SEPTEMBER 5, 1968.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed

Mr. PERKINS, from the Committee on Education and Labor,
submitted the following

REPORT

[To accompany H.R. 6498]

The Committee on Education and Labor, to whom was referred. the bill (H.R. 6498) the Welfare and Pension Plans Act, having considered the same, report favorably thereon with an amendment and recommend that the bill as amended do pass.

The amendment strikes out all of the introduced bill after the enacting clause and inserts a new text which is shown in the reported bill in italic type.

PART I. INTRODUCTORY STATEMENT

The Welfare and Pension Plans Disclosure Act was enacted in 1958. The basic purpose of the law is contained in section 2 in the findings and policy:

SEC. 2. (a). The Congress finds that the growth in size, scope and numbers of employee welfare and pension benefit plans in recent years has been rapid and substantial; that the continued well-being and security of millions of employees and their dependents are directly affected by these plans, that they are affected with a national public interest; that they have become an important factor in commerce because of the interstate character of their activities, and the activities of their participants, and the employers, employee organizations, and other entities by which they are established or maintained; that owing to the lack of employee information concerning their operation, it is desirable in the interests of employees and their beneficiaries and to provide for the general welfare and the free flow of commerce, that disclosure be

made with respect to the operation and administration of such
plans.

(b) It is hereby declared to be the policy of this Act to
protect interstate commerce and the interests of participants
in employee welfare and pension benefit plans and their bene-
ficiaries, by requiring the disclosure and reporting to partici-
pants and beneficiaries of financial and other information
with respect thereto.

The original Welfare and Pension Plans Disclosure Act imposed upon administrators of employee welfare and pension benefit plans the duty of filing with the Department of Labor a description of the plan and an annual report. The original act relied almost entirely upon individual participants and beneficiaries of the plan for enforcement. House Report No. 998 of the 87th Congress, first session, pointed out in discussing the original act:

Former President Eisenhower, in signing this law into effect on August 29, 1958, noted that he was approving the act "because it establishes a precedent of Federal responsibility in this area. It does little else ***. If the bill is to be at all effective, it will require extensive amendment at the next session of Congress.'

The act was amended in 1962 to make theft, embezzlement, bribery, and kickbacks Federal crimes if they occur in connection with welfare and pension plans. The 1962 amendments also conferred investigatory and regulatory powers upon the Secretary. In the 6 years since the amendments were enacted experience has shown that enforcement of reporting requirements coupled with the criminal penalties specified have not been sufficient to provide the protection called for in the original act's statement of findings and policy. Accordingly, the proposed legislation would provide for additional disclosure and, most importantly, set forth minimum Federal standards of conduct for fiduciaries. The intent of the proposed amendments is reflected in the modification of the statement of policy in section 2(b). The section is amended to read:

(b) It is hereby declared to be the policy of this Act to protect interstate commerce and the interests of participants in employee welfare and pension benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto by establishing fiduciary standards of conduct, responsibility, and obligation upon all persons engaged in, or responsible for receiving, disbursing, or exercising any control or authority with respect to employee welfare and pension benefit funds and by providing for sanctions in the case of a breach of such fiduciary standards as well as for recovery of losses suffered by such funds by reason of such breach.

PART II: SUBCOMMITTEE HEARINGS

Seven days of hearings were conducted by the General Subcommittee on Labor. Testimony was received from the Assistant Secretary of Labor for Labor-Management Relations, and representatives of industry, labor, banking, and accounting. Prepared statements, letters,

and supplementary materials were submitted by a large number of interested persons, including actuaries and life insurance specialists.

On July 24, 1968, the General Subcommittee on Labor reported H. R. 6498 to the Committee on Education and Labor, with amendments. On July 24, 1968, the Committee on Education and Labor ordered H.R. 6498, with the subcommittee amendments, reported to the House.

PART III. THE NEED FOR THE LEGISLATION

The continued rapid growth of private employee welfare and pension benefit plans is a development of major economic and social significance. More than 40 million American workers are covered by such plans; plan assets total $100 billion and are increasing at a rate of $7 billion annually. If, as appears probable, this growth continues at its present pace, the assets of private welfare and pension benefit plans will comprise the greatest single block of the U.S. economy by 1980. In addition to their great economic importance, private plans constitute a source of retirement income scarcely less vital to their beneficiaries than social security. They help provide a living income to millions of Americans and their families and figure largely in the plans for future retirement of millions more.

Sound and successful as the great majority of private plans have been, the field has not been without its problems. Disturbing instances of plan looting, misuse of funds, dangerous self-dealing on the part of trustees, and similar dishonesty have been uncovered.

In order to protect workers and their families as well as the public interest, Congress in 1958 adopted the Welfare and Pension Plan Disclosure Act. The act was amended in 1962. House Report 998 of the 89th Congress which accompanied the 1962 amendments pointed out that:

The committee is of the opinion that the existing legislation calling primarily for "disclosure" cannot provide the necessary safeguards and remedies. It is clear that only through examination and investigation can there be any real assurances that the reports truly reflect the financial position of these plans.

There must be, also, meaningful penalties to be applied when wrongdoing is disclosed, to punish unscrupulous individuals and to deter future violations of the act.

Although the broadening of the act effected by the 1962 amendments along with enforcement provisions and criminal penalties strengthened the Labor Department's hand in seeking out and eliminating plan abuses, subsequent experience has demonstrated clearly that much more remains to be done.

In June and July of 1965, the Permanent Subcommittee on Investigations of the Senate Committee on Government Operations held hearings on the diversion of union welfare-pension funds of the Allied Trades Council and Teamsters Local 815. The hearings and the report which accompanies them (S. Rept. 1348, 89th Cong. 2d sess.) trace a shocking history of duplicity, fund looting, and unethical conduct in several plans. Millions of dollars-money that was to help provide for the retirement of thousands of workerswere diverted from the fund for the personal, unscrupulous use of several of its trustees. Moreover, the men responsible for robbing

the fund could not be brought to trial under the present Welfare and Pension Plan Disclosure Act. The committee strongly suggests that any who doubt the need for this legislation read carefully the McClellan committee report.

There exist many similar instances of wrongdoing in connection with private welfare and pension plan funds which present law has proved unable to eliminate.

The following examples, among many others, have been brought to the attention of the committee:

1. Pension fund trustees, who were also officers of the corporation which maintained the plan, purchased shares of company stock for the fund while they themselves were selling their own holdings. When the fund ceased buying, the stock price dropped to one-third of its previously quoted price. The depreciation of fund assets as a consequence of this and other securities transactions was estimated at more than $4,500,000.

2. A small producer of components for machine tools maintained a profit-sharing fund to which it had made no contributions for several years, but to which its 384 employees continued to contribute. The trust fund was managed by an eight-man board, including the company's chief executive officer and its executive vice president. Both of these officers retired after the board had voted to purchase for the fund 206,000 shares of company stock held by the two officers. The fund paid $3 per share to the retiring officers, although the market price then was $1.87 a share. The overpayment yielded them $207,000 more than they would have received at the open market price.

3. A profit-sharing trust administered by trustees appointed by the company purchased 15 acres of land and a manufacturing plant for $424,000 and leased the land and plant to the company for 8 percent of the cost. The plan then entered into an agreement with the company which granted the company an option to purchase the land and manufacturing plant at 110 percent of depreciated cost (no consideration of market value) on December 31, 1973.

4. A small profit-sharing trust reported assets of $116,000 of which 90 percent were represented by loans to the employer corporation. These loans were secured by a lien on the inventory of the employer. When the employer corporation went bankrupt the plan participants suffered a large financial loss because the loans to the employer became worthless.

5. A welfare fund was jointly administered by representatives of a local union and the participating employers, but administration of the fund was dominated by a union trustee who was also the president of the local union. For several years this trustee's paramour was on the fund's payroll as an insurance adjuster. During 1962, when the fund had assets of more than $400,000 but had only 52 participants, she drew a salary of $9,450 from the fund. Administrative costs of this fund went from $12.70 per participant in 1961 to $431.50 per participant in 1962. The cost of administration exceeded employer contributions.

The serious need for this legislation was effectively argued by Assistant Secretary of Labor for Labor-Management Relations, Thomas R. Donahue, before the General Subcommittee on Labor:

Further Federal legislation is needed because is most cases the remedies otherwise available through the courts are in

participants. Although the fund of a welfare or pension plan
may be set up as a trust to qualify for tax exemption, many
of the concepts applicable to conventional trusts are meaning-
less in this field. The effectiveness of trust law may be les-
sened by the use of exculpatory clauses in trust agreements
which relieve trustees from liability for imprudent fund
management. Conventionally, the trustee of a trust fund is
answerable to the settlor who creates the trust; he is also
answerable to the beneficiary who is entitled to an accounting
and may bring suit for breaches of fiduciary responsibility.
In the usual corporate pension or profit-sharing plan, however,
we find a confusing situation. The company establishes the
plan and administers it through company officers, who are
thereby placed in a fiduciary position without actually be-
coming parties to a formal trust agreement. These fiduciaries
may enter into trust agreements with individual or corporate
trustees, who are then accountable to the company through
its designated fiduciaries. Or the company-appointed fidu-
ciaries may themselves manage and invest the fund's assets.
Whatever the arrangement, it is the company that has the
ultimate authority over the terms of the plan and the assets
of the fund and is accountable only to itself; that is, the
fiduciary and the settlor are the same person.

In summary, the committee finds that while private welfare and pension benefit plans perform great and vital services for their participants and beneficiaries and while the great majority of plans enjoy honest and competent administration of their funds, the need for legislation to assure additional protection to participants and beneficiaries has been demonstrated beyond question.

PART IV. SUMMARY AND GENERAL DISCUSSION OF THE MAJOR PROVISIONS OF H.R. 6498

PURPOSES

The Welfare and Pension Plans Disclosure Act provides for the disclosure of pertinent organizational and financial information respecting private welfare and pension benefit plans. In addition, it provides for the enforcement of reporting requirements and empowers the Secretary of Labor to investigate plans and reports, to issue regulations, and to interpret the statute authoritatively. H.R. 6498 is designed to strengthen and improve the protections for the interests of plan participants and beneficiaries by requiring additional disclosure and by establishing fiduciary standards of conduct for all persons exercising any control or authority with respect to such plans. DISCLOSURE, REPORTING, AND THE SECRETARY'S POWERS RELATIVE THERETO

Section 5 requires the plan description and annual financial report to contain the information required by sections 6 and 7 of the act "in such form as the Secretary shall prescribe and copies thereof shall be executed, published, and filed in accordance with the provisions of this act and the Secretary's regulations thereunder." The committee deleted the Secretary's authority under former section 5(a) of the Welfare and Pension Plans Disclosure Act to prescribe the "detail"