Mr. DENT. Don't you have social security?

Mr. DIAMOND. We are not liable for underfunding under social security. Collectively, that is, perhaps, but not specifically.

Mr. DENT. Somebody else is liable for that, but don't start pointing fingers. Let me ask you this. If the employer happens to be a large contractor and assume they work on the Metro, here in Washington, when that job is completed, he, of course, quits his contribution and leaves the area, is he not in the hazardous position of having caused a partial termination?

Mr. JELTEMA. For 5 years, he is liable.

Mr. DENT. Before that, he can't leave without perhaps escrowing the amount of his liability?

Mr. ERLENBORN. It seems the larger employer becomes a pawn in this and may well be held hostage?

Mr. TAYLOR. Right.

Mr. ERLENBORN. I certainly hope that this subcommittee can come up with an answer to this instead of putting it off for some later time. It is a very pressing problem.

Mr. TAYLOR. It is.

Mr. WHITE. I would like to emphasize a point brought out by Mr. Georgine this morning when he said there have already been resignations of trustees from a number of health and welfare pension funds. Now, if that situation were to continue, it would disrupt the orderly process of existing local welfare funds, there would be chaos in our industry, and I don't know what the rules would be, then. What happens to the moneys already in these funds, if there are no, or two sets of, trustees under the collective bargaining act?

I think we are leading into a chaotic situation here to have this happen and it is conceivable it could happen when the employee representatives on these boards are protecting their many employers against the liability of this 30 percent underfunding penalty and so forth, then it would be proper for them to protect their employers by just disorganizing the board. We don't want to do that sort of thing. We are all for pension plans and health and welfare. But we certainly don't want to be burdened and become underwriters and financiers for health and welfare funds and pension funds.

Mr. ERLENBORN. Have you considered renegotiating, which would be a difficult task, I know, but renegotiating so that your pension funds are truly defined contribution or target-benefit plans?

Mr. TAYLOR. As a practical matter, it is impossible. Ten thousand local collective bargaining units, all with different expiration dates on them.

Mr. ERLENBORN. Let's just terminate and start all over again.

Mr. DIAMOND. Mr. Erlenborn, I have that situation now. I am attempting to specifically be a target pension benefit plan, instead of a defined pension benefit plan. The problem that has developed as the actuaries tell me is, "How do you handle the older employee?" There is not nearly enough in what would be that employee's account to provide the retirement for that employee. He has to, in effect, use the moneys that are brought in by the younger employees to fund his retirement. So, the transition from the defined benefit to targetbenefit or defined contribution is not contribution is not easy. We may able to have a dual funding sort of thing for an interim period. But

be

this has to be proposed, that the union will go along with it, and, frankly, why should they?

Mr. ERLENBORN. Well, maybe they want the industry to maintain some viability so they can have a job.

Mr. DIAMOND. A good answer.

Mr. TAYLOR. Even if they were willing to do it, it would take years to go through the whole cycle of all testimony agreements and I don't think they can do that to clear up what they have before the expiration dates.

Mr. COAN. I would like to apologize for us not coming up before. I asked some of my people, and we are a mixed bag of union and nonunion, who deal in the area, to apprise me as to where they saw problems. The problems they brought forth were the ones that Harry mentioned, including portability. I am a little embarrassed myself coming before this subcommittee and saying, "We now find a problem," and we do find a problem, but I hope it won't happen again. It did happen and it is unfortunate. I do feel we have to bring it to your attention now, rather than keeping it quiet, because it will hurt us in the future.

Mr. DENT. All of us are famous for taking problems and sometimes we even afford you with some answers.

Mr. JELTEMA. I think one of the reasons you didn't hear too much from management in the mechanics industry is because historically our National Trade Association generally headquartered here, is not party to any collective bargaining agreement or any trust that established any type of a welfare pension plan. It has been done on a local level. As a result, if there is any criticism to be brought back to our industry, it should come back to people like myself who come from various States involved in these types of programs, who were not involved in any discussions.

Mr. TAYLOR. We did appear, sir, on a number of occasions on this bill, particularly when it came out of the Senate Finance Committee. I think that, or maybe you think that, we should have recognized this potential liability for the transient people. It is pretty hard to look at-what was that bill, finally, about 650 pages?-and to recognize every potential thing, that one was pretty hard for us to understand, I think.

Mr. JELTEMA. I think, furthermore, we are not too smart or we wouldn't be in this business.

Mr. DENT. I was going to say the same abcut myself, here.

Gentlemen, I assure you the committee is very serious about trying to correct any errors that are in the legislation and you will get a fair and open hearing on the matter. Our staff, both minority and majority staff, will be glad to set up appointments so each of you can come in and discuss the matter.

Mr. TAYLOR. If they will call me, I will arrange for the panel and am eager to do it.

Mr. DENT. Thank you very kindly.

[Supplemental statement of the National Association of Home Builders follows:]

STATEMENT ON THE INVESTMENT OF PENSION FUNDS IN RESIDENTIAL REAL ESTATE MORTGAGES

During the last ten years, the assets of this nation's pension funds have more than doubled and are now at a level almost equal to the total assets of the savings and

loans. Pension funds for the small saver have to a great extent replaced the traditional savings account which the smaller saver used for retirement and protection in his later years. Thus, thrift institutions, which by law and custom have put the great bulk of their funds into residential mortgages are no longer receiving the same proportion of the savings of the people who at the same time look to these institutions for a mortgage loan when they buy a home.

Pension funds, however, since the early '60s have taken an investment course away from residential mortgages and into corporate equities. It is the opinion of NAHB that the very heavy investment of pension fund assets in corporate securities is not in the best interests of the beneficiaries of the pension funds, nor does it serve the social purposes for which the pension funds were created. Evidence of this is borne out each time Wall Street takes a turn for the worse and the stock market falls. Neither corporate equities nor corporate bonds provide the protection of principal that residential mortgages provide. However, the investment of pension fund assets into these corporate issues continues to increase. Attached are three tables detailing the investment patterns of pension fund assets for the years 1969 through 1974. The tables detail in both amount and percentages the distribution of pension fund investment for private non-insured pension funds, state and local government employee funds and a total of the private and government employee funds. You will note the drastic reduction in mortgage investment by the private pension funds from 4.12% in 1969 to 2.03% in 1974. Equally significant is the reduction of state and local government employee fund mortgage investment from 11.55% to 7.55% for the same period while the increase in total assets was over 80%. The investment of these funds in corporate shares is almost four times the 1969 level.

It is the belief of NAHB that the reduction in private pension fund assets during the past two years is a direct result of the losses these funds have suffered in the equity market.

A number of residential mortgage investments yielding higher overall returns than corporate equities are and have been available for pension fund investment. Examples are the Government National Mortgage Association's MortgageBacked Passed Through Securities and the Federal Home Loan Mortgage Corporation's Guaranteed Mortgage Certificates. These instruments are guaranteed to return both principal and interest, are freely traded in the open market and represent funds for housing in America.

NAHB believes the pension funds, which enjoy a very favorable tax position should own up to their social responsibilities to both the pension fund beneficiary by protecting his assets, and to the nation as a whole as a repository of the people's savings. It is for these reasons that we have urged that pension funds be required to invest a percentage of their assets in residential mortgages. One way this can be accomplished is by conditioning their continued eligibility for favored Federal tax treatment on such investment.

1 Corporate shares reflect market value, all other categories reflect book value.

Source: Securities and Exchange Commission, "Statistical Bulletin," April 1975; data compilation and analysis by NAHB Economics Department.

ASSETS OF STATE AND LOCAL GOVERNMENT EMPLOYEE RETIREMENT FUNDS, 1969-74

Source: Federal Reserve Board (1) "Flow of Funds Accounts 1965-73," September 1974, p. 35, (2) Unpublished data for 1974; data compilation and analysis by NAHB Economics Department.

TOTAL ASSETS OF PRIVATE NONINSURED PENSION FUNDS AND STATE AND LOCAL GOVERNMENT EMPLOYEE RETIREMENT FUNDS, 1969-74

Source: Federal Reserve Board (1) "Flow of Funds Accounts, 1965-73,''September 1974, p. 35, (2) Unpublished data for 1974; Securities and Exchange Commission, "Statistical Bulletin," April 1975; data compilation and analysis by NAHB Economics Department.

Mr. DENT. The next witness will be Mr. Bernard F. Curry, senior vice president of American Bankers Association, and Robert L. Bevan, associate federal legislative counsel, ABA.

You may proceed.

STATEMENT OF BERNARD F. CURRY, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION, SENIOR VICE PRESIDENT, MORGAN GUARANTY TRUST CO., AND ROBERT L. BEVAN, ASSOCIATE FEDERAL LEGISLATIVE COUNSEL, ABA.

Mr. CURRY. Thank you, sir.

Mr. Chairman, Congressman Erlenborn, and Mr. Sarasin, I am Bernard F. Curry, senior vice president of Morgan Guaranty Trust Co. of New York and chairman of the Employees' Trust Committee of the American Bankers Association and I am appearing today on behalf of the American Bankers Association. I am accompanied by Robert L. Bevan, associate federal legislative counsel of ABA.

I apologize for a certain hoarseness in my voice. I hope the committee will bear with me.

The ABA welcomes the opportunity to appear before the subcommittee today as it conducts oversight hearings on the Employee Retirement Income Security Act of 1974. The association, throughout the years in which the proposed legislation leading to ERISA was under consideration, approached the legislation principally from the viewpoint of a corporate trustee concerned with serving the participants and beneficiaries of a retirement plan fund under its management. In this capacity, we testified before this subcommittee and its predecessor on at least four occasions. We commend the subcommittee for its leadership role in developing ERISA. As our testimony will indicate we regret that the final legislation does not reflect more closely the decisions of this subcommittee.

One principal problem the association has witnessed in the wake of ERISA's enactment is what we believe to be the overreaction which has occurred in many quarters. The belief that ERISA requires revolutionary changes in the management and administration of plans and plan assets is found in Government as well as in the private sector. The association recognizes that there are many specific cases where substantial change will have to be made in the way plans and plan assets are handled and in all cases there will have to be some specific changes. But we believe that for the most part the responsibilities and liabilities of a pension fund trustee have not changed materially. Rather they have been articulated for all to see. The prudent man rule has been the standard against which trustee conduct was measured, except where investments might be even further limited to a legal list, and it is our understanding that Congress in section 404 (a) (1) (B) intended to give pension trustees even more flexibility than the common law rule of Harvard College v. Amory.

However, because of the overreactions to ERISA, the Labor Department and the Internal Revenue Service have been forced to devote substantial time and effort on issues which are not found in the language of the new law.

An example of this, we believe, is found in the area of indemnification. A cause celebre has been made over the question of whether