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The amount of insurance coverage could be set on a more logical basis (e.g., fixed amounts for all members).
If the Plan were self-insured, the trustees would pay no premiums to insurance companies, but they would be responsible for paying claims directly from Plan moneys. would be necessary for the Plan to make an actuarial analysis to determine the level of benefits that could be paid. Since contributions are much greater than expected death benefits, the Plan appears to be in an excellent position to withstand possible variations in mortality rates.
Our analyses show that the Plan's financial position would be substantially improved if self-insurance procedures were adopted. Working from the same set of assumptions as those presented on pages 21 and 22 with one exception--the administrative cost of self-insurance is assumed to be $25 per member per year--we projected the results of the Plan's operations under self-insurance, as follows.
These gains under self-insurance would save the Plan about 18 percent of contributions with which to increase benefits, reduce contributions, or both. In addition to the greater risk involved under self-insurance, the main disadvantage would be the difficulty in permitting members to continue insurance after severance,
Group permanent insurance with separate investment fund
Another modification that is possible which would not change the Plan as radically as some of the other alternatives would be to use a level-premium group permanent contract with a separate investment fund. Under levelpremium group permanent plans, a level premium is determined for each participant using such forms of insurance as life paid up at 65, endowment, or whole life. Therefore, substituting a group permanent contract for individual wholelife policies would not affect many features of the Plan. The same form of insurance (whole life) could be provided, and the trustees could return contributions without interest in accordance with current practice. The size of the separate investment fund would be increased if the insurance premiums are reduced. A reduction in insurance premiums is likely because expenses (commission and other) would be substantially reduced, and mortality rates would be unaffected. The larger the membership turnover of Local 295, the larger would be the expense savings. Even a small savings in premium could have had a far-reaching effect on the status of the fund.
HIGH ADMINISTRATIVE COSTS INCURRED BY PLAN
The Plan's administrative costs for the first Plan year (December 1, 1970, through November 30, 1971) were $125,381, of which $86,877 represented charges of the former Plan administrator.
The $86,877 fee payable to the former administrator represented an annual cost of about $ 65 per member. This cost was substantially greater than the estimate of $0.94 per member a month ($11.28 per year) made by a representative of the former administrator during the January 21, 1971, Board of Trustees meeting.
Although there was no formal agreement between the trustees and former administrator, the invoice from the former administrator dated January 10, 1972, addressed to the trustees, attached a memorandum which gave the following formula for determining the fee payable to the administrator, based on employer contributions:
In addition to the fee determined through this formula, a charge of $0.40 was made for each item of mail out, turned mail, termination, beneficiary change, employer change, address change, name change, and etc. The total charge of $86,877 was made up of $80,893, determined on the percentagefee basis, and $5,984, determined on the per item charge.
The Plan's financial report shows that other operating costs of $38,504 were incurred in the first year, in addition to the costs paid to the former administrator.
These costs increased the Plan's total administrative costs to $125,381 and the costs per member to about $94.
Information provided by the New York State Insurance Department for expenses incurred by New York welfare and pension funds jointly administered by union and management show that administrative costs in 1970 averaged about $25 per member for welfare plans and about $20 per member for pension plans. Comparing these average costs with the Plan's cost shows that the Plan was subject to very heavy administrative charges with costs per member being about four times as great as costs for other funds in New York.
The Plan was not originally formulated or administered in the best interest of the members.
--Too small a proportion of the Plan's income was
being returned to the members.
--Other funding media existed which would have enabled
the trustees to reduce expenses and therefore either pay higher benefits to the members or reduce contributions required from the employers.
It appears that it is the trustees' primary responsibility to insure the interests of the employees and that .the trustees did not have sufficient knowledge to design their own plan or to effectively evaluate the plan which was developed for them. In early 1973 the trustees dismissed the administrator and made the following changes in the Plan.
--of the $40 weekly contributions to be made by the
employers for each member, only $4 will be applied to life insurance.
A separate insurance fund was established.
The balance, or $36, will go into a
in the future.
March 1, 1973, was purchased and the individual
whole-life policies were dropped.
covered for $30,000 plus accidental death and
--No agent or broker was involved in the purchase of
the group term insurance policy, thereby eliminating