The third one is a matter that I would like to talk about briefly. Some provision to permit simple reporting and more flexible funding for partially insured plans that accrue benefits at a sufficiently adequate rate. I am speaking primarily of the combination type plans— split funded plans.

One of the exemptions from the funding requirements proposed by ERISA is for insurance contract plans; as defined, these are typically individual retirement income policies-pension trust on their equivalent.

Congress seemed to be cognizant of the need and appropriateness of an exception from the funding requirements for plans that otherwise provide assurances that benefits will be funded. For example, the life insurance policy.

The problem we would like to bring to the subcommittee's attention is that as drafted this exemption is somewhat narrow. A broader exemption could be written that will provide flexibility in funding and yet provide some assurance that the benefits will be paid. The more essential aspects of the insurance contract plan definition require that the plan be funded exclusively by the purpose of individual and in some cases group insurance contracts that provide for level annual premium payments commencing at participation and extending not later than retirement age of the individual. The benefits under the contract equal the benefits provided under the plan at normal retirement age and the benefits are guaranteed by an insurance carrier licensed to do business with the plan.

The heart of this definition is, one, the level premium payments, and two, the guarantee by a licensed insurance carrier.

Level premium payments simply assure funding as needed. The purpose of the insurance carrier guarantee, of course, is to provide further assurances that the benefits would be there as promised.

The difficulty with these definitional requirements is that they are overly restrictive. If less restrictive provisions can be utilized to provide the same assurances that funding would be adequate, then it is in the best interests of the plan participants and beneficiaries to permit that added flexibility. Increasing flexibility produces greater marketability with resulting lower costs and increased benefits. I suppose that would be minor.

We propose an alternative funding method utilizing insurance which has the same benefits as an insurance contract plan but much greater flexibility. The basic idea is to create a split funded plan-this is one using individual ordinary life policies or group permanent policies in an auxiliary fund rather than the typical retirement income policy or retirement annuity and to provide direct comparability between the cash values of a split funded plan, that is, total cash value insurance policies and fund with the cash values of the insurance contract plan, has already been found to be adequate from a funding point of view. This alternative arrangement would only require cash value comparability and would permit variances in the other provisions, including permanent investments in assets other than insurance contracts. In effect, as long as this arrangement provides the same cash equivalency and benefit assurances as an insurance contract plan, it should be entitled to the same treatment under ERISA as well as simplified reporting requirements.

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It would be a relatively simple matter to develop aggregate cash value tables and you could include them right in the plan-we used to do this regularly-that could indicate the cash values very similar to those provided under individual retirement income policies of the type described.

Under this arrangement, the plan could use whatever actuarial method it desires. That is, normal or common entry or level annual deposit as long as the cash values of the individual or group life insurance policies together with the assets of the fund equal the total cash values that would exist if all funding were on the individual retirement income policy basis. It could provide a test every three years and simply have a statement from the insurance company that they are on course.

The value of a participant's accural benefit would be very simply determined in accordance with the aggregate cash value table just as is done under individual retirement income policies. This would be without the need for the costly actuarial calculations. If this arrangement were adopted, the same essential assurances and guarantees would have to be provided to employees, as are provided in the case of the insurance contract plans.

In addition, for plans utilizing the aggregate cash value table, it would be appropriate to also provide a simplified reporting procedure. This would reduce the cost and administrative burden for such plans, particularly the small ones which in view of the benefit assurances provided, serve no valuable purpose. In particular, the requirement of an actuarial statement and opinion is very costly and appears unnecessary with this type of arrangement.

Again, the primary purpose of such modification would be to provide more flexibility without diminishing any of the guarantees or assurances that are necessary to the proper operation of the plan. With these assurances fully intact in our proposal, we believe that the flexible and less costly arrangements for providing the employees benefits could be utilized. Consequently, the interests of plan participants and beneficiaries would be served if such an amendment to ERISA were adopted.

I have used about all of my allotted time. The remaining three points are pretty well documented and are quite simple, anyway. We appreciate the opportunity of discussing these problems with the subcommittee, Mr. Chairman, and if you would like to have additional information, we stand ready to furnish it.

I would be glad to answer any questions at this time.

Mr. DENT. The only question I have is not really a question, it is an observation.

Specific recommendation in certain areas for the administration of the act and the contents of the act is exactly what the oversight hearings are all about and I do appreciate your comments. I know you have come a long way with what appears to be suggestions on how to correct it and that helps us a great deal more than just having the testimony.

I have no questions.

Mr. Sarasin.

Mr. SARASIN. I don't wish to delay this either, Mr. Chairman, and I would like to thank the gentleman for testifying as well and for the

completeness of his statement. But, I must admit, I am confused by the third section that he submits to us-the third point.

You are talking about a split plan. Now, at some point you said you could test this every 3 years to make sure that everyone is on course. My concern is what happens if the portion of the plan other than the insured aspect is wiped out for some reason. Are you going to invest in assets other than insurance-common stock, and so forth? Suppose it is a downtrend as we have now, what happens?

Mr. MORTON. It would be the same situation, Mr. Sarasin, as exists now. You see, what we are talking about here is a simplified reporting system. Let's suppose we require this every third year in lieu of actuarial statements, and suppose we turn up this third year and the assets of the plan should be $30,000, and the assets of the cash value of the life insurance are right on course, but the assets in the auxiliary fund have fallen behind and we only have $25,000 and should have $30,000. Well, it would seem that we should simply refer them back to the full disclosures that are required ERISA with a full actuarial statement and then they would be required to make up that deficit over no more than a 10- or 15-year period.

We are talking about only a simplified reporting system so that the insurance company could come out and say we owe assets totaling $35,000 to be on course-assets should total $30,000 and as long as that is met, Mr. Sarasin, it would seem to us a very simple thing to just say-OK, the plan is fine. No further reports are required.

Mr. SARASIN. Can you determine that without an actuarial statement? As required under law.

Mr. MORTON. Yes, sir. You see, as I mentioned earlier by including in your plan an aggregate cash value table much like you would have in an individual retirement income policy, this aggregate cash value table shows what should be in the plan at any given time. I am not making myself clear, am I?

Mr. SARASIN. I am not sure it is your fault. I think it is mine. Mr. MORTON. Let me take 1 minute, here. Suppose you and I were the only ones in the plan and suppose you are eligible for $500 a month retirement benefit and I am eligible for $400 a month retirement benefit and I am 50 and you are 30 when we started the plan. You would fund at a slower pace then they would fund for me even though I am eligible for a smaller benefit over a shorter period of time. So, we just put in there a table of cash values that shows the tabular cash value for each $10 a month at different entry ages and so we come out here 3 years later, and there is supposed to be since I am eligible for $400 a month-we look at the table and say in 3 years there is supposed to be $4,000 in my cash value and there is supposed to be $6,000 in your cash value. We just add the two together and the insurance company says there is supposed to be $10,000 somewhere. Now, we have $4,000 in cash value and we have $6,000 in the fund. This could all be done with a very simple statement.

Did I not answer?

Mr. SARASIN. I am afraid to ask any more questions. It is not your fault. I am simply confused at this point.

Mr. Chairman, I have no questions.

Mr. MORTON. It could be done very simply, Mr. Sarasin.

sir.

Mr. SARASIN. I have no further questions. Thank you very kindly,

Mr. MORTON. Thank you.

Mr. DENT. The next witness is Mr. John Lippman, vice president and trust officer of the International Trust Corp.

Mr. Lippman.

STATEMENT OF M. JOHN LIPPMAN, VICE PRESIDENT AND TRUST OFFICER, INTERNATIONAL TRUST CORP.

Mr. LIPPMAN. Good morning. My name is M. John Lippman. I am vice president and trust officer of the International Trust Corp.

The following comments regarding various provisions of title I of the Employee Retirement Income Security Act of 1974, ERISA, are submitted on behalf of International Trust Corp., which is a trust company chartered under the State Banking Department of California, located at Newport Beach, Calif.

ITC presently acts as trustee for approximately 14,000 trust accounts, located in all 50 States, all of whose beneficial owners are participants in qualified retirement plans.

These plans are jointly administered by Certified Plans, Inc., which acts as Retirement System Administrator and ITC, whereby the two companies perform not only the trustee function, but all services relating to the total administration of the plan and trust. Furthermore, the vast majority of the plans administered by CIP and trusteed by ITC contain between 1 and 50 plan participants. These plans are comprised of both Keogh and Corporate forms.

To give you an idea of what we are dealing with, our average number of participants in a Keogh plan is 1.8. The average number of participants in our Corporation form of retirement plan is 5.6. We have none and we do not administrate or trustee any multiemployer plans. Therefore, our comments relate solely to the small employer. One of the main purposes of ERISA was to improve and protect the rights and benefits of all plan participants along with expanding the private pension coverage to more employees. Our comments relate solely to several of the major difficulties of the act which produce substantial costs to the employer, and do not provide any direct or indirect increase in benefits to employees. Furthermore, the act lacks specific direction to the administrating agencies regarding the allowance of dual services, which will act to the detriment of all employees. ITC strongly supports the purposes and intent of ERISA, but is extremely concerned over the apparent unintentional lack of consideration relating to small employers in title I of ERISA.

Our first comment deals with the definition of fiduciary in section 3(21), in that a complete oversight has occurred in applying the definition of a fiduciary within the act.

Absolutely no consideration was given to the Master and Prototype program, as used by the Internal Revenue Service whereby a small employer may economically adopt a qualified retirement plan, incorporating the usage of a master or prototype plan which has been previously approved by the National Office of the Internal Revenue Service. The conflict, with respect to the definition of fiduciary, occurs in that the Sponsor (i.e. banks, trust companies, insurance companies,

mutual funds, et al.) might be construed to be fiduciaries, and thereby provide dual services. This is especially true of the life insurance companies and mutual funds, as banks and trust companies are partially exempted from the provisions relating to providing dual services. Because of this error, the Internal Revenue Service has not, as of this date, seen fit to promulgate the necessary Revenue Procedures relating to master and prototype plans in order to revise same in accordance with the new law. This is diametrically opposed to both the public. interest as well as one of the main thrusts of the act, in that many small to medium size employers have been precluded from initiating qualified retirement plans for the benefit of their employees, caused by the absence of the availability of master and prototype plans.

We suggest, Mr. Chairman, that a permanent exemption be made applicable to all sponsors of master and prototype plans, under the provisions that the Internal Revenue Service are presently operating under with respect to the program.

In order to preclude this problem, our second comment relates primarily to sections 102 and 103 with respect to reporting and disclosure. It is suggested that the act specifically require the Secretary of Labor to generate simplified reporting forms for the purposes of the plan description, summary plan description, and annual reports. After reviewing the proposed Labor Department form EBS-1, as well as that same form in its final form, and the projected EBS-2, it would appear as though the cost of administrating a small to medium-sized qualified retirement plan will be "out of sight," as it were, unless greatly simplified forms are promulgated by the Labor Department. It is suggested that Congress make it incumbent upon the Department of Labor to provide for simplified reporting for plans with less than 100 participants, and allow plan administrators to incorporate modern computer technology with respect to the completion of these forms to further reduce the employer's administrative costs.

Many administrators administer vast numbers of plans, and use the computer to prepare most requisite agency filings, such as the U.S. Treasury forms 990-P, 4848, schedule A to form 4848, 4849, and 4848A. Administrative costs are increasing substantially with the advent of ERISA. In light of this fact, the Department of Labor forms must be prepared by computer in order to keep this additional cost down, especially with respect to the small employer. Therefore, it is recommended that the Congress make it incumbent upon the Department of Labor to accept a facsimile of the required filings, rather than use the specific agency form itself, reproducing the information in a like manner to that required by such forms.

As an aside, I personally had a meeting and several phone conversations with those responsible for promulgating the forms of the Department of Labor. Cost of computer paper has risen approximately 300 percent in the last 24 months. The cost of reproduction of the EBS-1 form onto computer paper in order that we may prepare these forms for some 14,000 trust accounts is absolutely horrendous.

We requested the Department of Labor in their instructions in the EBS forms to allow us to produce the EBS-1 in a very similar manner without the necessity of printing the actual form on computer paper. This was denied on the basis that they were going to apparently