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MEMORANDUM RE: UNION LOCAL 295

Group Premium Level Term v. Ordinary Life Annual premium for term..

$258, 662. 76 Annual premium for term per month..

21, 555. 23 Ordinary life annual premium.

505, 125, 00 Ordinary life monthly premium.

42, 093. 75 The following is a twenty (20) year comparison at age 33, between level group term and ordinary life:

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To continue the policy at age 53, the premium would be $1,015.68 to convert to ordinary life. However, this would not create equity in the converted policy until the end of the year two.

Attached herewith is a census as to the ages and amounts of insurance establishing the term cost of $258,662.76.

Under the ordinary life contract, it is safe to assume that we would recover approximately 85 to 90% of all premiums via cash value build-up so that we would recover approximately 847 to 9 million in equity against no equity in term. Notwithstanding the fact that we would arrive at a net cost of approximately 1 to 14 million in lieu of $5,100,000 in cost for term and an anticipated conversion rate that would, in effect, make it impossible for any rank-and-file to be able to continue his policy at severance.

Mr. Ostrer's presentation was misleading. In the case of term insurance the trustees themselves maintain the savings account for the difference of the whole life premium less the term premium, whereas, under whole life insurance, the insurance company maintains the savings (the "cash value”). If the trustees were to deposit the difference between the whole life premium and the term premium in a 5% interest bearing account, they would accumulate savings comparable to the cash values under the whole life contracts, at the end of a twenty year period.

(For Local 295 membership, the use of ordinary whole life insurance contracts is seriously questionable in certain respects.]

The high insurance costs involved in early terminations under whole life policies are highly significant for this plan because the annual turnover rate in the Local 295 plan membership appears to be approximately 15%. Under the fund's insurance policies there is very little cash value during the early years, in fact for those members under 25 there is no cash value until the fourth year. If a member joins the plan at age twenty four and terminates after three years, the fund will have expended approximately $2,270.00 in premiums and the policy will have no cash value.

Another serious deficiency in the present plan is the following:

An eligible member who joins the plan at age 33 should have $48,000 of insurance. Should the member after two years of coverage be laid off due to a temporary period of unemployment for a period in excess of three months the insurance on his life would be cancelled. When he returns to work and he is subsequently eligible for insurance, new policies would be purchased and since the member is three years older the new coverage would be reduced to $43,500. Naturally if the member had been in the plan for a longer period before the layoff the insurance would be reduced to a larger extent. The policies which after the two years in force would have started accruing cash values would have been cancelled and the new policies would have to be in effect for two years before any cash values would

Since the initial cost of life insurance policies are charged against the cash value increases in the earlier policy years, the replacement of an old policy by a new one results in the policyholder sustaining the burden of these costs twice.

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It is quite clear that the fund and the member will lose when new policies are issued. The only party that gains from the new policy transaction is the agent who again is paid 90% of the first year premium in commission and allowance.

{The scale of payments to the insurance agent is unconscionably high and in gross contravention of the Code of Ethical Practices; the fund trustees, in failing to demand adherence to the commission scales in the Code, have demonstrated serious lack of fiduciary responsibility.]

The Code of Ethical Practices was adopted by the National Association of Insurance Commissioners in 1957 to deal with commission and other insurance abuses found during a comprehensive investigation by the New York Insurance Department in 1954-1956. It has immeasurably improved the administration of welfare funds subject to registration under Article 3A of the Insurance Law.

The Code applies to permanent forms of life insurance sold on a group basis. The purpose of the Code is clearly evident in the following quotations from the Code:

"The basic purpose of this Code is to prevent a recurrence of insurance abuses.”'

"The Code of Ethical Practices, adopted by the National Association of Insurance Commissioners, is intended to serve as a declaration of applicable principles in the proper conduct of insuring welfare and pension funds.

"Excessive commissions, fees and other allowances tend to reduce the level of benefits paid to beneficiaries of welfare and pension funds. Consequently, it is in the best interest of the public and the beneficiaries of such funds that the commissions, fees and other allowances be reasonable and not excessive.”

The permissible commission rates are introduced in the Code as follows:

"The table following illustrates on the basis of the effective rate for the indicated premium volume a generally accepted range of commission rates, first-year and renewal averaged over a ten-year commission-paying period, to insurance agents and brokers, derived from schedules currently in use on group life and group accident and sickness policies, which are considered to be reasonable and not excessive." After the display of commission rates, the Code provides as follows:

Any commission rate schedule used by an insurer for welfare funds is considered unreasonable and excessive if it provides for the payment of commission in excess of the range shown in the preceding table.”

At the August 24, 1971 meeting held at this Department with representatives of the Fund, the Department voiced criticism of the plan; an analysis was presented indicating rates of commission, payable under the insurance arrangement, that are unconscionably high, in contravention of the Code of Ethical Practices, and detrimental to the interests of the trust fund.

The commission payable in accordance with the Code of Ethical Practices for the first two policy years would be approximately $27,600, calculated as fillows:

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In contrast, the commissions payable by the carriers to Dina Gelman for the first two policy years will be approximately $762,500 or 27 times the commissions payable under the code, calculated as follows:

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If commission had been made payable not at the unbelieveably high rates currently in effect but at the range of rates contemplated in the Code of Ethical Practices, the savings in commissions could have been of great financial benefit to the trust fund. Such savings could have been passed on the fund in the form of lower premiums or, the contracts could have been rewritten on a participating basis so the fund could receive the savings as dividends.

The trustees, having full knowledge that the 50% first year commissions and the high renewal commissions payable by Executive Life Insurance Company were excessive and in contravention of the Code of Ethical Practices, took no firm action to bring about reduction of the commission rates.

When the insurance amount was doubled in conjunction with the contribution rate increase from $15 per week per man to $30 effective December 1, 1971, the new policies representing the additional amount were placed with the Trans World Insurance Company under an aggregated 90% first year commission and allowances. The trustees at the time of the placement of the additional insurance once again took no action to effectuate reasonable commission rates.

CONCLUSIONS REGARDING MEMBER BENEFITS

As indicated in this section, the plan, its administration, and its acceptance by the trustees are subject to serious criticism.

(1) Plan provisions have been applied erroneously resulting in overpayments to terminated members in substantial amounts (Page 3–5).

(2) Members have not consented in writing to insurance coverage on their lives (Page 5–6).

(3) There are no written formal agreements between the fund and the insurance carriers setting forth eligibility for coverage (Page 6).

(4) Death benefits have been overpaid because of failure to carry out plan provisions (Page 6–7).

(5a). The trustees contrary to the Plan and with questionable legality withhold a part of the insurance proceeds upon death of a member (Page 7-8).

(5b) Apparently even the designated beneficiaries of those members who terminated prior to death and have acknowledged ownership of their policies are denied the full proceeds of their policies YPage 8).

(6a) The trustees allow terminated members the option of returning their cash benefits and reentering the plan as inception members, which is contrary to the plan (Page 9).

(6b) The amount of insurance actually purchased for some members is not in accordance with the plan (Page 9).

(66) The plan and the trust agreement are in conflict on the point of providing members with an annuity benefit (Page 10).

(7) The insurance contract was in actual fact solicited by Louis Ostrer who had lost his New York agent's license for misconduct (Page 10).

(8) Presentation by Louis C. Ostrer to the trustees was misleading (Page 11-14).

(9) For Local 295 members, the use of ordinary whole life insurance contracts is seriously questionable in certain respects (Page 14).

(10) The scale of payments to the insurance agent is unconscionably bigh and in gross contravention of the Code of Ethical Practices; the fund trustees, in failing to demand adherence to the commission scales in the Code, have demonstrated serious lack of fiduciary responsibility (Page 16).

It is recommended that appropriate action be taken by this Department and the trustees for the protection of fund members.

INFORMATION TO MEMBERS

Fund records and procedures indicate that the following distributions were made:

(1) _Annual Reports to members and contributing employers in accordance with Department Regulation 36.

(2) Descriptive booklets to members.
(3) Certificates of insurance to members.

(4) Individual reports to members indicating the amount of contributions credited to the member's account.

The descriptive booklet distributed to the members was found to be inadequate in that it failed to notify the member of his rights in the event of total and permanent disability.

As indicated under Member Benefits in this report, the actual practice in administering the plan differs from the wording of the plan; examples are the treatment accorded terminations and death benefits.

In view of the omission of significant material from the booklet and the misapplication of rules by the trustees, it is probable that the members did not understand the plan when they ratified it on December 6, 1970.

It is essential that corrective action be taken.

INCOME AND OUTGO

The fund's income and outgo statement for the seven month period ended June 30, 1971 follows: Income: Employer contributions.

$586, 065. 00 Total income..

586, 065. 00 Outgo: Premiums paid to insurance company

299, 047. 45 Direct benefits

4, 065. 00 General expenses

70, 848. 17 Total outgo...

373, 960. 62 Fund balance....

212, 104. 38

General expenses consist of the following:
Salaries.

2, 800, 00 Legal.

10, 500.00 Audit.

3, 150.00 Rent.

1, 079, 40 Taxes.

234. 85 Telephone

202. 03 Meeting expense

997, 03 Administrators fee...

50, 000.00 Miscellaneous expense.

1, 884. 86 Total.----

70, 848. 17 These expenses represented the first seven months of the fund's operation. As of July 1, 1972 the annual expenses of the fund were running at the rate of $124,000 and consisted of the following: Salaries..

$9, 000 Legal

18, 000 Audit.

9, 000 Rent..

4, 317 Taxes.

900 Fringe benefits...

2, 860 Administrator's fee..

75, 000 Miscellaneous expense.

5, 000 Total.---

124, 077 A count as of June 1, 1972 indicated there were 1329 covered members. Therefore, current annual administrative expenses are at the rate of $93,36 per member. Based on statistics compiled by the Department, the average annual administrative expenses per member in 1970 for 93 registered pension funds with contributions in excess of $1,000,000 was $20.86. The annual administrative expenses per member for this fund are currently at the rate of $93.36, four and one half times the average. It is recommended that the total operating expenses of the fund be made to approach, within reason, the average of funds of similar size, and that the trustees take prompt action to resolve on such economies as will bring about that result. Administrator's fee

Fringe Programs, Inc., is the fund's administrator. Dina Gelman, who is also the agent receiving commissions on the fund's insurance program, is the sole stockholder of Fringe Programs Inc. The administration fee for the first year of operation was $86,877.90.

It is noted that at the initial trustees' meeting held on January 21, 1971 Mr. Ostrer, representing Fringe Programs Inc., indicated that charges for the administrative service by Fringe Programs Inc. for plan administration would be approximately 94¢ per member per month. Based on Mr. Ostrer's figure, annual administration charges should have been approximately $15,000. Actual charges have exceeded his original quote by more than $70,000 or 542 times.

The trustees paid the $86,877.90 first year administration fee and continue to pay Fringe Programs, Inc. an administration fee which is presently running at the annual rate of $75,000.

The duties performed by Fringe Programs, Inc., duplicate in some areas the work performed by the fund's employee.

It is recommended that the trustees evaluate the functions performed by Fringe Programs, Inc., with the view of having these functions performed by fund personnel at the fund's premises or by another service organization, at substantially reduced costs. Legal

The fund retains the services of two attorneys: Herbert Simon and Haskell Wolf, at an annual fee of $9,000 each for legal services. In view of the fund's high administrative cost per member it is recommended that reconsideration be given to the need for retaining more than one attorney on a continuing basis.

BALANCE SHEET

The fund's balance sheet as of June 30, 1971 follows:
Assets:

Cash in bank.
Contributions receivable..
Prepaid expenses --
Furniture and equipment.-

$223, 061. 35 71, 820.00

462, 35 1, 744. 09

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ASSETS

Investment powers

In accordance with the provisions of the trust agreement, the trustees may make investments in their sole discretion. Cash in bank

This item consisted of $223,061.35 in a checking account with the Central State Bank of New York. All withdrawals require the signatures of two trustees. The balance was confirmed by direct correspondence with the bank and reconciled with fund records.

LIABILITIES AND FUNDS Employer contributions refundable

The fund had received $600 contributions from the National Association For Air Freight to cover J. Cossu and Haskell Wolf under the plan. There was no provision in the governing documents authorizing coverage for these persons and the contributions were refunded to the National Association For Air Freight on November 1, 1971.

GENERAL CONCLUSION

As set forth under the various sections of this report, the trustees have acted in a manner that demonstrates incompetence and a lack of fiduciary responsibility.

It is recommended that this Department act to protect the interests of covered members. Respectfully submitted.

MURRAY ZAROFF, Examiner.

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