4. MINIMUM TEN YEAR FUNDING FOR EMPLOYEES HIRED WITHIN TEN YEARS OF RETIREMENT AND FOR EMPLOYEES RECEIVING BENEFIT INCREASES WITHIN TEN YEARS OF RETIREMENT

For many years life insurance companies have been issuing retirement income policies and retirement annuity policies during the ten years immediately preceding an individual's normal retirement age. These policies typically require premiums to be paid over a fixed ten year period. The result of this customary practice has been, of course, that premium payments extend beyond the actual retirement of the individual in question. Customarily, such policies provide for the termination of all premiums in the event that the participant dies after retirement but before all premiums are paid. Likewise, if due to some reason such as increased earnings, the retirement benefits of the individual were increased within ten years of retirement, then premiums for this increased retirement benefit would be funded over the ten year period beginning with such increase and obviously would also extend beyond actual retirement. This practice has a long history and appears to have operated in the best interests of plan participants. Allowing funding in such cases over a ten year period provides a reasonable period for funding insured retirement benefits for an older individual and consequently tends to restrain an employer from being totally unwilling to provide retirement benefits or extra retirement benefits to those within ten years of retirement. If funding is required within a shorter period than ten years, e.g., three years, the employer is likely to feel that this greatly increased cost and cash burden is unacceptable. If so, the employee will be denied benefits that he might otherwise have received if a reasonable funding period had been allowed.

Under ERISA, as discussed before, an exception from the funding requirements is provided for insurance contract plans. One of the requirements for an insurance contract plan is that the premium payments extend not later than the retirement age for the individual. 15 This requirement is entirely reasonable for the average plan participant. However, to require this for those within ten years of retirement places an extra burden on the employer that may result in a failure to provide benefits for those employees.16 If the plan does not qualify as an insurance contract plan and is subject to the funding requirements, it would likewise be true that under the general operation of the funding rules the premiums would have to be paid in full by the individual's retirement.17 As a consequence of this it is felt that it would be appropriate and in the best interest of especially the older employees if ERISA permitted employers, in the case of employees hired within ten years of retirement or who receive salary increases within ten years of retirement, to have a minimum period of ten years in which to fund any benefits provided for those employees or any extra benefits provided due to salary increases. This modification could be made by modifying the requirements for an insurance contract plan in accordance with this suggestion and in accordance with the suggestion previously outlined.

5. ENTRY DATES FOR EMPLOYEES BECOMING ELIGIBLE TO PARTICIPATE

One of the particularly important provisions of ERISA was to specify new minimum age and year of service participation standards for virtually all employee retirement plans. Under these provisions, an employee must be allowed to participate after the later of one year of service or reaching age 25.18 In addition, ERISA provides that, once an employee has satisfied these requirements, he must actually begin participation no later than the earlier of (1) the first day of the first plan year beginning after the satisfaction of the eligibility requirements or (2) six months after the satisfaction of these eligibility standards, unless the employee leaves the employer's service before that time.19 In effect, these provisions add the new requirement that participation must actually commence no later than six months from the time on which the employee satisfies the new minimum participation standards.

For those employers wishing to utilize the one year of service eligibility provision, the new requirement that actual participation begin in no more than six

15 Section 301(b) (2), ERISA; Section 412(i) (2), Internal Revenue Code.

16 While ERISA generally prohibits maximum age provisions, for pension plan exclusion of employees within five years of retirement age is permissible. See Section 202(a)(2), ERISA Section 410 (a) (2), Internal Revenue Code.

17 Normal costs must be currently met. See Section 302(a), ERISA; Section 412(b)(2), Internal Revenue Code.

18 See Section 202 (a), ERISA; Section 410 (a), Internal Revenue Code.

19 See Section 202(a) (4), ERISA; Section 410(a)(4), Internal Revenue Code.

months produces considerable administrative complexity. For employers utilizing the maximum eligibility requirement two basic alternatives will be available with regard to entry dates. The employer can have one normal entry date, e.g., the first day of the plan year, coupled with a floating entry date, e.g., six months after completion of the eligibility requirement. As an alternative, the employer can have two normal entry dates six months apart.

The first alternative creates considerable administrative difficulty. Keeping track of individual hiring dates for various employees on a monthly or daily basis creates an additional and unwelcomed plan cost. In addition, an allocational problem will exist with regard to whether the employee should be given credit for a full year's participation or only a fraction of a year's participation in the year eligibility begins. If given credit for a full year's participation then some difficulty may exist with regard to discrimination against the other employees of the plan. If only a fractional year contribution is allocated to the participant then considerable administrative complexity is created in determining how much to allocate to the participant, especially if the participant's earnings have changed during the course of the year in question.

Using the second alternative, i.e., dual entry dates six months apart, also creates administrative difficulty. The administrative burden of having dual entry dates greatly increases the record-keeping and other administrative requirements in connection with eligibility. The trustee, in addition to having to make the allocational and benefit accrual adjustments previously discussed, must consider employee information twice as often and, if the plan is insured, arrange for insurance with different starting dates.

The apparent purpose of the maximum six month waiting period requirement was to insure that employees did not have a long waiting period after they had satisfied eligibility provisions. That is, apparently (although the Conference Committee Report does not discuss this provision) it was felt that an individual who qualifies for eligibility in a plan in February should not have to wait until the following January to actually begin his participation. While it is not disputed that this is unfortunate the solution adopted in ERISA creates worse problems than it solves.

In aggregate, the average employee will probably not have to wait more than six months after completing the eligibility requirements before beginning participation anyway. Normally, employees are hired throughout the year without regard to when their participation under a company's retirement plan will commence. Consequently, while some individuals may have to wait more than six months to begin participation probably an equal number of employees will begin participation in less than six months. On the average it is highly likely that most employees will begin participation in approximately six months after they meet the eligibility requirements whether the provision contained in ERISA is retained in the law or not. At any rate even under the provisions of ERISA the net effect is only to accelerate the actual participation date of some employees by a few months.

On balance the small benefit derived from preventing any employees from waiting a few extra months to begin actual participation is greatly outweighed by the administrative burden imposed upon employers and plan trustees by virtue of the six month maximum waiting period requirement specified in ERISA. The administrative costs inherent in coping with this problem are especially extreme when considered in conjunction with other administrative duties imposed upon employers by the other provisions of ERISA.

In addition, under the vesting rules of ERISA the actual date of participation is largely inconsequential. ERISA does not require immediate vesting so any participant who leaves within a year of actual participation probably will not have any vested rights. If the employee continues in employment long enough to become vested, it is the years of service and not the years of participation that determine his vested percentage.20

In view of the overall improvement that would be achieved by the deletion of the six month rule it is recommended that the six month rule be amended in accordance with the proposed suggestion attached to my statement as Appendix A which essentially provides that plans may use a single entry date for beginning actual participation under the plan.

20 See Section 203, ERISA; Section 411, Internal Revenue Code.

6. POSTPONEMENT OF INITIAL DUE DATE OF FORM EBS-1

Under the latest administrative determination the new Form EBS-1 (the initial plan description form) for plans in existence on January 1, 1975 must be filed by August 31, 1975.21 Under the general effective dates of ERISA 22 most plans, i.e., those in existence on January 1, 1974, will have to make enormous changes in their provisions effective for the plan year beginning in 1976. As a result of these amendments, it will be necessary that the Form EBS-1 be filed again for the plan year beginning in 1976.23 Since Form EBS-1 is not intended to be an annual filing requirement the effect of requiring double filing in the next two years is very detrimental to the efficient operation of plans. When considered in conjunction with the other administrative burdens (and confusion) in connection with ERISA, it is recommended that this dual filing load be relieved by a statutory or administrative postponement of the initial filing date of ERISA to a date that would permit the initial filing to take into account the amendments to plans that will be required by ERISA. This postponement will only be necessary for plans subject to the delayed effective date. That is, plans adopted in 1975 and subject to the essential provisions of ERISA immediately will not be subject to this. Making this change should not be significantly detrimental to the information available to plan participants, but can create an enormous savings in administrative costs, especially for smaller plans.

We appreciate having had the opportunity to discuss these problems with the Subcommittee. If in considering these problems any additional assistance or consultation would be useful both NALU and AALU would be happy to provide that assistance. I will be pleased to answer any questions the Subcommittee may have at this time.

Mr. MORTON. Good morning. I am Bill Morton, and I am presiIdent of the Association for Advanced Life Underwriters and the vice chairman of the Committee on Federal Law and Legislation of the National Association of Life Underwriters. I am accompanied by Gerald Sherman, counsel for AALU; and Stuart Lewis, associate counsel.

The National Association, representing approximately 130,000 life insurance agents, AALU, is an affiliate organization which represents about 950 of those members who are involved in the more complex areas of life underwriting which includes pension trust. Both organizations are vitally concerned with the role of life insurance and private pension system, and my remarks today are on behalf of both organizations.

Mr. DENT. So noted.

Mr. MORTON. The vast majority of the small pension plans, Mr. Chairman, are funded either partially or totally through some life insurance product. As the result of the close connection of the life insurance industry with the private pension system, many life insurance agents who have participated intimately in that association have developed substantial expertise in pension matters.

We are offering to put the combined expertise at the disposal of this committee. I hope you will recognize as we proceed the importance of life insurance in establishing funding and maintaining pension plans whether it is handled through these specialized agents or otherwise. In particular, small plans benefit by the use and availability of insurance.

Such plans might often be too costly to maintain from an administrative point of view without the use of life insurance as a funding medium.

21 See General Instructions Accompanying Form EBS-1, Part V.

2 See Section 1017, 2004 (d), ERISA.

23 See Sections 102(a) (2) and 104 (a) (1) (C), ERISA: General Instructions Accompanying Form EBS-1, Part V.

I would like to submit six fundamental points of the Employee Retirement Income Security Act that need some reexamination.

The first point and perhaps the most troublesome one in the entire life insurance industry right now is the applicability of the prohibited transaction provisions to insurance agents.

We believe there is little doubt about the importance of having these agents functioning in the private pension area. The principle benefit is their ability to market these retirement plans. Typically, smaller employers who have not established such plans yet usually have their first exposure through the activities of a good life insurance agent.

Somebody calls on him because they think he is a prospect. The net effect is that the sizable segment of the small employer work force in this country receives its pension planning through a life insurance agent. And, those employees will someday retire on guaranteed pensions that they might not otherwise have had. These agents and brokers perform numerous services.

They assist in the design, installation, and administration of these plans, and in some cases, as in our case, the agent or his company provides actuarial services and computes benefits required under the plan. The agent or his company may handle annual filings of various governmental agencies and may assist in the annual review and planning for the operation of the plan. The agent is compensated for his services in two general ways. For those specialized agents who are consultants who administer plans that are not funded with any life. insurance product, compensation is a direct fee. In a typical case, however, where life insurance is utilized, the agent is compensated largely through commissions and sometimes it is a combination of both where occasions warrant.

These commissions are not paid directly by the employer of the plan, but instead they are paid by the insurance company. Under State law, as all of you know, the agent is prohibited from sharing or rebating his commission with anyone, that is, anyone other than a licensed agent himself.

This industry practice has a long history that has operated without abuse for many years. The legislative history of the ERISA cites no example of a need to proscribe these activities of the insurance industry or its agents or brokers, and consequently, any effects on the normal operation of this industry is probably unintended. In fact, it should be recognized that the insurance industry has had a highly beneficial effect in not only spreading the use of retirement plans but in also providing relatively low cost and extremely safe funding media for providing employee benefits.

ERISA has, however, created a significant problem for the normal operation of the insurance industry in this field. The problem is created through the prohibited transaction provisions-that is, specifically the party in interest provisions and that of a fiduciary. In addition, the conference committee report makes it clear that consultants to plans may also be considered fiduciaries.

The result is that many insurance agents or consultants could conceivably be considered fiduciaries or parties in interest and as a result be unable to provide services to the plan. They would also be prohibited from receiving commission on sale of the insurance. Such

a result would of course effectively terminate the long-standing and valuable relationship that has endured between plans and insurance agents over many years.

Now, while administrative exemptions are potentially available, the problem of the insurance agent is of sufficient dimension that statutory relief is preferable. I should mention that we are seeking right now an administrative exemption. However, we can't be sure of the outcome of that effort.

Officials in the Labor Department have some hesitancy and rightfully so in granting broad, blanket exemptions to a whole industry. If a compromise is adopted, the proper functioning of the industry may still be substantially affected and curtailed. The proper functioning of the life insurance industry in this field should not be clouded with the threat of refusal of administrative exemption or with any type of conditioned or limited exemption. In view of the history and operation of the insurance industry, anything less than a total blanket exemption would not be in the best interests of plan participants and beneficiaries.

We therefore urge the subcommittee to provide exemption from the prohibited transaction provisions for insurance agents and brokers operating in the normal course of their business affairs.

If such exemptions should not be provided, great loss will undoubtedly result. Specifically, among employers in the existing plan. It seems to us, Mr. Chairman, that the real objective is to have as many workers as possible arrive at actual retirement age with guaranteed pension.

The second item is the need for an exemption from the plan termination insurance which we heard about earlier for fully insured plans.

As members of the subcommittee, you undoubtedly know life insurance companies cannot operate without being licensed under the laws of the State in which they are domiciled and under the laws of the State in which they operate. Now, these laws are there to insure the financial stability of these companies and in our written statement submitted for the record, we spell out in some detail these provisions. No purpose would be served by repetition here.

Suffice to say that as a result of State law, life insurance companies are perhaps the most financially solid of all forms of American business. Now, it seems clear that the purpose of plan termination insurance is to provide a method for insuring promised benefits would be paid at retirement. Insofar as we have been able to determine, no participant has ever failed to receive any benefit guaranteed by a life insurance company.

We believe, therefore, that the purpose of the plan termination insurance is already served on fully insured plans and that a provision should be added to the act to be exempt from title IV the plans fully insured by life insurance companies.

Now, I believe in the prior testimony that the gentleman indicated that there was very little premium income from these small plans. Anyway, in a relative point of view.

Such an exemption would also serve the best interests of the employees by making life a little bit simpler for the employer and by reducing employer costs. In short, we believe that the savings of the plan costs-the termination insurance and administrative cost-could better be used to provide additional benefits.