The Permanent Subcommittee on Investigations is presently conducting a preliminary investigation into labor-management activities with particular regard to a recent concept in employee benefit plans: namely, severance trust plans which are assumed to supplement existing employer group pension plans.

The investigation is presently centered on Teamster Local 295 of New York City, whose 1,300 membership is engaged in the trucking of air freight at John F. Kennedy Airport. We are also concerned in the instant case with the propriety of some of the insurance practices within the severance trust plan.

The inquiry necessarily requires an actuarial study of the Local's severance trust plan to determine whether the plan is properly funded and whether, in fact, the plan adequately inures to the benefit of the rank and file members. These studies require an expertise not available within the Subcommittee staff but which I understand is within the capability of your office.

Accordingly, it is requested that the General Accounting Office assist in this investigation by making such studies and reporting their findings to the Subcommittee. A more detailed description of the Subcommittee's requirements and access to the material upon which they would be predicated will be made available to your representatives by Subcommittee staff members.

In the event the matter is brought to hearings at some future date, it is likely that you would be requested to present testimony of those findings to the Subcommittee.

43

APPENDIX I

Honorable Elmer B. Staats

December 28, 1971

My sincerest thanks to you for your cooperation not only in this request but also for all the past help and cooperation to this Subcommittee.

Sincerely yours,

John Jms lellan

John L. McClellan

Chairman

Honorable Elmer B. Staats
The Comptroller General
of the United States

44

71-542 O-76-8

ROBERT E. DUNNE.

APPENDIX VI

STATE OF NEW YORK INSURANCE DEPARTMENT,

WELFARE FUND BUREAU,
New York, N.Y., June 30, 1971.

Assistant Counsel U.S. Senate Permanent Subcommittee on Investigations, Federal Building, New York, N.Y.

Dear Mr. DuNNE: Enclosed herewith is a report on the interview with Louis Ostrer held May 18, 1971, together with comments on the benefit plan of the subject trust fund.

Please advise if we may be of further help in this matter.

Very truly yours,

LAWRENCE M. HYMAN, Supervising Insurance Examiner. GEORGE PERLA,

Senior Insurance Examiner.

JUNE 25, 1971.

SEVERANCE BENEFIT PLAN OF LOCAL 295 INTERNATIONAL BROTHERHOOD OF

TEAMSTERS

On Tuesday, May 18, 1971, at 11:00 A.M. the following individuals met with Mr. Louis Ostrer at his offices at 377 Fifth Avenue, New York, N.Y.:

Robert E. Dunne, Assistant Counsel, United States Senate Committee on Government Operations, Permanent Subcommittee on Investigations, New York, N. Y.

Herbert L. Feay, Assistant Director and Actuary, U.S. General Accounting Office, Washington, D.C.

Lawrence M. Hyman, Supervisory Examiner, Life Bureau, State of New York Insurance Department, New York, N.Y.

George Perla, Senior Insurance Examiner Welfare, Plan Bureau, State of New York Insurance Department, New York, N.Y.

The principal purpose of the meeting was to secure Mr. Ostrer's explanation of the operations of the Severance Benefit Plan of Local 295. This Plan was established for Members of Local 295 as a result of a Collective bargaining agreement between the union and the group of employers for the air freight ground transportation and handling for J. F. Kennedy airport in New York City.

During the course of the interview, Mr. Ostrer explained provisions and operations of the Plan. His explanations about the Plan are summarized in the next section of this Report. The second Section following this introductory statement contains comment on statements and remarks of Mr. Ostrer.

SUMMARY OF EXPLANATIONS OF MR. OSTRER

The Severance Benefit Plan of Local 295 has been submitted to the Internal Revenue Service for approval as a pension plan with an effective date of December 1, 1970. The benefits of this Severance Plan are assumed to supplement the pension benefits of the Local 295 Employer Group Pension Fund which was established in 1952 and which received tax exemption from the Internal Revenue Service.

The first employer payments to the Severance Plan were made in January 1971. This Plan is classified as a pension Plan in accordance with the requirements of IRS for previously approved severance benefits plans granting similar benefits. IRS approval of Local 295 Severance Benefit Plan as a pension plan for income tax purposes is expected.

Fringe Programs, Inc., is the administrator for this Plan. The administrator will receive fees for administering the Plan. The amounts of and the frequency of the fees have not yet been determined and no fees have been paid to date. Income of the Plan

The employers included in the bargaining agreement must make payments to the Plan for each Union Member employed. The payments are determined as an amount per week for each Member. The payments for each Member are on the bases of $15 per week during the first Plan year, $30 per week during the second Plan year, and $40 per week for the third Plan year. Assuming approximately 1300 Union Members employed on the average for 50 weeks each per year, the

total income from the payments of the employers will be approximately one million dollars in the first year, two million dollars in the second year, and 2.6 million dollars in the third year.

The Plan will have income from that portion of the assets that is invested in interest-bearing securities. It is expected that the funds available for investment will be invested at an average rate of about 7 percent per year compounded annually.

Two other sources of income will be:

(1) Forfeitures of accumulations by Members employed after the effective date of the Plan who terminate before completing five years of covered employment.

(2) Excess of the amounts of insurance collected from the insurance companies over the value of the death benefits paid to beneficiaries.

Disbursements of the Plan

Practically half of the payments by employers will be used to provide insurance. The amount to be used for insurance is 49.98% of the payments on behalf of Members eligible for insurance. This percentage was selected to meet the requirements of IRS that less than half the payments be used to pay insurance premiums. After receiving payments of death claims from the insurance company, the Plan will disburse death benefit payments to the beneficiaries. Since the value of these death benefit payments is less than the face amount of insurance received from the insurance company, the Plan has a net gain from each claim at the time of death.

Expenses of administration of the Plan (including fees to Fringe Programs, Inc.) will be paid from payments received from the employers.

The amounts of the employer payments after deducting insurance premiums and administrative expenses are to be used to secure high grade bonds (AAA classification) that will have an average investment return of 7% per year compounded annually. Presumably the costs of buying the bonds (including any fees for investment advice) will be taken from the remaining gross income available so that the bonds purchased will represent the net amount available for investment after deduction of initial investment expenses.

Separate memorandum accounts will be maintained for each Member in the Plan showing the employer payments made for him, the amounts paid for insurance premiums, the amounts allocated to the funds for investment, and the interest allowed annually by the Plan Trustees.

Interest allocated to the Member Accounts will be a reduction in the investment income to the Plan from the separate fund. The Plan will have a net gain from investment income if the interest allocated to the individual accounts is less than the interest earned on the invested assets.

When-ever a Union Member is terminated as a participant in the Plan, the payments provided by the Plan are paid to him or to his beneficiary.

Assets of the Plan

The assets of the Plan presumably will be the investments purchased, cash on hand, and the cash values of the insurance policies purchased on the lives of Members.

Liabilities of the Plan

There was no discussion of the determination of liabilities of the Plan except a general statement that the solvency of the Plan had been demonstrated by an actuarial valuation using reasonable standards. Mr. Ostrer did not have any such valuation in his office that he could show us.

Life Insurance

The life insurance purchased on the life of each Member is ordinary levelpremium whole-life insurance provided by separate individual policies. The premiums are payable monthly for life. All Members in the working force as of the effective date of the Fund are eligible for insurance as of that date. New Members after this effective date become eligible for insurance on the first quarterly enrollment date following six months of employment for which an employer makes payments to the Plan. The enrollment months are January, April, July and October.

The life insurance granted by the individual whole life policies will be provided on a guaranteed issue underwriting basis without any evidence of insurability. The face amount of insurance for each policy will be level. The amount of coverage will depend on the attained age of the member at the time the policy is issued.