inequities that are visited upon plan participants, as evidenced by the hearings before this Committee. In almost every instance, participants lose their benefits not because of some violation of federal law, but rather because of the manner in which the plan is executed with respect to its contractual requirements of vesting or funding. Courts strictly interpret the plan indenture and are reluctant to apply concepts of equitable relief or to disregard technical document wording. Thus, under present law, accumulated pension credits can be lost even when separated employes are within a few months, or even days, of qualifying for retirement.

The proposed bill would, therefore, establish minimum standards of vesting, funding, and fiduciary conduct and also provide for voluntary portability of earned pension credits and a system of compulsory benefit insurance to protect the security of pension rights.

As suggested by the President's Cabinet Committee Report of 1965: "As a matter of equity and fair treatment an employee covered by a pension plan is entitled, after a reasonable period of service, to protection of his future retirement benefit against any termination of his employment." Concern for loss of benefits by workers after long years of labor through circumstances beyond their control was similarly expressed by President Richard M. Nixon on December 8, 1971, when, in a message to the Congress he said, "When a pension plan is terminated, an employee participating in it can lose all or a part of the benefits which he has long been relying on, even if his plan is fully vested ... even one worker whose retirement security is destroyed by the termination of a plan is one too many."

PRIOR LEGISLATIVE ACTION

Prior inquiries and studies by the Senate into the administration and operations of the private pension plan system in the United States

were made by the Subcommittee on Welfare and Pension Funds, Committee on Labor and Public Welfare under authority of Senate Resolution 225, 83d Congress, and Senate Resolution 30, as extended by Senate Resolutions 200 and 232 of the 84th Congress. That comprehensive investigation, which concluded with a final report to the Senate on April 16, 1956, had been primarily directed to determine whether federal legislation was necessary to protect the financial interests of participants in welfare and pension plans. The study also involved an appraisal of the functions exercised by federal agencies over private pensions, as well as the adequacy of state controls. It concluded with various findings and recommendations to the Senate, and, more specifically, calling for enactment of federal legislation to compel registration, disclosure and periodic reporting of welfare and pension plans in the United States. The Subcommittee intended that Congress provide for greater legislative protection for beneficiaries of pension plans through detailed public disclosure of the administration and operation of private pension plans.

Subsequently, the Subcommittee on Welfare and Pension Plans in the 85th Congress, 1st Session, conducted public hearings on legislative proposals. These measures proposed to establish the federal regulatory controls contemplated by the prior Subcommittee findings and recommendations. The records of these prior hearings and reports made by the Senate have been given meticulous and concerned analysis by this Subcommittee, and have furnished immeasurable and invaluable assistance in the inquiry which led to S. 4.

The prior investigations by the Senate culminated with the enactment of the Welfare and Pension Plans Disclosure Act on August 28, 1958. Its main objective was to require welfare and pension benefit plans covering more than 25 employees to file a description of the plan and pertinent financial reports with the Department of Labor, and to furnish participants and beneficiaries, upon request, with a description of the terms of the pension plan and summary of financial data pertaining to the plan. On June 18, 1962, amendments became effective that furnished the Secretary of Labor with enforcement authority and the power to require bonding of plan personnel who handle plan funds or assets. Various criminal penalties were added to the Act to apply to embezzlement, bribery, and other criminal actions which threaten the security of the funds of private pension plans.

During the 89th Congress, the Senate Special Committee on Investigations, the Senate Finance Committee, and the Joint Economic Committee each held investigatory hearings on the subject of pension and welfare plans. The Senate Special Committee on Aging took up the subject in the 90th Congress, as part of a comprehensive study on Developments in Aging, and the House Subcommittee on Labor of the Education and Labor Committee held extensive hearings in the 91st and 92nd Congresses. During the 90th Congress, 2nd Session, the Senate Labor Subcommittee held further hearings on four bills which proposed additional amendments to the Welfare and Pension Plans Disclosure Act, and various other reforms of the welfare and private pension plan system. None of this legislation was enacted. During the 92nd Congress the Senate Labor Subcommittee under the mandate of successive Senate resolutions conducted sweeping

inquiries into the private pension system. These inquiries are described more fully in Section IV of this Report infra.

In the 93rd Congress the Senate Labor Subcommittee held legislative hearings on S. 4 on February 15 and 16, 1973 and both the House General Labor Subcommittee and the House Ways and Means Committee conducted hearings in February and March of 1973 on this subject. The House General Labor Subcommittee has issued two interim reports covering its activities to date.

EXECUTIVE BRANCH ACTIVITY

The Executive branch expressed interest in the private pension plans system when, in March, 1962, President John F. Kennedy appointed a Cabinet Committee on Corporate Pension Funds to conduct an investigation of and assessment of laws which govern private pension and other employee retirement income programs. Additionally, the Committee was directed to review legislation and administrative procedures applicable to pension plans. It reported its findings on January 15, 1965, to President Lyndon B. Johnson on various aspects and areas of private pensions which it believed required remedial action. The Presidential Committee concluded that:

there were no effective prescribed government standards governing welfare and pension plans;

vesting provisions were generally severe and restrictive, or nonexistent;

lack of an adequately comprehensive federal funding requirement plans terminated prematurely, with no insurance to provide for payment of accrued benefits to workers; and

employees could be immobilized by lack of portability of earned pension credits.

The President's Committee findings in effect revealed that defective private pension plans were failing to provide the elderly with adequate income to meet economic needs when their productivity had ended.

In a report to delegates attending the 1971 White House Conference on Aging, called by President Richard Nixon, the need for strengthening private pension plans was emphasized. The Employment and Retirement Section of that Conference reported that: "Legislation must be enacted as soon as possible requiring early vesting, adequate funding and portability of pensions and to provide for Federal insurance of pensions." They further state, "A National Pension Commission with a Governing Board of management, labor and public representatives should be established to encourage the expansion and the improvement of pension plans with particular reference to: flexible retirement ages, liberal (early) vesting and portability, adequate funding, more general coverage, and job redesign."

Moreover, in a report of a Special Task Force to the Secretary of Health, Education and Welfare, issued December, 1972 and entitled "Work in America" it was concluded that: "earlier vesting and portability would clearly reduce inequities in the existing private pension plans, and enhance the worker's ability to change occupations-to be freed from the job that keeps him only because it holds out the promise of economic security".

III. Major Issues

Although the need for legislative reform has been and continues to be widely acknowledged among all persons and sectors affected, governmental supervision of mandated and essential improvements has been resisted due to the belief that such legislation might impede plan growth. However, as the Committee has progressed in its inquiries and made public disclosures of its analysis and findings, it has been discerned that some resistance has become dissipated and various opponents have now acknowledged that such reforms will not deter the establishment or the improvement of pension plans.

The principal issues affecting the vital and basic needs for legislative reform involve consideration of the essential elements of pensions:

a. Vesting

One of the major private pension plan considerations centers around the concept of vesting. Vesting refers to the nonforfeitable right or interest which an employee participant acquires in the pension fund. The benefit credits may vest in the employee immediately, although in most cases participants do not become eligible for vesting of benefits until a stipulated age or period of service, or a combination of both, is attained.

Upon compliance with the basic requirements of age or service, many plans will grant their participants vested rights to those benefits earned to that time. However, should employment terminate prior to such time, the employee will recieve no benefits. Some pension plans, however, specify "graded" vesting formulas, whereby only a defined percentage of the accrued benefits earned will vest upon fulfillment of minimum requirements, and such percentage may increase periodically, as the employee continues in his employment and completes additional service.

Despite the recognized and acknowledged need for pension plans to provide for vesting of earned benefits, if pension promises are to be meaningful to workers, there is need for federal statutory requirements which will compel an employer to grant such vesting benefits. The difficulties and hardships resulting from nonexistent or inadequate plan provisions for vesting of benefits have been vividly established by the Subcommittee's studies and hearings.

It is noteworthy that in 1965, the President's Commission on Public Policy and Private Pensions, while acknowledging that there had been some improvement in private plans by increased adoption of vesting provisions, nonetheless found and recommended legislation to make minimum vesting provisions mandatory. That Commission concluded that "... the degree of retirement protection in private pension plans varies widely and in many cases remains quite inadequate." "(President's Committee on Corporate Pension Funds and Other Private Retirement and Welfare Programs, Public Policy and Private Pension Programs: A Report to the President on Private Employee Retirement Plans, January, 1965, p. 39).

The vesting concept recommended by the Cabinet Committee suggested preference for deferred graded vesting. It specifically favored a vesting formula under which 50 percent of an accrued pension would