DISCOUNTING PRACTICE The administrator discounted the proceeds on life insurance policies when a member's beneficiary elected to receive a lump-sum payment rather than installment payments, and the trustees accepted this practice. The rules and regulations did not specifically authorize this practice. Furthermore, insurance notices issued to members did not state that the face amount of insurance would be paid in installments over a period of years or that the amount payable to the member's beneficiary at death would be the discounted value of such installments. A list of death-claim payments made by the Plan from its inception through March 31, 1972, shows that each beneficiary elected to receive a lump-sum payment and that the payments were discounted. The discount was computed on the basis of interest at the rate of 6 percent per year, compounded annually, with the first payment becoming due 1 year after death and with annual payments thereafter. This rate reduced the face amounts of insurance payable by 26.4 percent if death occurred on or before age 55 and by 15.8 percent if death occurred after age 55. In monetary terms, for each $1,000 of death benefits the life insurance company paid to the Plan when a member died on or before age 55, the member's beneficiary was paid $736 and the Plan retained $264. If death occurred after age 55, $842 was paid to the member's beneficiary and $158 was retained by the Plan. The booklet titled, "Your Severance Bonus Plan," which was intended to advise members of the benefits to which they were entitled, did not disclose that insurance proceeds were supposed to be paid in installments and that part of the proceeds would be retained by the Plan if a single-sum payment was made. The booklet states that certificates would be issued to members telling them what their insurance benefits would be in each case. As indicated above, however, the amount shown on the insurance certificate was the face amount of the insurance which was paid to the Plan rather than the amount payable to the member's beneficiary when a single-sum payment was elected. The trustees of an employee welfare fund are responsible in a fiduciary capacity for all money, property, or other assets which they receive, manage, disburse, or direct according to section 37-L of the New York Insurance Law. question how effectively the trustees have carried out their fiduciary responsibilities. We CHAPTER 3 WAS THE PLAN PROPERLY FUNDED? A test commonly used for determining the soundness of the financing of an employee benefit plan (such as the Local 295 Plan), is simply to determine whether the plan will be able to pay the benefits, provided under its terms in the future, assuming that the plan will not be modified. To pass this test, the plan's present value of expected future receipts, together with its existing assets, must equal or exceed the present value of benefits and expenses expected to be paid in the future. In addition, at no point in the future should the fund's cash position be projected as negative.. Applying the above criteria to the Plan, as it operated during the first 16 months, our calculations show that if the Plan were to have been terminated at November 30, 1973, the expiration date of the present union-management agree ments: --The Plan could not have been expected to have sufficient assets to pay benefits as they were determined during the first 16 months or to pay such benefits immediately upon its termination because earnings during the first 3 years would not have been sufficient to offset the expenditures made for insurance premiums, administrative expenses and benefit payments. --It would have taken from 15 to 20 years before the Plan's earnings would have put it, if terminated, in the position to immediately pay termination benefits (contributions made on member's behalf, subject to forfeiture conditions for noninception members). Although our projections based on the assumptions stated on pages 21 to 22 indicate that, if the Plan had been continued, it should have been in a position to pay benefits (as determined during the first 16 months of the Plan) as members terminated, we feel constrained to point out the following reservations. --The soundness of projections is dependent on how -- Plan documents were loosely worded and contradictory in some respects and our interpretations of Plan provisions were based largely on the actions of the trustees during the first year of the Plan's operation. --Future economic conditions can strongly affect the Our projections and comments should be considered in the light of these reservations. ASSUMPTIONS UNDERLYING OUR PROJECTIONS To project the monetary effect of transactions which could have been expected to take place in the future, it was necessary to make the following assumptions about the Plan's operations. Date of valuation -- December 1, 1970, the date the Plan became operational. Number of members--An estimated 1,332, inception members. Ages of members--The age distribution of new members Employer contribution (per member) --$15 per week during Mortality rate--1960 Commissioners Standard Group Mortality Table. Interest earnings--5 percent per annum. Insurance premium rates--Rates charged the Plan by Executive Life. Cash value of policies--Estimates based on whole life policies issued on Plan members by Executive Life. Face amounts of insurance policies-- Based on the coverage described on pages 8 to 9. Administrative expenses--Estimates were developed based on the actual expenses incurred by the Plan during its first year of operation. (See pages 37 to 38.) Rates of terminations--On the basis of experience during the first 7 months of operation, estimates were developed of the rate at which members would terminate from the Plan. Because the data available on the Plan's termination experience was extremely limited, we developed two sets of termination rates. Scale A assumes a higher rate of termination which would be unfavorable to the Plan because early terminations of inception members (except perhaps by death) will result in Plan losses. Scale B assumes a lower rate of terminations and therefore presents a less conservative view of the Plan's financial position. (Termination rates used are detailed in Appendix II.) Benefits--Our projections assume that payments will continue to be made on the same basis as during the first 16 months of the Plan. |