4.

5.

Schiff assumed a 6-percent return on the Plan's
investments. Our projection anticipates a
5-percent return. The only interest-bearing assets
held by the Plan during the first year were savings

accounts.

Schiff used termination rates of 15 percent for members below age 35 and 10 percent for members aged 35 and above. Our projections used graduated rates varying by attained ages.

CHAPTER 4

DID THE PLAN ADEQUATELY INURE

TO THE BENEFIT OF THE MEMBERS?

In our opinion, the benefits provided to the members would not have been commensurate with the costs of the Plan. Using data published by the New York Insurance Department on jointly administered welfare and pension plans, we conclude that a plan the size of the Local 295 should return--in terms of present values-- benefits to employees of about 95 percent of the contributions made to the Plan. By contrast, our analysis showed that the Plan would have returned only between 72 and 83 percent of the employer contributions based on present values.

In our opinion, Plan trustees made a number of highly questionable decisions regarding the Plan and its administration. The trustees provided a form of life insurance as part of the benefit package which was much more costly than that normally obtained for a plan of this size. As a result, substantial portions of the funds contributed to the Plan by the employers were applied to insurance commissions that could have been applied to employee benefits if group insurance had been obtained.

Also, the administrative costs incurred by the trustees and the contractor employed to administer the Plan were considerably above the average costs for a plan of this type.

COMPARATIVE FINANCIAL RESULTS

FOR TERMINATING MEMBERS

The table below compares the present values of the contributions made by employers with the benefit payments that were expected to have been made to members under the Plan. The results are stated as percentages of the contributions and are based on the assumptions described on pages 21 and 22.

Using these assumptions, the present values of future benefits and future contributions were calculated (as of the valuation date) for the inception members. In determining the present values the assumption was made that no member

71-542 O 76-7

would continue employment after age 65. The same procedures were followed in securing figures for noninception members. However, the inception members were assumed to receive the some benefits as noninception members.

The loss to members is merely the difference in the present value of what is paid on their behalf and what they receive. The difference is the result of (1) the insurance premiums having a greater present value than expected insurance benefits and (2) the administrative expenses incurred by the Plan.

The comparison in the table below is made as if (1) employer contributions continued at $40 per week and (2) the employee benefit structure were not changed. While this comparison shows that benefits to members vary between 72 and 83 percent of employer contributions, consideration must also be given to the ultimate gain or loss to the Plan.

Our projections of contributions and expenses showed that the ultimate effect on the Plan--stated as percentages of contributions--would be as follows:

In the normal plan it would be expected that, in the long run, either the benefit structure or the employer contribution rate would be adjusted to compensate for the gains or losses from operations.

ALTERNATIVE METHODS OF FINANCING PLAN

As previously discussed in Chapter 2, the trustees purchased individual whole-life insurance policies for Local 295 members. For a plan this size, we believe that other less expensive methods of providing benefits to members would have been more appropriate. Although it is not feasible to show a full cost-benefit analysis of alternative financing procedures which could have been used by the Plan, a brief discussion of the following alternative methods is presented.

-- Retention of all contributions for severance benefits.

--Group term insurance with a separate investment fund.

--Self-insurance.

--Group permanent insurance with a separate investment fund.

Retention of all contributions

for severance benefits

The collective bargaining agreement provides for a severance trust fund but does not require that any form of life insurance coverage be provided. All contributions, after deducting expenses, could have been retained and invested by the trustees, and eventually used to pay severance benefits.

The following table demonstrates the benefits that could be provided by such a plan for a 25-year-old inception employee and compares those benefits with the value of benefits provided under the original plan. The mortality rate and interest assumptions are the same as those of our previous calculations--1960 Commissioners Standard Group Mortality Table and 5-percent interest compounded annually. The table shows that retaining all contributions for severance benefits would produce greater termination benefits to a terminating member than the original benefit structure, if he remained in the Plan for more than 4 years.