MISCELLANEOUS PROBLEMS NEEDING CLARIFICATION There are many other areas of confusion under the law which need clarification through regulations. We would like to point out three examples which have considerable practical importance. One is the precise definition of plans which are covered. In Title I, "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" is exempted from the participation and vesting requirements of Part 2, from the funding requirements of Part 3 and from the fiduciary responsibility requirements of Part 4. However, it is not all obvious what a "select group of management or highly compensated employees" is. Is this intended to be only the senior executives of a corporation? Can such a group consist of middle management employees as well? Deferred compensation arrangements are frequently extended to employees well below the most senior management level. It is obviously necessary for a company to know the status of such arrangements under ERISA and possibly to make changes. Another potential problem area is the widespread practice of informally providing unfunded supplemental benefits to retired employees whose pension benefits have proven to be inadequate because of inflation or other reasons. This practice is highly desirable from a social point of view. We believe regulations should make it clear that this practice can continue. There are a great many plans in existence which are in a state of suspense. They have benefits and assets but no longer provide for accrual of additional benefits or for new entrants. Frequently, this situation arises because of a merger or acquisition and the participants of the suspended plan are also covered under the plan of the continuing company. Regulations are needed to specify how such suspended plans should be handled under the Act with respect to disclosure, funding and other requirements. STATEMENT OF THE AMERICAN LIFE INSURANCE ASSOCIATION The American Life Insurance Association has an aggregate membership of 380 life insurance companies which hold 99 percent of the reserves of insured pension plans in the United States. We appreciate this opportunity to express our views on the effects of the Employee Retirement Income Security Act of 1974 since its enactment in September 1974. GENERAL STATEMENT The ALIA endorsed the basic objectives of ERISA at each step in the legislative process and we continue to believe that its enactment will both encourage the growth and expansion of private retirement plans and increase the effectiveness of these plans in fulfilling the needs and expectations of covered participants. However, despite our optimism over the long-term effects of ERISA, we are seriously concerned with the unsettling effect this legislation is currently having on the employee benefit plan community, including the plans themselves (both pension and welfare), their sponsors, and those institutions, such as life insurance companies, which sell products to, and service, these plans. EXISTING PROBLEMS This present situation exists because of the interplay of several factors: First, as is inevitable with any legislation of this magnitude, ERISA contains many ambiguities and unintended hardships and restrictions. This is particularly true with respect to the fiduciary responsibility section, which was essentially redrafted by the Conference Committee in closed sessions where the interested public had no opportunity to examine the language and point out problem areas. Second, many of the new requirements were made effective almost immediately, with the result that, even under the best circumstances, there could be little opportunity for the Labor and Treasury Departments to issue clarifying regulations and rulings establishing at least the basic operating rules before they took effect. The fiduciary responsibility and the reporting sections of ERISA which are applicable not only to pension plans but also to the many welfare benefit plansare particularly indicative of this problem in that both became effective on January 1, 1975. Congress specifically recognized the need for administrative action to implement the fiduciary section by providing for an exemption procedure to allow the continuance of accepted business practices that otherwise might be prohibited by the technical language of the Act. However, it did not allow time for such administrative procedures to operate before the law took effect. The result is that some plans and related persons are now operating in violation of the law in anticipation of favorable action on exemption applications. This is an extremely undesirable situation as the penalties for an erroneous prognosis are potentially great. In this regard, it is important to note that, while the Labor and Treasury Departments may internally decide to temper their enforcement activities during the transition period, there is no interim safeguard against third party suits. Third, while the Labor and Treasury Departments have, in our opinion, done their best to meet their obligations under ERISA, they are not only understaffed, but are also in need of a transition period of their own in order to digest the many complex provisions. They have had to hire new people, many of whom are inexperienced in the employee benefit plan field, and must of necessity train these people. The law simply did not allow the time nor the necessary budget for the Departments to do this. As a result, while the Departments have answered a few very basic questions (as, for example, the effect of the new law on an insurance company's general account), they have been unable to address many other issues of extreme importance to employee benefit plans. These three factors have created considerable uncertainty and apprehension which we believe is a highly undesirable atmosphere in which to implement the wide-sweeping provisions of ERISA. If this atmosphere continues for long, it will inevitably lead to a slow down in the growth of private retirement and welfare benefit plans, with the possibility that some existing plans will even be abandoned. The establishment, or continuance, of an employee benefit plan is a voluntary act and employers or other sponsors may be unwilling to assume voluntarily the responsibilities associated with such plans (which have been significantly increased by ERISA) if they are uncertain as to the ground rules and are unsure of their potential liabilities. Any such slow down in the growth of private retirement and welfare benefit plans, or possible reduction in ex sting coverage, would be directly contrary to the objectives of ERISA. Moreover, such possible effects would, undoubtedly, be concentrated in the small employer area where the costs of sophisticated advice may be prohibitive. Yet, this is the very area where growth in coverage is particularly needed. SUGGESTED COURSE OF ACTION We recognize that we must live with a certain amount of confusion as the inevitable result of the transition to a new law as wide-sweeping as ERISA. On the other hand, we believe Congress should take immediate steps to alleviate the most pressing problems and we believe this can be done without undermining the basic objectives of ERISA. Specifically, we urge Congress to postpone the applicability of the detailed provisions of the fiduciary responsibility section of ERISA until such time as the Labor and Treasury Departments are able to issue regulations and act on exemption applications. For the interim, ERISA's general prudent man rule could be retained. FUTURE ACTION BY CONGRESS There will undoubtedly be a need to amend specific sections of ERISA. However, it is difficult to pinpoint all of the specific areas at this time since they will depend, to a large extent, on how the law is interpreted and how the applications for administrative exemptions are resolved. We urge, however, that your Subcommittee hold itself ready to act quickly as problems emerge which are in need of legislative redress. CONCLUSION As indicated at the outset, we fully support the basic objectives of ERISA and believe that, in the long run, this law will have a positive effect on the private employee benefit plan system. However, we urge that Congress immediately address the significant transitional problems that have arisen and, in addition, that it stand ready to deal with the inevitable unintended substantive problems that will emerge as the law is implemented. THE YOUNG WOMEN'S CHRISTIAN ASSOCIATION RETIREMENT FUND, Hon. JOHN H. DENT, DEAR MR. CHAIRMAN: The Young Women's Christian Association Retirement Fund and its companion retirement system, The Savings and Security Plan of the YWCA wish to record with the members of Congress their endorsement of the overall objectives of the Employee Retirement Income Security Act of 1974. From their beginnings over 120 years ago, the Young Women's Christian Associations of the United States have been strong advocates of the rights to justice and dignity of all human beings. ERISA provides long overdue rights for participants and beneficiaries of employee benefit plans in our country. Years before similar steps were taken by employers in business and industry, the Young Women's Christian Associations established by National Convention action two separately incorporated pension plans, the YWCA Retirement Fund for administrative and program personnel and The Savings and Security Plan for clerical and maintenance personnel. From their inception the YWCA plans have operated as self-insured, fully funded, money purchase pension plans, and have provided for early vesting of employer contributions to the participants. Since the enactment of ERISA the YWCA retirement plans, along with other similar plans operated for employees of not-for-profit organizations, we have been finding it extremely difficult and costly to comply with legislation with which we have been in general agreement as to spirit and intent. It seems appropriate, therefore, that we register with the Congress some of our very deep concerns. The YWCA Retirement Fund, Incorporated is a pension trust incorporated by a Special Act of the New York State Legislature; it has been in operation since September 1, 1925 and is exempt under Section 501(c)(3) and therefore exempt under Section 501 (a) of the Internal Revenue Code. The Fund was established by legislative action of the National Association, the Young Women's Christian Association of the U.S.A., to provide pension benefits for YWCA personnel. The members of the National Association are autonomous YWCAS located throughout the United States which: (1) conform in spirit, purpose, objectives and generally accepted standards of the National Association as established by their delegate representatives in Triennial Conventions, (2) operate as Associations incorporated under the laws of the State in which they are located and are tax-exempt religious, charitable and educational organizations under Section 501 (c) (3) of the Internal Revenue Code. (3) vary in size with the communities they serve; small YWCAs may have only one or two employees. By pooling their efforts and resources in this manner, these 410 YWCAs have been able to accomplish as a National Association an objective which would have been extremely difficult, and in some instances impossible to accomplish as individual Associations. The history of The Savings and Security Plan of the YWCA is essentially the same as that of the Retirement Fund, except that it was incorporated pursuant to Section 200 of the New York State Insurance Law, began operation on September 1, 1940, and is qualified as a pension trust under Section 401(a) of the Internal Revenue Code, The YWCA Retirement Fund and The Savings and Security Plan of the YWCA are governed by the same individuals who are mebmers of both Boards of Trustees and administered by the same staff. Since their establishment, both the Fund and the Plan have filed annual statements with the State of New York Insurance Department and complete audits have been conducted every five years by the Department. The cost of these audits has been an expense of the Fund and the Plan. The problems encountered in our efforts to comply with ERISA are as follows: (1) While the YWCA plans have operated from their beginnings as single employer plans, it is apparent that the formulators of ERISA did not have our type of plan in mind when it defined "single employer" plans in the Act. Neither do the YWCA plans meet the definition of a "multi-employer" plan which the Act defines as a plan adopted and maintained by more than one employer pursuant to a collective bargaining agreement. Because of the nature of the YWCA plans, the only practical treatment is that they are "single employer" plans although in fact the participants are employed by the locally organized Associations. (2) The YWCAS participating in these plans in behalf of their employees are responsible only for the enrollment of eligible personnel and the transmittal of employee and employer contributions each month to the Fund and the Plan. The Boards of Trustees of the two corporations operating the pension plans have the sole responsibility for the investment and management of the funds and for the payments of benefits. Consequently, the reporting requirements are more practically the function of the pension plans rather than of the participating YWCAs. The member YWCAS do not have the specific knowledge and information regarding the management and operation of the pension plans. If the participating YWCAs were required to file as individual Associations and report information available only from the Retirement Fund and The Savings and Security Plan, unquestionably the results would be incomplete and inaccurate. It is our belief that it would be to the advantage of the Labor Department and the participating YWCAs if the Retirement Fund and The Savings and Security Plan were permitted to file as "single employer" plans. (3) The provisions of ERISA and regulations issued to date seem to be directed to corporate and union employee benefit plans and do not take into account the existence of the YWCA plans and other similar plans operated by tax-exempt organizations, except for the exemption of church plans. It is a matter of fact that the YWCA plans were instituted at about the same time as many of the church plans, have similar patterns of organization and structure and meet annually with representatives of church plans in The Church Pensions Conference because of these similarities. (4) Until the enactment of ERISA the YWCA Retirement Fund and The Savings and Security Plan have not reported to the Labor Department. To the YMCA plans the added reporting means increased administrative costs and these we have diligently striven over the years to keep to a minimum in order that any excess earnings could be used to improve the benefits of the participants and beneficiaries. (5) In light of the unique situation in which the YWCA plans find themselves, the complexities of the Act have greatly increased our administrative, legal and actuarial expense as we attempt to comply with applicable sections of the law. While we recognize that this can be said by almost all employee benefit plans, we wish to point out that it is an even greater hardship for plans operated for not-for-profit organizations like the YWCA. Currently the Fund and the Plan are sending monthly benefit checks to over 2,000 retired employees. In the past 25 years the YWCA plans, supplementary to the basic money purchase benefits provided, have equitably distributed or allocated from surplus funds to retired and active participants a total of $15,802,000. Our record of service to over 30,500 employees is one of which the Young Women's Christian Association is justifiably proud. It is our earnest desire that the Congress be aware of the problems ERISA inadvertently created for the YWCA and similar organizations. It is our hope that an attempt will be made to alleviate some of these problems by appropriate regulations or amendatory legislation. Respectfully yours, DOROTHY M. ANDRUS, THE NORTHWESTERN MUTUAL LIFE INSURANCE Co., Re oversight bearings on ERISA. Mr. VANCE J. ANDERSON, Counsel, Pension Task Force, Subcommittee on Labor Standards, Cannon House Office Building, Washington, D.C. DEAR MR. ANDERSON: Instead of requesting time to appear personally at the hearings, I thought it better to submit our thinking on three points in writing. Please add the following to the points you and the staff will undoubtedly be considering as a result of the hearings and other written testimony. INADEQUATE TRANSITION TIME Based on experience since passage of the Pension Reform Act last September, it is our conclusion that it was an oversight on the part of Congress to fail to provide sufficient transition time for such a complex law and to fail to recognize the gigantic task the Act placed upon (1) the Departments of Labor and Treasury charged with jurisdiction, and (2) the private pension system. All concerned with ERISA-Labor, Treasury, insurance companies, banks, attorneys, accountants, actuaries—are having substantial trouble in doing what is necessary within the time frame prescribed by the law to bring existing plans in compliance and to create new vehicles and procedures to permit the continuing creation of new plans. Because of that defect in the law and the resulting delay in the promulgation and issuance of regulations and the publication of procedures for qualifying new plans and amendments to existing plans, particularly IRS approved masters and prototypes, the private pension system is confused and disrupted. The creation of new plans by employers and the required correction of old plans is substantially hindered. Coverage of more of the uncovered is delayed. Such coverage was one of the major goals of the Act. The present effective dates, depending on the area of the Act, are (1) January 1, 1975; (2) first plan year beginning after September 2, 1974; and (3) first plan year beginning after December 31, 1975. We believe Congress should immediately pass an emergency bill which would extend the effective date for all provisions of ERISA (except Title II, Part 5, sections 2001 and 2002 and Title IV). The new effective date for all plans subject to the Act (those in effect on September 2, 1974 and those established subsequent thereto) should be the first plan year beginning after December 31, 1976. As to masters/prototypes, it should be the later of 12/31/76 or 6 months after IRS approval of amended documents, subject to timely filing of amended master/ prototype documents with the IRS following release by it of final regulations on applicable provisions of ERISA. Such action would permit the use of existing IRS approved master/prototype documents, as well as specimens for custom designed plans, until amendments are prepared and approved by the IRS. It would also enable employers now under existing previously approved IRS master/prototype documents to continue to be qualified until the sponsors of such plans are in a position to offer them IRS approved amended documents to "move into". Thus, efforts could be continued by all concerned to install new plans and cover more of the uncovered with the comforting knowledge that they are not technically in violation of some or all of the provisions of ERISA. Also, such action will give the Departments of Labor and Treasury more time to adequately prepare and publish required regulations and procedures. Other provisions of the Act which we believe require attention are: Title I, section 205 JOINT AND SURVIVOR ANNUITY REQUIREMENT The goal of Congress in this respect could have been accomplished without producing the complications resulting from the manner in which this section is written. Administration of the provision will be difficult as will be the drafting of plan language to cover it. A simple and direct solution to the problem this section, as written, was designed to solve, would be to require a qualified plan to provide by its terms that an alternate method of paying retirement income to participants be available which provided a joint and at least one-half annuity to the surviving spouse of the participant, on an actuarial equivalent basis. It is not too late to simplify that provision and we recommend that such simplification be included in any bill resulting from the oversight hearings. Definition of fiduciary, title I, section 3, (21) The definition goes too far. It gets in the way of what have been for decades normal, honest, above-board and necessary business dealings between what are now called parties in interest. Of particular concern to the small pension cases and to the men who sell policies to fund them is the "investment advice" definition. The provisions are so cloudy and apparently far-reaching that individuals are unwilling to accept duties in connection with plans which will cause them to be |