U.S. Department of Labor

Pension and Welfare Benefits Administration

Employee Retirement

Income Security Act

1999 Report to Congress

ERISA

25th

Anniversary
This publication has been developed by the U.S. Department of Labor, Pension

and Welfare Benefits Administration, and is available on the Internet at:

http://www.dol.gov/dol/pwba

For a complete list of PWBA publications, call the toll-free Publications Hotline

at: 1-800-998-7542

This material will be made available in alternate format upon request:

Voice phone: (202) 219-8921

TTY: (202) 501-3911

This booklet constitutes a small entity compliance guide for purposes of the

Small Business Regulatory Enforcement Fairness Act of 1996.
U.S. Department of Labor

Pension and Welfare Benefits Administration

Employee Retirement

Income Security Act

1999 Report to Congress
Introduction.......................................................................... 1

Overview of PWBA Office Functions ................................ 2

1999 Highlights .................................................................... 5

Enforcement ......................................................................... 6

Participant Assistance/Public Education and Outreach .. 21

Exemptions........................................................................... 25

Regulatory Activities ........................................................... 30

Policy and Research............................................................. 31

Accounting and Auditing..................................................... 33

Health Plan Standards and Compliance Assistance ......... 35

ERISA Advisory Council .................................................... 37

Table of Contents
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 1

Introduction

The Pension and Welfare Benefits

Administration (PWBA) of the U.S.

Department of Labor protects the

integrity of pensions, health plans and

other employee benefits for more than

150 million people. The Agency’s

mission is to administer and enforce

the fiduciary, reporting and disclosure, and coverage provisions of

Title I of the Employee Retirement

Income Security Act of 1974

(ERISA). The provisions of Title I

were enacted to address public

concerns that funds of private

employee benefit plans were

being mismanaged and abused.

Since its enactment in 1974, ERISA

was amended to meet the changing

retirement and health care needs of

employees and their families. The

role of PWBA also has evolved

continually to meet these challenges.

In 1986, the Consolidated Omnibus

Budget Reconciliation Act (COBRA)

was passed, and PWBA was charged

with certain notification requirements

under the Act. The passage of the

following health care laws gave the

Agency added responsibilities with

respect to group health plans:

• The Health Insurance Portability

and Accountability Act of 1996

(HIPAA);

• The Mental Health Parity Act of

1996;

• The Newborns’ and Mothers’

Health Protection Act of 1996; and

• The Women’s Health and Cancer

Rights Act of 1998.

As a result, the Agency provided

technical guidance on how to apply

ERISA’s Title I provisions, as

amended by HIPAA and other health

care laws that affect group health

plans. In addition, it created a new

office in December to address its

expanded role in the health care area.

The SAVER Act (Savings are Vital to

Everyone’s Retirement) also amended

ERISA in 1997 to require that the

Secretary maintain an ongoing

program of public outreach to effectively promote retirement income

savings. The Agency has partnered

with numerous public and private

businesses and organizations through

its Retirement Savings Education

Campaign to increase the public’s

understanding of this important issue.

On another front, the Agency developed an electronic filing system

called EFAST to accept annual

reports that will make Form 5500

Annual Reports faster and cheaper for

plans to file and for the government

to process the filings. It also continued to work to support the

Administration’s proposals to simplify pension rules and to improve

pension portability.

Finally, 1999 marked the 25th anniversary of the passage of ERISA.

PWBA commemorated the anniversary by raising public awareness of

the Agency’s role in protecting both

pension and health benefits through a

series of national and regional

outreach initiatives. This report

details the year’s accomplishments in

executing the Agency’s mission, and

adds highlights of the last quarter

century.
2 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

PWBA accomplishes its mission

through the collective efforts of seven

major offices that administer and

enforce the law and through two

offices that support the Agency’s

operations. The Agency also provides

support for a bipartisan, independent

Council that appraises the programs

instituted under ERISA and makes

recommendations to the Secretary of

Labor.

Office of Enforcement

The Office of Enforcement is responsible for overseeing and implementing the Agency’s investigative programs. Through 15 regional and

district offices1

 in major cities

throughout the country, it conducts

investigations to detect civil and

criminal violations of Title I of

ERISA and criminal laws relating to

employee benefit plans.

These investigations are performed to

gather information and evaluate

compliance with ERISA’s civil law

requirements as well as criminal law

provisions relating to employee

benefit plans. Except in those cases

involving national priorities, projects,

enforcement policy or other designated matters, the field offices

generally exercise broad discretion in

determining when investigations are

to be opened and which entities or

individuals are to be investigated.

The field offices conduct their

investigations in accordance with

established enforcement procedures.

Overview of PWBA Office Functions

Each PWBA field office coordinates

civil investigations and case referrals

with its local regional Solicitor’s

Office or with the Plan Benefits

Security Division of the Solicitor’s

Office in Washington, D.C., both of

which are responsible for bringing

civil lawsuits on behalf of the

Agency.

Field offices also coordinate criminal

investigations with the appropriate

U.S. Attorney’s Office that has

responsibility for the prosecution of

Federal crimes. Field offices may

also coordinate criminal investigations with local or state prosecutor

offices.

PWBA’s Office of Enforcement (OE)

communicates national enforcement

policies, priorities and procedures to

PWBA’s field offices. OE is responsible for operational review and

oversight, enforcement policy direction, program coordination and

technical assistance.

Office of Program Services

PWBA also satisfies its mission of

protecting pension, health and other

benefits in private-sector employee

benefits plans by helping plan participants and beneficiaries understand

their rights, and employers and plan

sponsors their obligations, under the

Federal law that protects pension and

health benefits.

This function is executed through the

Office of Program Services’s (OPS)

Division of Technical Assistance and

Inquiries in the Washington, D.C.,

office, and in the 15 PWBA field

offices. When participants write, call

or visit one of these offices, they

receive individual assistance from

benefits advisors who explain their

rights under the law and help them

obtain benefits that have been denied.

Public education is also a significant

responsibility of PWBA. Through the

OPS Public Affairs Division, the

Agency provides plan participants,

plan sponsors and the general public

with educational publications and

materials that increase public awareness of basic health, pension and

retirement planning issues.

It is responsible for coordinating two

national education campaigns on

retirement savings and health benefits

education; for constructing and

maintaining the Small Business

Retirement Savings Advisor Web site

to help small business owners interested in starting a retirement plan;

and for developing a toll-free publications hotline number as a central

source for free publications on

retirement savings and pension and

health benefits. The Public Affairs

Division also serves as a liaison

between the Agency and the news

media.

In addition, this division issues press

releases on civil and criminal cases

pertaining to ERISA; answers and

directs media inquiries; holds press

events to publicize Agency issues and

initiatives; and arranges and hosts

briefings for foreign officials to

educate them on the Agency’s mission and the U.S. pension and health

laws. It also arranges speaking

engagements throughout the country

for the Assistant Secretary and other

departmental officials, who deliver

1 PWBA’s regional offices are located in Atlanta,

Boston, Chicago, Cincinnati, Dallas, Kansas

City, Los Angeles, New York, Philadelphia and

San Francisco. PWBA’s district offices are

located in Detroit, Miami, Seattle, St. Louis and

Washington, D.C.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 3

the Agency’s message on health,

pension and retirement issues.

Through the OPS Public Disclosure

Room, the Agency provides the press

and the public with basic financial

information on employee benefits

plans that private-sector companies

file with the Labor Department.

Office of Exemption

Determinations

The Office of Exemption Determinations administers the Agency’s

program for granting administrative

exemptions from the prohibited

transaction provisions of ERISA.

The Office has two divisions. One is

responsible for class exemptions. The

other administers the program for

individual exemptions.

ERISA prohibits certain specified

transactions between employee

benefits plans and entities defined as

“parties in interest”. However, it

gives the Labor Department authority

to grant exemptions from these

prohibited transactions if an applicant

can demonstrate that a transaction is

administratively feasible; serves the

interest of the plan, its participants

and beneficiaries; and protects the

rights of the plan participants and

beneficiaries.

The Office reviews applications for

such exemptions and determines

whether to grant relief. Individual

exemptions relate to a particular plan

or applicant. Class exemptions are

applicable to anyone in the described

transactions, provided the enumerated

conditions are satisfied.

Office of Regulations and

Interpretations

The Office of Regulations and

Interpretations is responsible for

planning, directing and carrying out

PWBA’s program for the development and delivery of policy and

technical guidance concerning the

application of Title I of ERISA. It

also is responsible for interpreting

certain provisions of the Internal

Revenue Code, the Federal Employees’ Retirement System Act of 1986,

and other laws affecting employee

benefit plans. The Office develops

regulations and interpretive bulletins,

and issues advisory opinions, information letters and rulings. It also

develops employee benefit plan

reporting forms and provides training,

technical assistance and other guidance to facilitate compliance with and

enforcement of the fiduciary, coverage, reporting and disclosure, and

other statutory provisions administered by PWBA.

Office of Policy and

Research

The Office of Policy and Research

provides technical, legislative, and

research analysis on health and

pension benefits legislation proposed

by the Administration and pending

before the Congress. It also provides

leadership and coordination of

employee benefit plan policy analyses, and prepares congressional and

executive departmental briefings and

proposed testimony.

In addition, it is responsible for

maintaining comprehensive data and

statistics on the private retirement

income system and pension plan

investments that are derived from the

annual reports of the Form 5500.

These are released semiannually in

the Private Pension Plan Bulletin to

make timely information available to

research and policy analysts.

Office of the Chief

Accountant

The Office of the Chief Accountant

(OCA) is responsible for administering a reporting compliance function

designed to enforce ERISA’s reporting and disclosure requirements.

OCA insures the integrity of the

reporting and compliance process

through enforcement initiatives

involving civil penalties imposed

against plan administrators for their

failure to submit complete and

accurate Form 5500 Annual Reports;

reviews the quality of work performed by auditors of employee

benefit plans; establishes several

proactive programs designed to help

educate plan professionals; and

encourages voluntary compliance

through reduced fines.

In addition, OCA is responsible for

establishing a program to carry out

audits to determine the level of

compliance with the requirements of

the Federal Employees’ Retirement

System Act (FERSA) of 1986 relating

to fiduciary responsibilities and

prohibited activities of fiduciaries.
4 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

Office of Health Plan

Standards and Compliance

Assistance

The Office of Health Plan Standards

and Compliance Assistance (The

Health Office) is responsible for

planning, directing and carrying out a

program for providing policy and

technical guidance with respect to the

recently enacted health care provisions under Title I of the Employee

Retirement Income Security Act of

1974 (ERISA). These include

provisions added to ERISA by:

• The Health Insurance Portability

and Accountability Act of 1996;

• The Mental Health Parity Act of

1996;

• The Newborns’ and Mothers’

Health Protection Act of 1996; and

• The Women’s Health and Cancer

Rights Act of 1998.

The Health Office is responsible for

providing regulations, interpretive

bulletins, opinions, rulings, forms,

training, technical assistance and

other guidance to facilitate compliance with, and enforcement of, these

provisions relating to group health

plans.

ERISA Advisory Council

The duties of the Advisory Council

on Employee Welfare and Pension

Benefit Plans are to advise the

Secretary and submit recommendations regarding the Secretary’s

functions under ERISA. The council

customarily holds four meetings each

year that are open to the public. The

Council consists of 15 members,

appointed by the Secretary of Labor

to serve 3-year terms. The members

must be qualified to appraise the

programs instituted under the federal

pension and health benefits law.

Three members must represent

employee organizations — with at

least one representing participants of

a multi-employer plan. Three must

be selected from employer organizations, with at least one representative

of employers maintaining or contributing to multi-employer plans; and

three members must be selected from

the general public, one of whom must

receive benefits from a pension plan.

The other six members must be

selected from the insurance, accounting, actuarial counseling, investment

management and investment counseling, and corporate trust communities.

The law also requires that five

members rotate off the council each

Nov. 14 and that no more than eight

appointees represent any one political

party.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 5

1999 Highlights

Richard McGahey was Assistant

Secretary through early December.

Upon his departure, Leslie Kramerich

was named Acting Assistant Secretary. She was and also continued to

serve as the Agency’s Deputy Assistant Secretary for Policy. Also in

1999:

• In the area of enforcement, the

Agency closed a total of 4,287

civil and criminal cases and

recovered more than $574.7

million.

• As the Retirement Savings Education Campaign neared its 5-year

mark, the Agency increased its

media and grassroots efforts

throughout the country to bring the

retirement savings message to

diverse populations.

• The Health Benefits Education

Campaign also continued to gain

momentum, with meetings of the

65 partner organizations that were

acquired in the Campaign’s 1998

kickoff.

• With respect to reporting and

disclosure of plan documents, the

Agency assumed the responsibility

from the Internal Revenue Service

for processing the new 1999 Form

5500 and developed a more

streamlined processing system

called the Electronic Filing Acceptance System, or EFAST.

• A notable class exemption was

granted by the Agency permitting

parties in interest to employee

benefit plans to make interest-free

loans to plans.

• The Agency published proposed

rules designed to enhance the

security of assets held by small

pension plans.

• In regard to research, a 16-study

compendium that examined health

care issues was published.

• The Patients’ Bill of Rights also

remained a major health policy

initiative for PWBA.

• The Office of Health Plan Standards and Compliance Assistance

replaced the Health Care Task

Force in December reflecting the

Agency’s increased responsibility

under the new health care laws.

• Finally, the ERISA Advisory

Council examined issues such as

the growth of the contingent work

force and the market trend toward

cash balance plans.
6 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

25th Anniversary Milestones in Enforcement

• The first enforcement action taken by the Agency was filed on June 3,

1976, in the Western District of Oklahoma. The purchasers of the plan

sponsor had used the plan assets to acquire control of the plan sponsor

without giving the plan substantial consideration. The Court ordered

cancellation of the transaction and restitution of all assets to the plan.

• In an investigation that extended over a number of years during the late

1970s and early 1980s, PWBA recovered more than $21.5 million for

the Central States Teamsters Pension, Health and Welfare Funds.

• In 1983, the Department took vigorous steps to prevent the misuse of

pension assets in corporate takeovers by establishing investigator/

lawyer teams with special expertise in takeovers and by filing a lawsuit

(Donovan v. Simmons).

• In 1986, in Brock v. Cunningham, the Court required restitution of

$400,000 to plan participants and beneficiaries of the Metropolitan

Contract Services, Inc. Employee Stock Ownership Plan. The appeals

court ruled that the defendants breached their fiduciary duties. The

opinion contains a full discussion of ERISA’s “adequate consideration”

requirement. This case was typical of the Department’s enforcement

actions, in that it both restored assets to the plan and helps to clarify the

law.

• In 1993, PWBA and the Office of the Inspector General restored

$494,000 to health plan participants who belonged to a Multiple

Employer Welfare Arrangement (MEWA) that was a bogus union health

plan. The case represented a milestone in ongoing efforts to vigorously

investigate and bring to justice health plans sponsored by bogus unions

and the plans. During the 1990s, PWBA aggressively investigated

MEWAs and recovered more than $89.9 million in civil and criminal

MEWA actions.

• In 1995, PWBA launched its 401(k) Employee Contribution Enforcement Project to hold employers accountable for failing to promptly

deposit employees contributions in the employees’ accounts. By

Dec. 31, 1999, the Agency had recovered $87 million nationwide

through the initiative.

Enforcement

1999 Accomplishments

PWBA recovered $574.7 million for

employees of pension, health and

employee benefit plans in 1999. This

monetary recovery resulted from the

Agency’s closing of 4,151 civil

investigations and 136 criminal

investigations, which included 63

indictments (see Figure 1).

The Agency also increased the

number of investigations that targeted

fraud in employer plan assets in

which a plan had been either misused

by a fiduciary or endangered by his or

her imprudent conduct. This strategy

contributed significantly to the

Agency’s success in protecting plan

assets.

In the field offices, more effective

targeting techniques were used to

increase the number of cases that

resulted in corrections of fiduciary

and other violations. Some field

offices, for example, requested

special computer-generated targeting

reports that would identify specific

types of plans that might have problems, such as an Employee Stock

Ownership Plan (ESOP). Other

offices worked directly with financial

institutions to help them identify

plans that might have a delinquent

contribution problem or plans that

might have been abandoned by

irresponsible plan officials.

PWBA also continued to commit

substantial resources to address

abusive practices that violated

ERISA, and pursued enforcement

actions against unscrupulous operators of multiple employer welfare

arrangements (MEWAs), and against

insurers and service providers who

received hidden discounts in connection with the operations of health

benefit plans.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 7

Civil Investigations

4,400

Opened

129

Opened

4,151

Closed

136

Closed

63

Indictments

$574.7

Million

Monetary

Recoveries

Criminal Investigations

The following is a sampling of the

civil and criminal cases investigated

in 1999.

Civil Cases

Herman v. Seafarers International Union of Puerto Rico, the

Caribbean and Latin America

10-22-99

Hato Rey, Puerto Rico

The U. S. Department of Labor

obtained a consent order requiring the

Seafarers International Union of

Puerto Rico, the Carribean and Latin

America to pay $374,729, plus

interest, to its welfare plan as repayment for improperly retaining employer contributions owed to the

welfare plan.

According to a lawsuit filed simultaneously with the order, the union

failed to forward to the welfare plan

Figure 1. Both civil and criminal cases may continue from one calendar year to the next

(i.e., a case opened in 1999 may not be closed until 2000). The numbers in the chart above

represent totals for the 1999 calendar year.

contributions paid by employers from

1976 to March 1997. The union

allegedly retained the money for its

own use.

The welfare plan provides health and

other benefits to eligible participants.

As of Dec. 31, 1995, there were 646

eligible participants and the welfare

plan had net assets of $249,965.

Herman v. Veatch, Carlson,

Grogan & Nelson, et al.

9-30-99

San Francisco, Calif.

A Los Angeles law firm, its executive

director/administrator, and attorneys

were ordered to restore $647,188,

plus interest, to the firm’s pension

plan, and a former partner was

ordered to restore $127,600 to the

pension plan, in two separate consent

decrees entered by a San Francisco

District Court.

In a lawsuit simultaneously filed with

the consent decrees, the Department

alleged that the law firm of Veatch,

Carlson, Grogan & Nelson; Phillip

M. Borini, its executive director/

administrator; attorneys James C.

Galloway, Jr., Mark A. Weinstein,

Anthony D. Seine, and former partner

C. Snyder Patin either failed to make

or made untimely employee and

employer contributions to the firm’s

pension plan, and diverted participant

contributions into the firm’s general

account in violation of ERISA.

The consent decree required the

lawyer defendants to make monthly

installment payments of $10,000 until

March 2001, and monthly installments of $30,000 thereafter until the

total amount owed is fully paid. Patin

is required to make a lump-sum

payment to satisfy the consent decree.

The decree also requires that the

defendants relinquish their positions

as fiduciaries of the firm’s pension

plan and remain permanently barred

from servicing any benefit plan

covered by ERISA; that an independent fiduciary be appointed to administer the pension plan; and that the

defendants pay all costs in connection

with the appointment and retention of

the independent fiduciary.

Herman v. Agati, et al.,

Herman v. Spatol, et al., and

Herman v. Marchio, et al.

9-16-99

Binghamton, N.Y.

The U.S. Department of Labor

reached settlements in three related

lawsuits with trustees of three pension plans that resulted in a total of

$3 million being repaid to the plans.
8 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

The settlements also required the

trustees to use the funds’ investment

managers, with full power and

discretion, to manage all the assets of

the trusts held for investment purposes.

The funds to which the recoveries

will be paid are noncontributory

defined benefit plans established

through collective bargaining agreements between the three unions and

various employers and employer

associations. In addition, trustees of

the pension plans agreed to pay

ERISA Section 502(1) penalties

amounting to $600,000 for their

alleged violations of Federal pension

law.

The defendants in the three separate

lawsuits, which were filed concurrently on June 12, 1998, in the

Federal District Court in Binghamton,

and the amounts they agreed to pay

the pension plans are: trustees Sam

Marchio, Gerald Spiridilozzi,

Carmen Nicotera, Richard Alexander,

Jack Endryck and Tony Korrie,

$930,000 to the Laborers Local 35

pension fund; trustees Carl Spatol,

Edward Morgan, Richard Buck and

Harold McElwain, $960,000 to the

Carpenters Local 120 pension fund;

and trustees John Agati, Sam Agati,

Robert Ashley, Lanny Miller, Fred

Rexford and Hugh Schickel,

$1,110,000 to the Laborers

Local 322 pension fund.

According to the Department’s

lawsuits, the pension plan trustees

allegedly violated their fiduciary

duties when they caused their respective plans to make numerous purchases from the same broker-dealer of

a class of collateralized mortgage

obligations (CMOs) and real estate

mortgage investment conduit bonds

(REMICs), known generally as ZBonds, and a highly volatile class of

CMOs and REMICs with high

sensitivity to interest rate changes.

By the end of plan year 1994, each

plan held a significant number of

these financial instruments. Ultimately, the Z-Bonds were sold by

each of the plans at a significant loss.

The Department’s complaints alleged

that the trustees’ purchases of these

Z-bonds were imprudent because,

when the investments were made, the

trustees lacked a sufficient understanding of them and of their inherent

risks. The lawsuits also alleged that

the trustees failed to adequately

investigate the bonds, failed to

consider the purpose of these bonds

relative to the funding needs of the

plans and failed to adequately monitor the plans’ investments.

Herman v. Carmine Gelsomino,

et al.

8-20-99

Cranston, R.I.

A lawsuit filed by the Labor Department was resolved by a partial

consent judgment and order when the

International Brotherhood of Electrical Workers’ Local Union No. 99,

Cranston, R.I., and trustee board

members of the union’s Joint Apprenticeship and Training Committee

Trust (JATCT) agreed to restore a

total of $246,700.66 to the trust,

which is an employee benefit plan

under Federal law. The trust was

created in cooperation with employers to train apprentices for the electrical trade and to provide training

programs for journeyman electricians

to meet industry demands.

The suit alleged that the trustees and

directors attended out-of-state conferences and authorized payment with

plan assets of travel stipends to

themselves without any consideration

of the actual expenses and without

maintaining any accounts or receipts.

The suit also alleged the trustees

caused or permitted the plan to rent

office space in the Local Union No.

99 union hall without a valid lease,

and to pay rent in excess of reasonable compensation for the space.

Consequently, the suit alleged the

trustees failed to discharge their

duties with respect to the plan solely

in the interest of the participants and

beneficiaries of the plan; and that

they engaged in transactions that

constituted a transfer of plan assets to

parties in interest to the plan, a

prohibited transaction under ERISA.

Named as defendants in the lawsuit

were the union and members of the

Board of Trustees for the JATCT,

including: Carmine Gelsomino,

William Lepore, Jr., Walter L. Perry,

Jr., John Vinnitti, Patrick Brady,

Arthur Watson, Raymond Lambert,

Mary Germershausen and G. Thomas

Chabot. Richard Irace, director of the

trust, was also named. The directors,

trustees, and the union were parties in

interest to the trust under ERISA.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 9

Herman v. Financial Applications Consultants Services, Inc.

7-8-99

Livonia, Mich.

Financial Application Consulting

Services, Inc. in Livonia, Mich., and

trustees of the company’s 401(k) plan

were ordered to collectively restore

$222,503.86 to the plan in a consent

order and judgment obtained by the

U. S. Department of Labor.

The judgment resolves a lawsuit filed

on July 1, 1999, which alleged the

company and trustees Steven Kandt,

Stephen Rupe and Roger Jelsma

violated ERISA by failing to

promptly remit 401(k) contributions

deducted from employees’ paychecks

into the plan’s investment accounts

for the period Dec. 31, 1988, to Dec.

31, 1997. The 401(k) plan provided

retirement, death and disability

benefits to 66 employees. As of

Dec. 31, 1997, the plan had $937,684

in assets.

The lawsuit also alleged that the

defendants failed to remit matching

employer contributions, to collect

employer contributions owed to the

plan and to collect payment on

outstanding participant loans from the

plan totaling more than $72,000, all

prohibited transactions under ERISA.

The judgment obtained by the Department also stipulates that: the

money restored to the plan be credited to the pension accounts of all

participants, excluding the defendants; the Court appoint an independent fiduciary to manage the plan;

and the defendant trustees be permanently barred from servicing or acting

as fiduciaries to any ERISA-covered

plan.

Herman v. Brewster Dairy, Inc.,

et al.

7-1-99

Cleveland, Ohio

The U.S. Department of Labor settled

a lawsuit with executives of Brewster

Dairy, Inc. in Brewster, Ohio, who

agreed to pay $333,333 to the

company’s profit sharing plan. The

Department’s lawsuit charged that

dairy co-owners Fritz Leeman, Walter

Leeman and Vice President of Finance Thomas Riegler — who were

also plan fiduciaries — imprudently

invested more than $1 million of the

company’s plan assets in a real estate

limited partnership.

The lawsuit also alleged the defendants committed the plan to pay

$1,013,115 to purchase units in the

Heartland California Clayton Limited

Partnership. The plan ultimately

invested $749,462.50 in the partnership from December 1990 until

February 1996.

The limited partnership was invested

in a parcel of property located in the

San Francisco Bay area. Brewster

Dairy was charged with failure to

take steps to remedy the improper

actions of the plan fiduciaries.

The money was recovered and any

additional distributions from the

limited partnership were prorated and

allocated to individual accounts of the

plan’s eligible participants, excluding

the defendants in the case.

Herman v. Administrative

Services of North America, Inc.,

et al.

6-11-99

Houston, Tex.

The U.S. Department of Labor

obtained a preliminary injunction

freezing the assets of third-party

administrator Administrative Services

of Texas, Inc., of Houston (ASO

Texas), its parent Administrative

Services of North America (ASONA)

and former corporate executive Mark

A. Strange. The action was taken to

prevent further depletion of the assets

of client welfare plans, whose accounts were held by them. The

preliminary injunction also ordered

Jack M. Webb appointed as the

independent fiduciary with authority

to operate the plans.

The Department simultaneously filed

a lawsuit against the company, its

parent and Strange, for allegedly

violating ERISA by using the assets

of client plans to benefit ASO Texas

and Strange.

According to the lawsuit, Strange

signed and authorized the transfer of

$1,027,188 from plan trust accounts

to corporate accounts between Oct.

29, 1998, and March 3, 1999. Approximately $305,220 was wired

back into the trust accounts, leaving a

shortfall of $721,968.

The lawsuit also alleged that approximately $508,400 of plan assets from

refund payments from service providers and Consolidated Omnibus

Budget Reconciliation Act (COBRA)

payments were not properly forwarded to the plans’ trust accounts,
10 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

but were used to pay operating

expenses of defendants ASONA and

ASO Texas.

In addition, Strange allegedly diverted some $332,700 in plan trust

funds for his own personal expenses

including making a down payment on

a Jaguar, making payments on a

personal car note, on a $100,000

personal bank loan and for American

Express credit card charges.

The lawsuit asked that defendants

restore to the plans the lost money,

plus interest, be removed from their

positions and be barred permanently

from acting as fiduciaries to the plans

and any other employee benefit plan

covered by ERISA.

Herman v. O’Brien, et al.

5-27-99

Tacoma, Wash.

The U.S. Department of Labor

announced that consent judgments

were signed in the United States

District Court in Tacoma, Wash.,

which formalized negotiated settlements that affected management of

the J.D. English Steel Company Profit

Sharing and 401(k) Plan and ordered

restitution to the plan for alleged

ERISA violations.

A civil lawsuit filed May 27, 1999,

sought equitable relief for the plan

arising from alleged breaches of

fiduciary duty on the part of current

plan trustee James H. O’Brien;

former plan trustees William E.

Saylor and Raymond A. Johnson; and

Agnes Rosenberger, an officer of J.D.

English Steel Company, the nowclosed Tacoma business that sponsored the plan.

The consent judgments ordered the

defendants to restore losses to the

plan, including lost opportunity costs,

remove current trustee O’Brien and

appoint an independent

fiduciary. Further, the three trustees

were permanently barred from

serving as fiduciaries or service

providers to any employee benefit

plan subject to ERISA.

The Labor Department’s suit alleged

that the plan trustees caused the plan

to make nonperforming real estate

loans and limited partnership investments that were imprudent and not in

accordance with the plan’s governing

instruments.

The alleged imprudent investments

involved projects formed by J.A.

Groce Private Placement, Inc.,

including one that was to be developed by Badger Mountain Partners.

Both are Tacoma concerns. Approximately $533,430 related to these

allegedly imprudent investments will

be restored to the plan under the

consent judgments.

O’Brien and Rosenberger were

alleged to have engaged in transactions specifically prohibited by

ERISA when O’Brien caused the plan

to transfer plan assets to the plan

sponsor, to himself, and to

Rosenberger, all of whom were

parties in interest to the

plan. These prohibited transactions

also have been corrected, with

another $214,551 restored to the plan.

Herman v. Frederick Thacher

and Community Care Systems,

Inc.

4-5-99

South Portland, Maine

Community Care Systems, Inc.

(CCSI), of Wellesley, Mass., and

Frederick Thacher, the company’s

chief executive officer and principal

shareholder, agreed to restore nearly

$140,000 to the pension plan accounts of the participants of the CCSI

Employee 401(k) Plan as the result of

a lawsuit filed by the U.S. Department of Labor.

In June 1998 the agency filed suit

against the defendants, who operated

a number of behavioral health care

facilities in Massachusetts and Maine,

alleging, since November 1997,

Thacher and CCSI had caused some

of these subsidiaries to withhold

employee 401(k) plan contributions

from employees’ paychecks without

forwarding the money to the plan.

In a consent judgment and order,

reached on April 5, 1999, and modified on May 24, 1999, Thacher and

CCSI agreed to restore $138,036.43

to employees participating in the

401(k) plan who had worked for

CCSI, Charles River Health

Management, Charles River Hospital

East of Wellesley, Charles River

Hospital West of Chicopee and

Jackson Brook Institute (JBI) of

South Portland, Maine. Some of

these entities have since changed

ownership, gone into bankruptcy or

ceased to exist.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 11

According to the modified judgment,

$74,748.81 of the restored amount

was paid to the fund from the

bankruptcy estate of JBI. The balance

of $63,287.62 will be paid to the plan

from an escrow account held by the

court. On June 29, 1998, the Department had obtained a preliminary

injunction signed by the presiding

judge that required the defendants to

transfer $200,000 to an interestbearing escrow account and appoint

an independent plan administrator to

determine the exact amounts – plus

interest – which had been deducted

from plan participants’ paychecks but

had not been forwarded to their plan

accounts.

The payback amount is the result of

the plan administrator’s calculations,

and the balance of the escrow account

will be retained by the court pending

the resolution of another lawsuit

involving CCSI.

The Court order also directed the

defendants to appoint an independent

plan administrator and an independent trustee to the plan at their

expense, and prohibited Thacher and

CCSI from ever serving as a trustee,

plan administrator or service provider

to this or any other employee benefit

plan.

Herman v. Nationsbank of

Georgia, N.A.

5-17-99

Atlanta, Ga.

The U.S. Department of Labor

obtained a settlement agreement

providing for Nationsbank of

Georgia, N.A., a subsidiary of

Nationsbank of Charlotte, N.C., to

distribute more than $5 million in

cash and stock to the accounts of

certain participants covered by the

Polaroid Employee Stock Ownership

Plan (ESOP).

The ESOP was created in 1988 with

$15 million in cash and $285 million

in loan proceeds to purchase stock of

Polaroid. Shortly after creation of the

plan, Polaroid was the subject of an

unsolicited takeover offer. The

company subsequently purchased up

to 16 million shares of its own stock

at a premium price of $50 per share at

a time when the stock was trading at

$40 per share. Nationsbank’s

predecessor, Citizens and Southern

Trust Company (Georgia), was

trustee of the Polaroid plan.

Under the agreement, the bank will

distribute the cash and stock to

participants covered by the plan as of

April 1989. The settlement resolves

a lawsuit filed in June 1992 against

the bank and its investment advisor,

Sovran Capital Management

Corp. — the successor to Citizens

and Southern Investment Advisors,

Inc. — in connection with Polaroid

stock owned by the ESOP.

The Department alleged in the lawsuit

that Nationsbank and its investment

advisor violated ERISA in connection

with tendering the stock to Polaroid.

The bank, the lawsuit alleged, did not

adequately investigate the merits of

tendering the stock owned by the

ESOP to Polaroid and failed to

monitor the performance of investment advisor CSIA. The lawsuit also

alleged that the bank imprudently

failed to tender certain stock to

Polaroid.

CSIA allegedly failed to adequately

analyze the merits of the Polaroid

offer to buy back plan shares in order

to properly advise the trustee on

whether to tender the ESOP shares.

Herman v. Kenneth Fullerton, et

al.; Herman v. Stephen McLane,

et al.; and Herman v. Stephen E.

McLane

3-3-99

Lexington, Mass.

The trustee of two Lexington, Mass.-

based employee benefit plans and two

officers of the now-defunct Auto

Engineering Limited Partnership of

Lexington have agreed to restore a

total of $115,000 to the company’s

employee stock ownership plan

(ESOP) in order to conclude several

lawsuits filed by the U.S. Department

of Labor.

The Department filed a lawsuit in

1996 against Stephen McLane, the

trustee, as well as Kenneth Fullerton,

William Currie and Charles

Henninger, who were officials of the

former luxury car dealership. A

departmental lawsuit had also named

Auto Engineering Limited Partnership and Wainwright Bank and Trust

Company, which served as a custodian for the company’s profit sharing

plan, as defendants at the time. All

were charged with violating or

participating in violations of ERISA.

The lawsuits alleged, among other

things, that the individual defendants

were liable under ERISA for participating in and benefitting from illegal

transactions in which McLane

engaged that resulted in the misuse of

plan money, including: depositing
12 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

assets of the profit sharing plan into a

non-plan account for purposes of

making undocumented and unsecured

loans to Auto Engineering; using plan

money as collateral for corporate

loans and permitting the bank to use

plan assets to offset the company’s

debt to the bank; improperly loaning

plan money to a participant without

obtaining proper documentation and

subsequently using the loan proceeds

to offset a personal debt owed by the

participant to the company; failing to

properly establish the ESOP, to remit

employee contributions to the trust

and to allocate shares of company

stock purchased through the ESOP to

the accounts of participants; not

paying benefits owed to participants;

and allowing the plan’s administrator

to not file annual financial and other

reports required by ERISA.

On December 19, 1997, a partial

consent judgment was entered that

resolved the profit sharing plan

component of this case, following the

restoration by Wainwright

Bank and two officials of Auto

Engineering (Fullerton and Currie) of

a total of $390,000 to the participants

of the profit sharing plan.

Two partial consent judgments on

March 3, 1999, finally resolved the

remaining matters in this case. In

one, defendant Stephen McLane

agreed to restore to the ESOP a total

of $30,000.

In the other partial consent judgment,

defendants Kenneth Fullerton and

William Currie agreed to restore to

the ESOP a total of $85,000. In both

cases, the restored money was

credited to the accounts of plan

participants other than Charles

Henninger, William Currie, Kenneth

Fullerton and Stephen McLane.

In addition, all of the defendants

(except Wainwright Bank and Trust

Company) are permanently barred

from exercising any authority or

control over any employee benefit

plan covered by ERISA.

Herman v. Health Care Delivery

4-20-99

Van Nuys, Calif.

The U.S. Department of Labor

announced that a settlement agreement and consent decree was entered

in Los Angeles, Calif., settling the

Department’s lawsuit against Health

Care Delivery Services, Inc. and

seven individual members of its board

of directors who served as fiduciaries

of the company’s pension plan. A

total of $208,564 in losses resulted

from violations of ERISA.

The action resolves allegations raised

in the Department’s August 1998

lawsuit that, due to financial difficulties that began in July 1995, Health

Care Delivery Services President and

Chairman Clement Sainten ordered

the transfer of pension plan assets

totaling $157,200 into Health Care

Delivery Services’ accounts to pay

business-related expenses, including

the organization’s payroll.

By engaging in these prohibited

transactions, Sainten allegedly

breached his fiduciary responsibilities

under ERISA, including his duty to

act solely in the interests of the

retirement plan’s participants and

beneficiaries.

The settlement agreement and

consent decree were entered into by

the Department and Health Care

Delivery Services, Inc.; Sainten; and

by Roy Rodriguez, David T.

Feinberg, M.D., Elliott H. Goldstein,

Ph.D., Thomas D. Leary, Arthur W.

Weiss and V. Charles Charuvastra,

M.D., all of whom served as members of the board and as pension plan

fiduciaries. They allegedly violated

ERISA by failing to monitor

Sainten’s actions.

Health Care Delivery Services, a

California nonprofit organization,

operated Pride House, an adolescent

residential group home in Van Nuys,

and the West Los Angeles Treatment

Center, an outpatient drug treatment

facility.

Under the terms of the settlement

agreement and consent decree,

Sainten also was permanently barred

from serving as a fiduciary or service

provider to any employee benefit plan

covered by ERISA; and defendant

Roy Rodriguez, for a period of 3

years from the date of entry of the

consent decree, is prohibited from

participating in any discussions,

deliberations, votes or other activities

associated with the administration of

any employee benefit plan covered by

ERISA.

Herman v. Carolina Fitness

Equipment, Inc.

4-7-99

Miami, Fla.

A Federal District Court in Miami,

Fla., appointed an independent trustee

to manage and terminate the 401(k)

plan of Hollywood, Fla.-based
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 13

Carolina Fitness Equipment, Inc.,

under a settlement agreement obtained by the U. S. Department of

Labor.

Under the settlement, the court

appointed M. Larry Lefoldt of Lefoldt

& Co., located in Jackson, Miss., as

the independent manager of the plan

with authority to terminate and

distribute assets of the 401(k) plan.

Harvey Miller and Edwin B. Beam

Jr., also were removed from positions

as trustees of the plan.

Carolina Fitness, a North Carolina

corporation, was a retailer of exercise

equipment. Carolina Fitness was sold

in February 1994 to Bio-Dyne North

Corporation of Atlanta, which relocated the company’s operations to

Florida. The company ceased

operating Aug. 23, 1996.

The company sponsored the 401(k)

plan for 58 participants. The plan,

which had not been formally terminated, had assets of $361,929 as of

Sept. 30, 1998. According to the

lawsuit, no employer or employee

contributions had been made to the

plan since July 1996.

A December 1998, lawsuit filed by

the Department alleged Miller and

Beam terminated employment with

the company in July 1996 but did not

resign formally as trustees of the plan

or notify the plan’s third-party

administrator or group annuity

contractor of their resignation.

Carolina Fitness also allegedly failed

to appoint replacement trustees for

Miller and Beam or successor fiduciaries to manage and operate the

plan. Participants allegedly were

unable to direct their investments

among the different options available

under the plan and the company and

trustees failed to respond to participant inquiries.

Herman v. Cardillo

5-5-99

Howard Beach, N.Y.

The U. S. Department of Labor

obtained a consent order requiring the

trustees of the pension, annuity,

education and welfare funds of Local

363 of the International Brotherhood

of Teamsters located in Howard

Beach, N.Y., and TAP Electrical

Contracting Service, Inc., a contributing employer to the plans, to pay

more than $1.4 million to the funds as

restitution for improper reimbursements made to contributing employers for legal expenses and back

wages.

Under the court order, trustees

Anthony Cardillo and Eugene Iovine

were removed from their positions

with the plan, and, along with trustees

Patrick Bellantoni and Joseph

Canizio, were barred for 10 years

from serving as fiduciaries of employee benefit plans governed by

ERISA.

In earlier court actions, Thomas J.

Carlough was removed from his

position with the plan and Douglas

Windle was permanently barred from

serving as trustee to any plan covered

by ERISA.

These court actions resolved a lawsuit

filed by the Labor Department in

November 1992 against five fund

trustees for allegedly transferring

money to several contributing employers, including the TAP Electrical

Contracting Services, Inc., to compensate them for legal expenses and

back wages. Fund director Carlough,

who allegedly received excessive

reimbursement for conference and

restaurant expenses, previously

agreed to have a consent judgment

entered against him.

Herman v. GMP Associates

3-16-99

Honolulu, Hawaii

The U.S. Department of Labor

announced that a settlement agreement and consent order have been

entered in the U.S. District Court in

Honolulu, which resolves the

Department’s lawsuit against GMP

Associates, Inc., and its president

Wagdy Guirguis for alleged violations

of ERISA. The violations stemmed

from the administration of the GMP

Associates, Inc., 401(k) profit sharing

plan. GMP Associates, Inc., and its

wholly-owned subsidiaries GMP

Holding, Inc., GMP Construction,

Inc., and GMP Construction Guam,

Inc., provided architectural and

engineering services to their clients.

Under the settlement agreement and

consent order, the defendants will pay

the plan at least $169,235 representing an estimate of the amount of

employee contributions, employer

matching contributions and participant loan repayments owed to the

plan, plus interest, calculated through

Feb. 1, 1999.

The action resulted from a December

1998 lawsuit filed by the Department

that alleged GMP and Guirguis
14 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

breached the fiduciary responsibilities

imposed upon them under ERISA by

engaging in a pattern of withholding

employee contributions from participants’ paychecks and then failing to

timely forward these contributions to

the plan; and by failing to collect for

the plan loan repayments that were

withheld from employee paychecks

and GMP’s required 1995 matching

pension plan contribution.

In addition to the restoration of any

losses suffered by the plan, the

defendants agreed to relinquish their

positions as plan fiduciaries and to

appoint an independent fiduciary with

full discretionary authority to administer the plan’s assets.

Herman v. Bertin Steel Processing, Inc.

3-4-99

Cleveland, Ohio

The U. S. Department of Labor

obtained a consent judgment requiring Bertin Steel Processing, Inc. of

Wickliffe, Ohio, and trustees of its

welfare plan to pay $556,842 as

restitution for improper loans made

by the plan and to appoint an independent entity to manage the plan.

The Court ordered Bertin Steel and

trustees Bernard and Samuel

D’Ambrosi to make the restitution to

the plan as repayment for delinquent

loans made by the plan to Benefit

Management Consultants, Inc.

(BMCI), its owner Nicholas Vukich

and his wife Patricia Vukich.

Under the judgment, trustee Bernard

D’Ambrosi, who also serves as

president of Bertin Steel, is also

permanently barred from serving in a

position of trust or providing services

to any plan governed by ERISA.

Trustee Samuel D’Ambrosi, who also

is the company’s vice president, is

permanently barred from servicing

plans of Bertin Steel and barred for

10 years from dealing with any plan

governed by ERISA.

The defendants also were ordered to

guarantee repayment of $103,626.34

to the plan, representing principal and

interest on delinquent loans to

Richmond Industries, Inc., as well as

the repurchase of Richmond Industries stock owned by the plan for

$223,061.10 by March 31, 1999.

The Department sued the defendants

in December for misusing plan assets

to make improper loans and transfers

to themselves and others, including

BMCI and Richmond Industries.

The welfare plan provided health,

death, dental and disability benefits to

employees of Bertin Steel. At the

end of 1996, the plan covered 103

participants and reported $1,345,313

in assets.

Herman v. Wellmark, Inc.

3-2-99

Des Moines, Iowa

An Iowa-based insurance company,

formerly Blue Cross/Blue Shield of

Iowa and South Dakota, agreed to pay

$6.875 million to employers and their

workers who were denied discounts

they should have received for health

services.

The U.S. Department of Labor

reached a settlement with Wellmark,

Inc. of Des Moines, which also

agreed to pay $1.375 million in civil

penalties. The Labor Department

lawsuit, filed simultaneously with the

consent order and settlement agreement, alleged that Wellmark, while

operating as Blue Cross, improperly

overcharged ERISA-covered, selfinsured plans during the period from

1990 to 1994. The Department

alleged that Blue Cross negotiated

discounts with area hospitals but

retained the difference between the

reduced rates and the full cost

charged by hospitals. Blue Cross

improperly billed the plans for fees

based on the full amount rates rather

than the discounted amounts actually

paid by Blue Cross.

Blue Cross/Blue Shield of Iowa and

South Dakota administered more than

200 private employer self-insured

health plans, which are governed by

ERISA. In that capacity, the firm

provided administrative services for a

fee, including claims administration

and negotiation of discounts, rebates

and charges by area hospitals.

Herman v. Anand

2-1-99

Landover, Md.

An independent trustee was appointed

to manage the 401(k) plan of Applied

Research Corp. of Landover, Md.,

and two of the company’s former

owners were required to repay

$120,940 in restitution and civil

penalties for failure to remit

employee and employer contributions

owed to the plan, in a consent judgment obtained by the U.S. Department of Labor.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 15

Under the consent judgment, Alan N.

Kanter & Associates was appointed to

manage and operate the plan. Money

returned to the company’s 401(k)

plan distributed to the accounts of all

plan participants except defendant

Surendra P. S. Anand, the president of

Applied Research.

Anand and defendant Manjit K.

Anand were also ordered to pay

$20,156 in civil penalties for violating the prohibited transaction provisions of ERISA. The plan received

an additional $505,000 from Space

Applications Corp. as part of Space’s

1997 purchase of Applied Research’s

assets after Applied Research filed for

bankruptcy.

The defendants, who resigned as

trustees of the 401(k) plan, also are

permanently barred from serving in

positions of trust to any plan governed by ERISA.

Herman v. C. W. Haynes and

Co., Inc.

6-22-99

Columbia, S.C.

The U.S. Department of Labor

negotiated a settlement of its lawsuit

against Columbia, S.C.-based C.W.

Haynes and Company, Inc. and its

president. The defendants are required to pay the company’s profit

sharing plan $1,093,172 for the plan’s

40 percent interest in the Folly

Fontaine Commerce Center partnership and for the fair market value of

the note payable to the plan by the

Fontaine partnership.

The Department’s lawsuit alleged the

defendants invested imprudently in

real estate and in a related partnership

in excess of $3.3 million. The $1.4

million figure was the outstanding

amount of a loan made by the plan to

the Folly Fontaine partnership.

According to the lawsuit, the firm

invested most of the plan’s assets in

real estate and property-related

partnerships between 1956 and 1990.

In 1988, the plan made a loan for a

land purchase to the Folly Fontaine

partnership, which had 40 percent

plan ownership and 60 percent

ownership by third-party investors.

The loan was subsequently extended

until the outstanding loan balance

reached $1,419,825.

C. W. Haynes and Company and

trustee W.E. Sellars allegedly failed to

collect the outstanding balance of the

loan. The company was charged with

failing to monitor the activities of

Sellars or to remedy the improper

transactions with the plan.

The defendants also were required by

the settlement to diversify the plan’s

assets as soon as possible; to refrain

from investing in real estate or related

ventures unless such investments

were deemed prudent and advantageous to the plan; and to amend,

effective June 30, 1999, its distribution provisions to allow participants

to request and receive distributions at

and after termination of employment.

C.W. Haynes was founded in 1934 to

conduct investment business with a

fire and marine insurance department.

It subsequently converted its business

to land development and real estate

sales. There were 50 participants and

$4.78 million in assets in the plan as

of June 30, 1996.

Criminal Cases

U.S. v. Pereira

7-21-99; 1-7-00; 3-30-00

Boston, Mass.

Paul Pereira of Fall River, Mass., was

sentenced March 30, 2000, to 24

months imprisonment, 3 years

supervised release, and ordered to

make restitution of $880,746 after

being charged on July 21, 1999, with

health care fraud, embezzlement and

making false statements relating to a

Federal health program. The defendant allegedly established a phony

insurance plan called Ameri-Med and

collected premiums through his

company. Pereira was not a licensed

insurance carrier, and Ameri-Med

was not a licensed insurance product,

yet Pereira sold the Ameri-Med

product largely to small businesses

and self-employed individuals,

mostly throughout Massachusetts,

New Hampshire and Rhode Island.

In the scheme, he fraudulently

represented 60 Ameri-Med subscribers as his own employees in an

attempt to get legitimate health

insurance coverage through the Blues

of Rhode Island.

It was alleged that between August

1996 and May 1998, he collected

more than $1.6 million in premiums

but only paid $360,000 in claims and

diverted more than $900,000 in

premiums to his personal use or to

support businesses that he owned.

Pereira plead guilty on Jan. 7, 2000,

to health care fraud and to embezzlement from a health care benefit

program. This case was investigated

by PWBA with assistance from the

FBI.
16 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

U.S. v. Selman

7-21-99; 12-17-99; 4-3-00

Charlottesville, Va.

Joe Bob Selman of Charlottesville,

Va., was sentenced on April 3, 2000,

to 41 months imprisonment, 3 years

supervised release and ordered to

make more than $2.3 million in

restitution to the 10 victim plans and

to Metlife Insurance for his part in a

scheme that allegedly netted more

than $2.3 million in embezzled funds.

His wife Jeannie Selman pleaded

guilty and admitted that she also was

responsible for $1,252,597 in losses

to companies that were victims of her

fraudulent acts. She was incarcerated

in January 1999.

The Selmans were officers of the

defunct Duke Benefit Services, Inc., a

company designed to administer

health care benefit plans for a number

of different client companies, involving more than 2,400 participants.

The investigation was conducted by

PWBA with assistance from the

United States Postal Inspection

Service, the FBI and the Virginia

State Police.

U.S. v. Huppe

7-30-99; 1-25-00

Buffalo, N.Y.

Allen Huppe, a Canadian national,

was sentenced on Jan. 25, 2000, to a

3-year prison term, 3 years supervised

release and ordered to make restitution of $750,000 after being found

guilty on July 30, 1999, of embezzling $750,000 from the Highland

Nursing Home Defined Contribution

Pension Plan. Huppe served as

investment manager of the nursing

home’s pension plan, located in

Massena, N.Y.

Through a related civil investigation,

PWBA was able to restore $702,740

to the plan. The criminal action is the

result of a joint investigation conducted by PWBA, the FBI and the

Labor Department’s Office of the

Inspector General.

U.S. v. Goto, et al.

9-29-99; 11-8-99; 11-29-99

Honolulu, Hawaii

The owners of a Hawaiian tour

company were indicted on Sept. 29,

1999, for conspiring to embezzle

$379,569 from their company’s

401(k) plan. Tetsuya Goto, Issac

Kuwamura, and Randall Yamane, all

of Honolulu, were charged with the

fraudulent action. The defendants

were principals of U-Me-Enterprises,

a Hawaii corporation operating

recreational tours in Hawaii. The

conspiracy count of the indictment

listed 22 overt acts alleging primarily

that the defendants failed to deposit

funds withheld from employee

paychecks by failing to segregate plan

assets from the company’s assets, by

falsely reporting the amount of

employer contributions made to the

plan, and by failing to disclose that

unauthorized withdrawals had been

made from the plan. The plan

covered 105 employees and had

assets of more than $400,000.

Yamane pleaded guilty to conspiracy

on Nov. 8, 1999. Kuwarura pleaded

guilty to conspiracy on Nov. 29,

1999. At the time of the indictment,

sentencing remained pending as

of December 1999 for the three

defendants. The investigation in this

case was conducted by PWBA.

U.S. v. McCarthy

10-13-99

White Plains, N.Y.

A guilty verdict was returned on

Oct. 13, 1999, after a 10-day trial that

resulted in the conviction of Robert

McCarthy on charges of embezzling

$2.1 million from the Lloyd’s Shopping Center, Inc. Pension and 401(k)

Plans. McCarthy was the majority

owner of Lloyds. The plans covered

288 participants.

This case was jointly investigated by

PWBA, the Inspector General’s

Division of Labor Racketeering, and

the Internal Revenue Service’s

Criminal Investigative Division.

Sentencing remains pending.

U. S. v. Walker

2-9-99; 9-3-99, 2-28-00

Portland, Maine

The former Chief Financial Officer

for Beacon Cadillac Oldsmobile and

Jeep, in Bangor, Maine, Christopher

Walker was charged on Feb. 9, 1999,

with embezzling $925,000 from the

company’s profit sharing plan.

Walker allegedly told co-workers he

was “remodeling” when he removed

furniture and computer equipment for

his office. Later, from an untraceable

cellular phone, he called the dealership and said he quit. He pleaded

guilty to the embezzlement on Sept.

3, 1999. He was sentenced Feb. 28,

2000, to 46 months imprisonment, to

be followed by a period of probation

and ordered to make restitution of

$505,082. The investigation was

conducted by PWBA.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 17

U.S. v. Krimsky

2-11-99; 6-10-99

Cleveland, Ohio

On Feb. 11, 1999, a federal jury in

Cleveland, Ohio, convicted Leonard

Krimsky, 57, of Englewood, N. J., the

sole trustee of his company’s defined

benefit plan, the IAM Kent Worldwide Machine Plant Retirement

Income Plan, of embezzling

$2,195,000 of plan funds through

wire transfers from the plan to his

company, Kent Worldwide Machine

Works. It is located in Stow, Ohio.

He was also convicted of making

false statements on documents

required by ERISA. The plan covered 240 participants and had assets

of $3,410,355. Kent was purchased

in 1990 by Worldwide Process

Technologies, of Allendale, N. J., a

company solely owned and controlled

by Krimsky. In 1993, Krimsky

acquired 100 percent of the stock of

the financially troubled Kent from its

parent corporation. Krimsky named

himself as the plan’s sole trustee and

began to make a series of “loans”

from the plan to Kent. When he

finished, the plan had lost almost 90

percent of its assets.

He was sentenced June 10, 1999, to 5

years of imprisonment and ordered to

make restitution of $2.2 million. A

parallel civil investigation has resulted in the recovery of $1 million,

and the Pension Benefit Guaranty

Corporation has taken over the

pension plan to assist the workers in

getting their benefits.

The investigations in these parallel

criminal and civil actions were

conducted by PWBA. Criminal

prosecution was brought by the

United States attorney for the Northern District of Ohio, and the civil

litigation was brought by PWBA.

U.S. v. Carrico

3-12-99; 5-18-99, 9-8-99

San Francisco, Calif.

Dan Carrico of Benicia, Calif., the

owner of General Industrial Insulation, Inc., was sentenced Sept. 8,

1999, to 60 months probation, fined

$10,000 and ordered to make restitution of $116,351. He was charged on

March 12, 1999, with embezzling

$75,000 from the company-sponsored

profit sharing plan. The plan had

assets of $116,350 and covered 16

participants. He pleaded guilty as

charged on May 18, 1999. This case

was investigated by PWBA.

U.S. v. Asmus

3-17-99, 6-9-99

West Haven, Conn.

George Asmus, III, was sentenced on

June 9, 1999, to 12 months probation

and fined $5,000 after pleading guilty

on March 17 to making false statements on records required under

ERISA. Asmus was the owner and

president of Asmus Electric, Inc.,

West Haven, Conn., and the sponsor

of the Asmus Profit Sharing and Trust

Plan. Between October 1992 and

September 1995, he was required to

pay into the plan $286,735 of prevailing wage fringe benefits for the

employees of the plan. During that

period, he paid a total of $170,000.

At the end of the 1995 plan year, he

owed a total of $116,735 to the plan.

He falsified the annual report, Form

5500, saying there were no employer

contributions owed to the plan that

were overdue, but, at that time,

$20,936, was owed to the plan.

In addition, at the time of filing the

1995 annual report, $95,759 in

contributions required for that year

had not been made. As part of the

plea agreement, Asmus agreed to

make full restitution to the plan, and

$116,735 was paid to the plan.

The investigation was conducted by

PWBA.

U.S. v. Kossan

3-22-99, 6-11-99, 7-2-99

Vienna, Va.

U.S. v. Parris

10-15-99, 12-21-99, 3-3-00

Alexandria, Va.

Robert Kossan and Robert Parris,

former trustees of the 401(k) plan for

Matrix Corporation in Vienna, Va.,

were sentenced on July 2, 1999, and

March 3, 2000, respectively, for

embezzling $653,185 from the

company’s plan. Part of the theft

involved employee contributions

deducted from payroll but never

forwarded to the trust. The plan

covered 51 employees. Kossan

pleaded guilty to a criminal information that charged him with theft on

March 22, 1999. He was sentenced

to serve 18 months in jail followed by

2 years supervised release.

Parris was indicted on Oct. 15, 1999,

and convicted on Dec. 21, 1999, on

conspiracy to embezzle plan assets, to

engage in money laundering and

falsification of records required by

ERISA. He was sentenced to 21

months imprisonment and 1 year of
18 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

supervised release. The criminal

investigation and a parallel civil

investigation were conducted by

PWBA. Restitution of $400,000 was

made to the plan.

U.S. v. Baker

4-19-99, 7-29-99

Geneva, N.Y.

Joan Baker, a claims processor for the

Carpenters Finger Lake District

Health and Welfare Plan in Geneva,

N. Y., was sentenced on July 29,

1999, to 3 years probation and

ordered to perform 150 hours of

community service, after pleading

guilty on April 19, 1999, to an ERISA

false record charge. Baker submitted

false claims resulting in excessive

reimbursement of about $27,000.

Restitution of $24,496 was made to

the plan. The plan had assets of $1.4

million and covered 501 participants.

The investigation in this case was

conducted by PWBA and the Inspector General’s Division of Labor

Racketeering.

U.S. v. Bilyeu

4-27-99

Odessa, Tex.

Denver Bilyeu, who was employed as

Chief Financial Officer for the

Holloman Construction Company of

Odessa, Tex., was sentenced April 27,

1999, to 18 months imprisonment and

5 years probation. He made restitution voluntarily prior to his guilty

plea last October. He had been

indicted on pension embezzlement

and bank fraud charges.

The scheme was revealed when the

plans’s bank trustee received a

complaint that the bank had sent an

IRS Form 1099 to Bilyeu indicating

he had received a distribution. The

bank was not aware of any such

action and notified PWBA, who

discovered that Bilyeu, by writing

checks against the plan account and

negotiating the checks, converted

more than $97,000 of plan funds to

his use. PWBA, working together

with the FBI, discovered that Bilyeu

embezzled upwards of an additional

million dollars from the company by

using his position to siphon off

corporate funds through a web of

bank accounts under his control.

The plan, known as the Jack Whisler

Company Pension Plan, covered 36

participants and had assets of

$171,000. Holloman had once owned

the Jack Whisler Company but sold it

in 1992; however, Bilyeu improperly

continued to exercise control over the

pension plan. The joint investigation

was conducted by PWBA and the

FBI.

U.S. v. Kaplan, et al.

5-7-99, 1-28-00

Uniondale, N.Y.

Harold Kaplan , owner of Halpack

Plastics Inc. on Long Island, N.Y.,

was sentenced on Jan. 28, 2000, to 6

months home detention, 4 years

probation and 100 hours of community service. He pleaded guilty on

May 7, 1999, to one count of embezzling $170,000 from the company’s

defined benefit plan and $48,000

from its 401(k) plan. He was also

ordered to make restitution of

$7,299.02 to the 401(k) plan and to

pay $25,000 to the U.S. Attorney’s

Office. His wife, Sandra Kaplan, was

sentenced on Feb. 4, 2000, to 6

months home detention, following

her husband’s term of home

detention and 2 years probation. She

was also ordered to make restitution

of $7,228.02 to the 401(k) plan and to

pay $12,500 to the U.S. Attorney’s

Office.

Sandra Kaplan pleaded guilty to one

count of failing to keep, disclose and

maintain plan records required under

ERISA’s reporting and disclosure

provisions. The case was based on a

tip from a participant who alleged

that 401(k) employee contributions

were not being forwarded to the trust.

The case was investigated by PWBA.

U.S. v. Herman

5-7-99, 8-3-99

Houston, Tex.

Dr. James Herman, M.D., of Houston,

was charged in a two-count criminal

information with falsely representing

plan assets on the plan annual report

and with falsifying his tax returns,

after pleading guilty on Aug. 3, 1999.

The fraud involved a profit sharing

plan that he sponsored through his

practice, which covered 23 participants. He was immediately sentenced

following the plea to 5 months

incarceration, 5 months home detention, 2 years supervised release

scheduled to run concurrent with

home detention, and ordered to make

$371,538 restitution to plan participants. He made an immediate

installment payment of $50,000.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 19

The investigation was jointly conducted by PWBA and the Internal

Revenue Service’s Criminal Division

of Investigation.

U.S. v. Taylor, et al.

5-25-99, 7-7-99, 9-17-99

Dallas, Tex.

James Taylor, a former Dallas insurance entrepreneur, was sentenced

Sept. 17, 1999, to 15 months imprisonment as a result of failing to appear

for a prior sentencing. The sentence

was in addition to a 10-year sentence

imposed in May 1998. He was

previously convicted on charges of

mail and wire fraud, and money

laundering related to the theft of

millions of dollars from Kentucky

coal mine companies and workers’

compensation programs. The funds

were supposed to be used for worker

compensation benefits, which included medical insurance. He was

arrested in Houston by U.S. marshals

and charged on May 25, 1999, with

failing to appear for sentencing. His

wife, Vena Vines, was charged with

aiding a fugitive. She also pleaded

guilty and was sentenced to 36 months

probation and fined $3,200.

They had purchased a car under a

bogus name and resided in a home

that was paid in full under the name

of an alias. This case was jointly

investigated by PWBA and the FBI.

United States v. Stetler

6-9-99, 12-10-99

Chicago, Ill.

Daniel Stetler was sentenced Dec. 10,

1999, to 24-months imprisonment, 5

years probation and ordered to make

restitution to the bank, following his

release from incarceration, at $200

per month. The sentence stemmed

from a charge on June 9, 1999, that

Stetler made false statements to a

bank in order to get a larger line of

credit. Stetler was the former president of the bankrupt Louis Allis Co.,

in Milwaukee. Allegedly, he directed

employees to manipulate the firm’s

production records, which resulted in

the company’s accounts receivable

being overstated by $4.7 million. The

loss attributed to his actions is

between $1.5 and $2.3 million. The

Louis Allis Co., which was a manufacturer of electric generators, closed

its doors in October 1992 and filed

for liquidation under Chapter 7 of the

U.S. Bankruptcy Code. More than

230 workers lost their jobs.

In a civil action, the Department of

Labor alleged that nearly $203,000

in contributions to the employee

retirement plans, including $176,000

that was deducted from payroll

checks, never made it to the plans’

investment managers. The judge also

ordered Stetler to cooperate with the

Department of Labor in their civil

action. The investigation into the

criminal allegations was conducted

by PWBA and the FBI.

U.S. v. Woods

6-28-99, 9-17-99

Dallas, Tex.

Pam Woods, a legal compliance

claims auditor, pleaded guilty on June

28, 1999, to stealing $95,000 from

the South Central United Food and

Commercial Workers Union Health

and Welfare Trust, and was sentenced

Sept. 17, 1999, to serve 15 months in

a federal penitentiary. The unionsponsored health plan provided

medical coverage for more than

25,000 union members who worked

primarily in grocery stores in Texas,

Arkansas, Louisiana, Missouri and

Oklahoma. The investigation was

handled by PWBA, the Inspector

General’s Division of Labor Racketeering and the FBI.

U.S. v. Moore

6-2-99

Hartford, Conn.

On June 2, 1999, the Second Circuit

Court of Appeals added an additional

14 months to the prison sentence of

Gary Moore, who had been sentenced

last October 1998 to 51 months

imprisonment for embezzling more

than $1.5 million from the EmergiLite 401(k) plan.

The sentencing judge ruled that the

“abuse in this case involved a continuous course of conduct persisting

over a period of 10 years or more”

and that the conduct could have

continued indefinitely if the illegal

acts hadn’t been discovered. In

imposing the sentence, he also

maintained the defendant should have

foreseen that his embezzlement

would cause the company’s employees “significant financial hardship.”

This case was investigated by PWBA

with assistance from the FBI and the

Inspector General’s Division of Labor

Racketeering. In a parallel civil case,

the Boston office was able to recover

$2,031,000 for the plan.
20 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

U.S. v. Sander

6-29-99

Kansas City, Kan.

Barry Sander, the former owner of an

Overland Park, Kan., company

pleaded guilty to a one-count information charging him with embezzling

assets from his company’s 401(k)

plan in 1999. His sentence was

postponed when it was discovered he

was involved in an earlier investment

scam involving a golf course development, where he pleaded guilty to wire

fraud.

Prior to sentencing, the government

and defense had agreed to an 18-

month sentence total for both crimes

to be served concurrently.

The sentencing judge ruled that such

a sentence would send the wrong

message, and sentenced Sander,

instead, to 12 months for the embezzlement plea and 12 months for

the wire fraud plea, with the sentences to be served consecutively.

The longer sentence was based on the

fact that employees’ retirement

security was significantly compromised, according to the judge. This

investigation was conducted by

PWBA and the FBI.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 21

1999 Accomplishments

Education and Outreach

PWBA used the occasion of ERISA’s

25th anniversary to renew its commitment of service to the public. The

Agency initiated a year-long education and outreach campaign to help

workers and their families understand

their rights under the Federal pension

and health laws and to obtain benefits

to which they are rightfully entitled.

Its goal was to increase the public’s

awareness of PWBA as their first

resource for information on pension

and health benefits plans and their

rights.

To meet this objective, the Agency:

• Published a kick-off interview by

Secretary Alexis Herman with a

syndicated columnist from the Los

Angeles Times that reached 22

major newspapers nationwide, in

which Secretary Herman answered

the most commonly asked questions about pensions and health

benefits;

• Held regional seminars in Atlanta,

Boston, San Francisco and Philadelphia to educate practitioners

and consumers about the Agency’s

services;

• Published a news column, How to

Learn More About Your Benefits,

authored by Secretary Herman and

circulated to more than 1 million

readers of medium and small

newspapers nationwide;

25th Anniversary Milestones in Participant Assistance/

Public Education and Outreach

• PWBA created the Division of Technical Assistance and Inquiries in the

1980s to answer consumers’ questions about pension, health and other

workplace-based benefits. The Office was initially staffed with 10

analysts.

• From 1995-1999, customer service staff responded to approximately

900,000 inquiries and recovered more than $147 million in pension

benefits (see Figures 2 and 3).

• Increased consumer inquires required increased staff. From 1995-1999,

the agency’s customer service staff expanded from 12 to 84 benefits

advisors located in the national and regional offices throughout the

country.

• PWBA launched in 1995 the Retirement Savings Education Campaign

to educate working Americans about the importance of saving for

retirement.

• A second education effort, the Health Benefits Education Campaign,

was launched in 1998 to inform workers of their health benefits rights.

• By 1999, PWBA’s roster of publications had grown to more than 45,

with a distribution of 800,000 a year. The Agency promoted its issuances through a toll-free 1-800 number, print and broadcast public

service announcements and through its Web site.

Participant Assistance/

Public Education and Outreach
22 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

• Connected the general public with

specific regional offices, where

they could obtain assistance or

answers to inquiries; produced a

series of public service announcements; and

• Wrote news releases on enforcement actions for regional media

organizations’ use.

In addition to specialized educational

and outreach campaigns, PWBA

maintained its ongoing educational,

outreach and customer assistance

initiatives developing and distributing

new publications; continuing to

promote the goals of the Retirement

Savings Education and Health

Benefits Education Campaigns; and

continuing to assist plan participants

by answering a record number of

consumer inquiries and obtaining

benefit recoveries.

The Agency produced several new

publications in 1999, and continued

to maintain and update an array of

booklets and pamphlets that educated

consumers, pension plan participants

and their beneficiaries, businesses,

service providers and legal professionals. Last year’s popular consumer publication, For Employees...

A Look at 401(k) Plan Fees, was

followed by a similar publication for

employers.

For Employers ... A Look at 401(k)

Plan Fees was released by Secretary

Herman in conjunction with a new

401(k) Plan Fee Disclosure Form.

Employers may use the 401(k) fee

disclosure form to obtain information

from prospective plan service providers to help them make a selection.

The new booklet lists 10 basic

Total Inquiries Handled

160

140

120

100

60

80

40

20

1995 1996 1997 1998 1999

0

96,034

135,452

155,035 150,772 156,124

Thousands

Figure 2.

questions employers should answer in

considering fees and expenses for

services in both selecting and monitoring plan service providers.

As part of PWBA’s outreach to

minority audiences, the Agency

produced three additional publications in Spanish. The three most

recent publications educate the

nation’s Spanish-speaking population

about health benefits. They are:

• Las 10 mejores maneras de hacer

que sus beneficios médicos

funcionen para usted (Top 10

Ways to Make Your Health

Benefits Work for You);

• Los cambios de vida requieren

tomar decisiones médicas ...

Conozca sus opciones de

beneficios (Life Changes Require

Health Choices ... Know Your

Benefit Options); and

• Los cambios de condición laboral

requieren hacer elecciones

médicas ... Proteja sus derechos

(Work Changes Require Health

Choices ... Protect Your Rights)

In addition, the Agency issued several

other revisions to publications in the

health area that included an interim

revision to Health Benefits under the

Consolidated Omnibus Budget

Reconciliation Act (COBRA); and an

expansion of Questions and Answers: Recent Changes in Health

Care Law, to provide an overview

of the benefits and requirements

under the Health Insurance Portability

and Accountability Act, the Mental
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 23

40

12.5

16.3

30.9

46.7

62.5

30

60

70

Millions

50

20

10

0

1995 1996 1997 1998 1999

$169 Million

Participant Assistance – Individual Benefit Recoveries

Note: These recoveries were obtained by PWBA benefit advisors in response to 

participants’ complaints. These recoveries are in addition to those recoveries by 

investigators through the ongoing Enforcement program.

Figure 3.

Health Parity Act, the Newborns’ and

Mothers’ Health Protection Act and

the Women’s Health and Cancer

Rights Act.

Other publication reprints and

revisions included: Women and

Pensions ... What Women Need to

Know and Do; Keeping an Eye on

the Future (the Agency’s recruitment

brochure); Customer Service Standards: Our Commitment to Quality;

In Brief: New Form 5500; and In

Brief: Can the Retiree Health

Benefits Provided by Your Employer

Be Cut?. In addition, the Agency

continued to produce its in-house,

bimonthly newsletter Panorama.

Through an existing partnership with

the General Services Administration’s Consumer Information Center

and the Internal Revenue Service

(IRS), a notice about the Agency’s

most widely read publication, Top 10

Ways to Beat the Clock and Prepare

for Retirement, was included with 2

million randomly selected tax return

checks mailed by the IRS. The

brochure was one of several publications mailed in response to taxpayer

requests, and the marketing strategy

allowed the Agency to reach thousands of consumers at a critical

moment — with their tax refund

check in hand — urging them to

“save for retirement”.

PWBA continued to produce, in an

easy-to-read format, its list of publications and field office contacts. This

format was used in developing

marketing materials for a popular

publication, Pension and Health

Care Coverage ... Questions and

Answers for Dislocated Workers, and

in presenting a summary of the

benefits of legislation under The

Mental Health Parity Act. Another

marketing tool, Workers’ Pension and

Health Benefit Plans ... Where to Go

for Information, was produced to

promote the services of the Agency’s

field offices.

Health Benefits Education. By the

end of 1999, staff members of the

Health Benefits Education Campaign

had met with its 65 partner organizations in an effort to educate consumers about their rights and about how

to obtain quality health care benefits

under their employer-provided health

plans. They also informed employers

— particularly small employers —

about the value of providing quality

health benefits to employees.

In the Campaign’s first year, the

partners worked together to create the

mission statement and set general

Campaign goals. Three working

committees were established to begin

research, design and development of

future Campaign products.

The Campaign conducted focus

groups in different areas of the

country throughout the year to

determine consumers’ knowledge of

their current health benefits rights

and responsibilities. This information

will be used to develop additional

educational materials and messages

as the Campaign progresses.
24 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

Staff members from PWBA’s national

and regional offices gave presentations at seminars in several states,

working with the Georgetown University Institute for Health Care Research and Policy, as part of its

Consumer Health Care Education

project. These seminars provided

information about federal laws that

affect employer-provided health

benefits.

Retirement Savings Education. In

1999, PWBA continued to build on

the outreach initiatives developed

since its signature savings campaign

was launched in 1995. Some of the

major highlights of the Campaign

included the following outreach

activities:

• Produced a news segment on

women and retirement savings for

CNBC’s Today’s Health, which

aired in syndication for a year and

reached 55 million households;

• Produced a news segment for

Parenting in the 90s and Beyond to

encourage parents to teach their

kids to save, which aired in syndication for a year;

• Developed a new series of print

public service ads targeting women

and minorities that reached millions of readers;

• Worked in partnership with the

U.S. Securities and Exchange

Commission to exhibit retirement

savings materials at SEC Town

Hall meetings throughout the

country;

• Collaborated with the Certified

Financial Planner Board of Standards to develop Savings Fitness:

A Guide to Your Money and Your

Financial Future; and

• Distributed more than 600,000

copies of the Labor Department’s

retirement savings brochures and

booklets through the Consumer

Information Center, the Agency’s

1-800 number and through other

sources.

Participant Assistance

Education and outreach activities

continued to increase the volume of

consumer inquiries. In 1999,

PWBA’s benefits advisors handled

more than 156,000 inquiries, with

benefit recoveries of more than $62.5

million. More than 91,000 inquiries

were made on behalf of participants

about health and welfare plans, more

than 70,000 inquiries were made

about pension plans, and more than

11,000 were made concerning other

plans (see Figures no. 4 and 5).

Total = 156,124

Telephone 132,877

Written 22,201

Visitors 796

Electronic Mail 250

Benefit Recoveries

$62.5 million

Summary of Inquiries

Calendar Year 1999

Figure 4.

Summary of Inquiries

Calendar Year 1999

Health & Welfare 

Plans (91,760)

Pension Plans 

(70,128)

Other Plans 

(11,793)

Some inquiries cover more than 

one subject.

Figure 5.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 25

25th Anniversary Milestones in Exemptions

• The first Prohibited Transaction Class Exemption (PTE 75-1), covering

certain transactions in the securities industry, was issued in 1975 by

PWBA and the Internal Revenue Service (IRS).

• A Prohibited Transaction Exemption (PTE 84-14) was issued in March

1984 for transactions that involved plan assets managed by an independent qualified professional assets manager or QPAM. This class

exemption allowed plans managed by QPAMs to engage in a number of

transactions with related parties without first having to seek an individual prohibited transaction exemption.

• Prohibited Transaction Exemption (PTE 96-62) was issued in July 1996.

Under this class exemption, PWBA offered a faster exemption process

where the transactions involved are substantially similar to at least two

previously granted individual exemptions (EXPRO).

Exemptions

1999 Accomplishments

In 1999, PWBA received 187 exemption applications, granted 109, 86

were denied or withdrawn and 183

were pending at year’s end. The

following listing summarizes the

exemptions granted, amended and

proposed during the year.

Class Exemptions Overview

• Received three applications for

class exemptions in 1999. PWBA

granted two and had 11 under

consideration at the end of the

year.

Amendments to Existing Class

Exemptions

• Granted two significant amendments to existing class exemptions,

PTEs 93-33 and 97-11. These

class exemptions permit individuals with IRAs or Keogh plans to

receive certain services, at reduced

or no cost, from a bank or brokerdealer. The account balance in the

IRA or Keogh plan is taken into

account to determine eligibility.

• Proposed amendments to PTE 80-

26, a class exemption that permits

related parties to make interest-free

loans to plans. The temporary

amendment would expand the

current exemption to cover circumstances in which a loan would be

made to a plan to address Y2K

liquidity problems.

Proposed Class Exemptions

• Proposed a class exemption to

permit cross-trades of securities by

index and model-driven funds, as

well as between such funds and

certain large accounts, in connection with a portfolio restructuring

program for such accounts.

EXPRO Exemptions Overview

• Received 51 applications submitted pursuant to EXPRO. PWBA

granted 32 exemptions and had 10

under consideration at the end of

the year.

EXPRO Grants for

Securities Lending

• Morgan Stanley & Company

Inc., (MS&Co.) received authorization for employee benefit plans

to lend securities to Morgan

Stanley & Co. International Ltd. or

any other MS&Co. affiliate based

in the United Kingdom, Japan or

Switzerland. Morgan Stanley

Trust Company (MSTC), an

affiliate of MS&Co., acts as

securities lending agent (or subagent) for the plans. The exemption permits MSTC or other

affiliates of MS&Co. to receive

compensation as a lending agent

(PTE 99-01E; January 4, 1999).

• Merrill Lynch Pierce Fenner &

Smith, Inc. (Merrill Lynch)

received authorization to permit: 1)

purchases or sales of securities

(including options thereon) between certain affiliates of Merrill

Lynch, which are foreign brokerdealers or banks (Foreign Affiliates), and employee benefit plans

for which the Foreign Affiliates are

parties in interest; 2) extensions of

credit to the plans by the Foreign

Affiliates to permit short sales or

the settlement of securities transactions (regardless of whether such

transactions are affected on an

agency or a principal basis), or in
26 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

connection with the writing of

options contracts; and 3) the

lending of securities to the Foreign

Affiliates by the plans (PTE

99-21E; Sept. 8, 1999).

EXPRO Grants for Asset-Backed

Securities

• Bank of America, N.A., and Bank

One Corporation received

authorizations to allow employee

benefit plans to acquire and hold

asset-backed securities representing equity interests in trusts

holding credit card receivables

(PTE 99-11E; March 26, 1999).

• Ironwood Capital Ltd. received

authorization to allow plans to

acquire and hold asset-backed

securities issued by trusts holding

secured receivables or obligations

that have prefunding arrangements

(PTE 99-31E; Dec. 20, 1999).

Individual Exemptions Overview

• Received 133 applications for

individual exemptions. PWBA

granted 75 exemptions and had

162 under consideration at the end

of the year.

Individual Exemptions for

Securities Lending

• Citibank, N.A. (Citibank),

including Salomon Smith Barney

(SSB), was granted an exemption

to permit the lending of securities

by employee benefit plans to

affiliated U.S. registered brokerdealers of SSB or Citibank, and

affiliates of SSB or Citibank that

are based in the United Kingdom,

Japan, Germany, Canada and

Australia. The exemption granted

to Citibank, or any U.S. affiliate of

Citibank, is applicable in situations

where these institutions act as

securities lending agents (or

subagents) to plans, which includes those plans for which

Citibank also acts as directed

trustee or custodian of the securities being lent (PTE 99-21; May

27, 1999).

• The Chase Manhattan Bank

received an exemption to permit

the lending of securities to affiliates of Chase Manhattan Corporation (CMC) by employee benefit

plans for which CMC acts as

directed trustee or custodian and

for which CMC, through its Global

Securities Lending division or a

U.S. affiliate of CMC, acts as

securities lending agent (or subagent) and thereby receives

compensation as the lending agent

(PTE 99-34; Aug. 25, 1999).

• Bankers Trust Company (BTC)

also received an exemption to

permit the lending of securities by

employee benefit plans to affiliates

of BTC, a wholly owned subsidiary of Deutsche Bank AG (DB),

that are either 1) banks supervised

by the U.S. or by a state within the

U.S., or broker-dealers registered

under the Securities Exchange Act

of 1934; or 2) foreign affiliates of

BTC and DB that are brokerdealers or banks in certain specified jurisdictions. Under the

exemption, BTC, DB or their

affiliates may act as a securities

lending agent (or subagent) for the

plans involved and may receive

compensation as the lending agent

(PTE 99-50; Jan. 5, 2000).

• Donaldson, Lufkin & Jenrette

Securities Corporation (DLJ)

was granted an exemption to

permit: 1) purchases and sales of

securities, and options between

certain affiliates of DLJ, which are

foreign broker-dealers (Foreign

Affiliates), and employee benefit

plans with respect to which the

Foreign Affiliates are parties in

interest; 2) any extension of credit

to the plans by the Foreign Affiliates to permit the settlement of

securities transactions (regardless

of whether such transactions are

affected on an agency or principal

basis), or in connection with the

writing of options contracts; and

3) the lending of securities to the

Foreign Affiliates by the plans

(PTE 99-45; Nov. 9, 1999).

Individual Exemptions for

Demutualizations

• MONY Life Insurance Company

(MONY) received an exemption to

permit the receipt of common

stock of the MONY Group, Inc., a

holding company and the parent

corporation of MONY, or the

receipt of cash or policy credits, by

any eligible policyholder of

MONY that is an employee benefit

plan other than a plan maintained

by MONY or an affiliate for its

own employees, in exchange for

such policyholder’s membership

interest in MONY, in accordance

with the terms of a plan of reorganization adopted by MONY and
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 27

implemented according to New

York state insurance law (PTE

99-14; April 5, 1999).

• Manufacturers Life Insurance

Company (Manulife) was granted

an exemption to permit the receipt

of common stock of Manulife

Financial Corporation, the holding

company for Manulife, or the

receipt of cash or policy credits,

by any eligible policyholder that is

a plan other than a policyholder

that is a plan maintained by

Manulife or an affiliate for its own

employees, in exchange for such

policyholder’s membership interest

in Manulife, in accordance with

the terms of a plan of reorganization adopted by Manulife and

implemented under the insurance

laws of Canada and the State of

Michigan (PTE 99-41; Oct. 4,

1999).

Individual Exemptions for

Asset-backed Securities

• Mellon Financial Markets, Inc.

received an exemption for transactions relating to the acquisition and

holding by plans of asset-backed

securities representing equity

interests in trusts that hold specified types of secured receivables or

obligations. The exemption is

limited to trusts that have a fixed

pool of assets, but permits a

prefunding arrangement for

additional receivables acquired

during a prefunding period of no

more than 90 days (PTE 99-11;

March 8, 1999).

• Fleet Bank, R.I., was granted an

exemption to permit employee

benefit plans to acquire and hold

asset-backed securities representing equity interests in trusts

holding credit card receivables.

Such assets may be added to and/

or removed from the trust during a

so-called “revolving period”. The

exemption contains special conditions designed to safeguard the

investment interests of plans

against additional risks from a

decline in the quality of the assets.

Among other things, the trusts are

allowed to enter into certain types

of notional principal contracts (i.e.,

swap transactions) with

counterparties that are highly rated

as a means for facilitating timely

payments of interest and principal

that are due to the holders of these

securities (PTE 99-39; Oct. 4,

1999).

Individual Exemption for

QPAM-Related Relief

• Bankers Trust Company (BTC)

was granted a significant individual exemption so that BTC and

its affiliates, including Deutsche

Bank AG, would not be precluded

from functioning as a “qualified

professional asset manager”

(QPAM), pursuant to Prohibited

Transaction Exemption 84-14.

PTE 84-14 is a class exemption

that permits certain transactions

between plans and parties in

interest, where the assets of the

plan involved are managed by a

QPAM. The individual exemption

for BTC is effective for the period

beginning on the date of sentencing for the charges to which BTC

pled guilty on March 11, 1999,

until the date that is exactly 5

years from the date of publication

of the exemption in the Federal

Register (PTE 99-29; July 27,

1999).

Individual Exemption for “Synthetic” GICs

• Pacific Life Corporation was

granted an exemption to permit the

sale of certain “synthetic” guaranteed investment contracts (GICs) to

employee benefit plans for which

Pacific Life is a party in interest.

This exemption covers transactions

where an affiliate of Pacific Life

manages the assets of the plan

relating to the “synthetic” GIC, as

well as where such assets are

managed by an unaffiliated investment manager (PTE 99-44;

Nov. 9, 1999).

Individual Exemption for Performance Fees

• RREEF America LLC (RREEF)

received an exemption to permit

the payment of certain investment

fees, asset management fees and

performance fees to RREEF by

employee benefit plans for which

RREEF provides investment

management services for certain

real estate investments (PTE

99-32; Aug. 5, 1999).

Individual Exemption for Asset

Allocation

• Salomon Smith Barney (SSB)

was granted an exemption that

amended PTE 94-50, an exemption

that was granted to Smith Barney,

Inc., the predecessor of SSB, for

the operation of the TRAK asset
28 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

allocation program. The new

exemption updates and modifies

PTE 94-50, and implements a

record-keeping reimbursement

offset system and an automated

reallocation option (PTE 99-15,

that amends PTE 94-50; April 5,

1999).

Additional Individual

Exemptions

Exemption for Securities Lending:

PTE 99-04 Jan. 27, 1999

Salomon Smith Barney, Inc.

Exemption for Insurance Contracts:

PTE 99-36 Sept. 29, 1999

Aetna, Inc.

Exemption for Transfers of Properties to Separate Accounts:

PTE 99-49 Jan. 5, 2000

Massachusetts Mutual Life Insurance

Company

Exemptions for Credit Facilities:

PTE 99-08 Feb. 19, 1999

Bankers Trust Company

PTE 99-47 Dec. 17, 1999

Bankers Trust Company

EXPRO Grant for Reinsurrance:

PTE 99-22E Sept. 28, 1999

Union Cabide Corporation

EXPRO Grant for Asset-Backed

Securities:

PTE 99-27E Oct. 30, 1999

Bank One

Significant Proposed Individual

Exemptions in Connection with

Demutualizations

John Hancock Mutual Life Insurance Company (John Hancock).

This proposed exemption would

permit the receipt of common stock

of John Hancock Financial Services,

Inc., the holding company for John

Hancock, or the receipt of cash or

policy credit, by eligible policyholders of John Hancock that are employee benefit plans, other than plans

maintained by John Hancock or an

affiliate for its own employees, in

exchange for such policyholders’

membership interest in John Hancock

in accordance with the terms of a plan

of reorganization adopted by John

Hancock and implemented pursuant

to Massachusetts state law.

Metropolitan Life Insurance

Company (MetLife). This proposed

exemption would permit either: 1)

the receipt of an interest in a trust

whose corpus consists of common

stock issued by MetLife, Inc., the

parent company of MetLife by

eligible policyholders that are employee benefit plans, including plans

covering employees of MetLife or its

affiliates; or 2) the receipt of cash or

policy credits by such plans, in

exchange for such plans’ membership

interests as policyholders in MetLife,

according to a plan of conversion

adopted by MetLife and implemented

in accordance with New York state

insurance law.

Other Significant Exemption

Requests under Active Consideration

UBS/Swiss. This exemption application requests relief for the sale to

plans of certain “synthetic” GICs by

UBS AG, UBS Brinson, and ongoing

operations between the parties with

respect to such GICs. A similar

exemption request is also pending for

Bankers Trust Company.

Merrill, Lynch & Co., Inc. This

exemption application requests relief

for the purchase by plans of certain

debt instruments issued by Merrill,

Lynch & Co., Inc. A similar exemption request is also pending for

Citigroup, Inc. Masters, Mates and

Pilots (MMP) pension and individual

account plans. This exemption

application requests relief for the sale

of certain employer stock by the

MMP pension and individual account

plans to an ESOP being established

by a contributing employer in exchange for a promissory note.

Columbia Energy Group. This

exemption application requests

permission for an insurance company

subsidiary of the Columbia Energy

Group, which is located in Bermuda,

to reinsure the risks covered by a

long-term disability insurance policy

sold to the Columbia Energy Group’s

disability plan by Employers Insurance of Wausau, a third-party insurer.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 29

J. P. Morgan. This exemption

application requests relief for plans to

acquire securities in an initial public

offering (IPO) where the underwriting syndicate for the IPO is being

managed by an underwriter that is

affiliated with the plans’ investment

manager. Similar exemption requests

are pending for Goldman Sachs,

Citigroup, Chase Manhattan and

Morgan Stanley.

New York Life Insurance Company

(NYL). This exemption application

requests relief for: 1) sales of insurance and annuity contracts, including

a certain synthetic GIC, issued by

New York Life Insurance Co.(NYL),

and shares of mutual funds underwritten by NYL to plans that participate

in a collective investment trust

maintained by an affiliate of NYL;

and 2) the receipt of commissions and

other fees, including 12b-1 fees, by

NYL, its employees, brokers and

agents in connection with the sales of

such insurance contracts and mutual

funds to plans.

General Motors Investment Management Company ( GMIMCO).

This exemption application requests

relief for the GMIMCO that is similar

to that provided in Part I of PTE

84-14, the QPAM class exemption.

The plans affected by the exemption

would include: 1) the Delphi plans;

2) any plan whose assets have been

managed by GMIMCO, as an inhouse asset manager; 3) any plan that

is sponsored by a former affiliate of

GMIMCO; and 4) any plan that

engages GMIMCO as investment

manager for which QPAM relief

would be available but for the exclusion of in-house assets from the

definition of client assets under

management for purposes of Part I(e)

of PTE 84-14. A similar exemption

request is pending for DuPont Capital

Management Corporation.

Good Faith Waivers

• The Agency processed more than

40 petitions requesting a “good

faith” waiver of the civil penalty

imposed by Sec. 502(1) of ERISA.
30 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

Regulatory Activities

25th Anniversary Regulatory Milestones

• Mid-late 1970s: Published minimum standards for compliance with the

participation, vesting and benefit accruals rules applicable to pension

plans. Adopted a uniformed annual reporting form (Form 5500) by the

Department of Labor, the Internal Revenue Service and the Pension

Benefit Guaranty Corporation.

• 1980s: Published guidance defining what constitutes “plan assets” for

purposes of ERISA’s fiduciary rules. Published rules defining when

participant contributions constitute “plan assets”. Adopted rules

governing participant loans.

• 1990s: Published rules describing the circumstances under which

participants will be viewed as having control over the investment of

their pension plan individual accounts. Published guidance on the

provision of participant investment education. Adopted voluntary

compliance programs for violations of the annual reporting and fiduciary responsibility rules. Adopted streamlined annual reporting forms

(Form 5500) and developed a new annual reporting system.

1999 Accomplishments

During 1999, PWBA took the

following regulatory actions:

• Published proposed rules on the

electronic disclosure of plan

information. These rules are

intended to facilitate plan administration through the use of electronic media for communicating

plan information to participants

and beneficiaries.

• Published proposed rules designed

to enhance the security of assets

held by small pension plans.

• Published proposed rules establishing a National Medical Child

Support Notice. These rules are

intended to facilitate state agency

efforts to secure health care

coverage for children.

• Published an interpretive bulletin

defining the circumstances under

which an employer can assist

employees in saving for retirement

without establishing a formal

pension plan under ERISA.

• Conducted a public hearing on

proposals to streamline the annual

return/report forms (Form 5500).

• Conducted a public hearing on

proposals to update ERISA’s

claims procedure requirements.

• In conjunction with the American

Bankers Association, Investment

Company Institute and the American Council of Life Insurance,

made available a 401(k) Fee

Disclosure Form to enable employers, particularly small employers,

to easily compare fee and expense

information from various service

providers relating to their 401(k)

plan.

• Published proposed rules relating

to the elimination of the Summary

Plan Description filing requirement, the requirement to furnish

plan documents to the Secretary

upon request, and the assessment

of civil penalties for failures or

refusals to provide requested

documents to the Secretary.

These rules serve to enable the

Department to respond to requests

from participants and beneficiaries

for copies of Summary Plan

Descriptions.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 31

Policy and Research

25th Anniversary Milestones in Policy and Research

• Published in 1985 the Handbook of Pension Statistics, a compendium of

articles and statistical data that tracked growth and trends in pension

coverage.

• Published in 1989, and updated in 1992, Trends in Pensions, a comprehensive study that analyzed the status of pensions in the U.S. and

abroad.

• Published in 1992 Health Benefits and the Workforce, a compendium of

16 studies that provided a range of information from health insurance

mandates to health portability reform.

• Developed the initiative that became the Multiple Employer Welfare

Arrangement (MEWA) Enforcement Improvement Act of 1992, which

enhanced the soundness and stability of MEWAs.

1999 Accomplishments

PWBA was a leader in benefits policy

in tracking patterns and trends that

pertained to plan sponsors and plan

coverage, the design and adequacy of

benefit plans, the costs of maintaining

a plan, and the behavior and attitudes

associated with retirement decisions.

The Agency published its Private

Pension Plan Bulletin, which covers

Form 5500 Annual Reports for the

1996 plan year. The bulletin reported

that the number of 401(k)-type plans

increased by 15 percent to 231,000

plans from 201,000 plans, while the

number of active participants in these

plans increased by 10 percent to 30.8

million. The increase in 401(k)-type

plans resulted not only from new

plans being established, but also from

existing defined contribution plans

being amended to include a cash or

deferred arrangement.

The Agency initiated or completed

under existing, multiyear contracts a

number of major health and pension

benefit studies. Topics addressed

include trends in self-insurance and

pooled purchasing of employmentbased health benefit plans, managed

care issues, integration of pension

benefits with Social Security, lumpsum cash outs of pension benefits and

employee benefits’ effect on earnings

inequality.
32 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

PWBA also continued developing

simulations models of workers’

retirement benefit accumulations and

employers’ and workers’ health

insurance purchasing decisions.

PWBA participated with other

agencies in developing pension

legislative proposals.

Key Testimony

February

Acting Assistant Secretary Leslie

Kramerich appeared before the House

Committee on Education and the

Workforce, Subcommittee on

Employer-Employee Relations, to

testify on the role of the Employee

Retirement Income Security Act in

providing health care to millions of

the nation’s workers.

March

Leslie Kramerich testified before the

House Ways and Means Committee,

Subcommittee on Oversight, on the

private pension system.

June

Leslie Kramerich testified before the

Senate Special Committee on Aging

on creative initiatives by the government, private-sector organizations and

companies that encourage retirement

savings.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 33

1999 Accomplishments

Reporting Compliance Program

The reporting compliance program is

divided into three groups: 1) deficient

filers, 2) late-filers, and 3) non-filers.

Penalties are imposed on plan administrators for their failure to submit

timely, complete and accurate Form

5500 Series annual reports with the

Department. Almost $15 million in

civil penalties was assessed under the

Agency’s reporting compliance

program for filing unsatisfactory

Form 5500 Series annual reports in

1999. More than $8 million was

assessed for late filings and

nonfilings.

 In 1999, approximately 2,900 plans

chose to take advantage of the

DFVCP, which collected more than

$8 million in civil penalties.

Coordination with the Accounting Profession

The Agency continued its work with

the American Institute of Certified

Public Accountants (AICPA) to revise

the AICPA’s guide for auditing

employee benefit plans. The updated

guide published in May 1999 incorporated new audit and accounting

requirements. The guide is expected

to help improve compliance with

ERISA’s audit, reporting and disclosure provisions.

New Form 5500

PWBA continued to prepare for

major changes in the 1999 Form

5500. The Department will assume

responsibilities from the Internal

Accounting and Auditing

25th Anniversary Accounting Milestones

• The Office of the Chief Accountant was established in 1988.

• To alleviate the employee benefit community’s concerns

 that late filing deficiencies would result in substantial penalties under

ERISA, the Agency launched in 1995 the Delinquent Filer Voluntary

Compliance Program (DFVCP). A 1992 grace period program that

preceded the DFVCP resulted in the filing of more than 40,000 delinquent reports.

• During the 1990s, the Agency built alliances with various associations

and industry groups and developed various accounting initiatives to

encourage industry practitioners to comply with the Agency’s filing

requirements:

– A national outreach program aimed at providing guidance on preparing the Form 5500 Series Annual Report;

– A program aimed at the various state societies of certified public

accountants to assist independent auditors on audits of employee

benefit plans; and

– One-day workshops to instruct plan professions on how to complete

the Form 5500.

• The Agency developed the Federal Employees’ Retirement System Act

(FERSA) Audit Program in 1987 to determine the level of compliance

with the requirements of FERSA relating to fiduciary responsibilities

and prohibited activities of fiduciaries.
34 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

Revenue Service for processing the

form. EFAST, the streamlined,

electronic processing system, includes new data collection, filing

requirements for direct filing entities,

computer scannable forms and an

electronic filing option. Under

EFAST, PWBA’s new responsibilities

will include a help desk for responding to questions from the public

regarding the new system and proper

completion of the Form 5500 Annual

Report, and the processing of filings.

The new system will generate letters

to filers whose reports fail certain edit

tests. The IRS currently handles

these inquiries. To prepare, the

Agency is developing an outreach

program, new technical guidance,

monitoring systems, training manuals

and processing systems.

Educational Outreach

Under the sponsorship of the International Foundation of Employee

Benefit Plans, PWBA continued an

educational outreach program. The

program, which consisted of workshops, covered both the Form 5500

filing requirements and an overview

of the Department’s enforcement

program. Through December 1999,

PWBA conducted four such workshops in Boston, Chicago, Dallas and

San Francisco. An additional 15

workshops are planned for 2000 to

acquaint filers with the new Form

5500 requirements.

Referral of Substandard Audit

Work

Through December 1999, PWBA had

referred 311 cases of potential

deficient accounting and auditing

work to the AICPA’s Professional

Ethics Division. Of the 311 cases: 90

were either referred to the AICPA’s

trial board, or the accountant reached

a voluntary settlement agreement;

163 cases resulted in remedial

corrective action letters; 19 resulted

in no violations; and 26 cases were

closed for other reasons. Additionally, 80 cases were referred to state

boards of accountancy in instances

where the AICPA lacked enforcement

jurisdiction over the accountant or the

accountant was not properly licensed.

Performance of On-site

Workpaper Reviews

The Agency continued its quality

control program for improving the

audit work performed by independent

qualified public accountants. PWBA

performed 52 on-site reviews and

analyses of audit workpapers during

1999.

Thrift Savings Plan Audits

PWBA conducted fiduciary compliance audits of the Thrift Savings Plan

(TSP) as required by the Federal

Employees’ Retirement System Act.

During 1999, the TSP reengineered

its recordkeeping system with many

enhancements. These included

implementing a completely new TSP

recordkeeping software; replacing the

TSP bookkeeping system by converting from monthly to daily account

valuations with new individual

account unit valuations; establishing

two new TSP investment funds (an

international fund and a small cap

fund) as required by Congress; and

ensuring Y2K compliance.

Audits performed were designed to

ensure that the Thrift Savings Board

met its fiduciary requirements to

strengthen the security of more than

$91 billion held in 2.4 million TSP

accounts of Federal workers, and to

enhance opportunities for greater net

earnings by recommending improvements in the TSP system.

Plan Audit Reviews — 1999

Number of reporting

compliance cases 2,592

Reviews of auditor’s work papers 52

Plan Audit Reviews

Cumulative through 12/31/99

Total Audits Referred 391

State Licensing Boards 80

AICPA 311

Resolutions-AICPA 298

Referred to AICPA Trial

 Board or Settlement 90

Letters for Corrective Action 163

No Deficiencies 19

Closed for Other Reasons 26
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 35

Health Plan Standards and

Compliance Assistance

Milestones in the History of Health Plan Standards and

Compliance Assistance

• The Health Care Task Force was established in 1996 to provide technical expertise relating to legislative, policy and regulatory issues pertaining to health care benefits.

• In December 1999 a permanent Office of Health Plan Standards and

Compliance Assistance was established to replace the Health Care Task

Force.

• Since 1996, policies and regulations have been developed for new health

laws:

– The Health Insurance Portability and Accountability Act (HIPAA);

– The Mental Health Parity Act (MHPA);

– The Newborns’ and Mothers’ Health Protection Act (NMHPA); and

– The Women’s Health and Cancer Rights Act (WHCRA).

1999 Accomplishments

Following is a summary of the most

significant activities of PWBA in the

area of health plan standards and

compliance assistance.

Memorandum of Understanding

PWBA, in conjunction with the

Departments of the Treasury and

Health and Human Services, developed a Memorandum of Understanding (MOU). The MOU codifies the

current practices that have developed

among the three Departments while

working on implementing HIPAA,

MHPA, the NMHPA and WHCRA.

These health care laws create shared

jurisdiction and shared regulatory

responsibility for the three Departments. The Departments formed an

interagency working group to develop

regulations under these provisions.

Request for Information under

WHCRA

The Agency published a Request for

Information (RFI) to provide the

public and the regulated community

with the opportunity to submit

comments and provide input prior to

the issuance of regulations under

WHCRA. WHCRA specifies that

group health plans and health insurance issuers offering mastectomy

coverage must also provide coverage

for reconstructive surgery and for

prosthesis and physical complications

under certain circumstances. Its

provisions also specify the type of

coverage that group health plans and

issuers must provide, establish

standards for deductibles and coinsurance, and restricts certain provider

incentive and reimbursement arrangements.

Development of MEWA Reporting Regulations and Form M-1

PWBA developed three regulations

implementing an annual reporting

requirement for multiple employer

welfare arrangements (MEWAs). For

many years, MEWAs have been

marketed to employers as a means of

providing health benefits to their

employees. Sponsors and promoters

of MEWAs typically have represented

to employers and state regulators that

the MEWA was an ERISA-covered

plan and, therefore, exempt from state

insurance regulation under ERISA’s

broad preemption provisions. By

avoiding state insurance reserve,

contribution and other requirements

applicable to insurance companies,

MEWAs often have been able to

market insurance coverage at rates

substantially below those of regulated

insurance companies, thus, making

the MEWA an attractive alternative

for small businesses. In practice,

however, a number of MEWAs have

been unable to pay claims as a result

of insufficient funding and inadequate

reserves, or in the worst situations,

they were operated by individuals

who drained the MEWA’s assets

through excessive administrative fees

and outright embezzlement. In 1992,

in a report entitled “States Need

Labor’s Help Regulating Multiple

Employer Welfare Arrangements”,

the General Accounting Office

(GAO) recommended a MEWA
36 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

registration requirement. However,

the Department did not have authority

to implement such a requirement until

HIPAA was enacted in August of

1996. In 1999, the PWBA developed

three regulations (published in

February 2000) that implemented a

reporting mechanism to help identify

MEWAs and respond to the 1992

GAO report.

Request for Information under

HIPAA

PWBA began developing final

regulations under HIPAA. In 1997

the Agency issued interim regulations

implementing HIPAA’s provisions.

These provisions set forth federal

requirements relating to portability,

access and renewability of group

health plans and group health insurance coverage. The provisions also

include several other protections,

such as special enrollment rights for

individuals. As part of the process of

developing final regulations, the

Agency published a Request for

Information to provide the public and

the regulated community with the

opportunity to submit comments

reflecting the experience interested

parties have had with the nine interim

regulations and to provide input prior

to the issuance of final regulations.

Development of Health Plan

Compliance Guide

PWBA developed an extensive

compliance guide to assist the

Agency’s benefits advisors in answering calls and investigators in reviews

of health plans to determine whether

there is compliance with the new

health care laws. As part of PWBA’s

efforts to ensure that workers and

their families are not denied any

protections provided under HIPAA

and other new health care provisions,

PWBA investigators implemented a

nationwide enforcement pilot project

during FY ’99 to test the compliance

guide as an investigative aid to

determine how it can best be used in

future investigations of health plans.

Coordination with State

Insurance Departments

The Agency expanded its state

coordination program to ensure

effective implementation of federal

health care reforms including HIPAA,

MHPA, NMHPA and WHCRA.

Agency staff trained state insurance

regulators on the new federal laws

and developed training material for

the states. The Agency assisted state

regulators in developing information

for consumers and the regulated

community by providing sample

materials and by reviewing pamphlets

developed by the state regulators.

The Agency also continued to send

representatives to quarterly meetings

of the state insurance commissioners.

At these meetings, the Agency

updated the commissioners on

regulatory, outreach and compliance

initiatives. These meetings also gave

both the Federal and state regulators

an opportunity to share information,

to discuss ERISA issues, and to

identify areas for future coordination.

To ensure effective coordination, the

Agency maintained a contact-person

network among individuals in the

Agency’s national and field offices,

and the various state insurance

commissioners’ offices who are the

“point-people” responsible for

developing responses on the provisions of HIPAA, MHPA, NMHPA,

WHCRA, and other health care laws

affecting group health plans. Initiatives, such as working closely with

states, have helped ensure successful

implementation of Federal health care

reforms.
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 37

1999 Accomplishments

In 1999, the ERISA Advisory

Council tackled three major study

topics: the benefit implications of the

growing contingent workforce, using

pension surplus money to fund retiree

health care, and the trend in the

defined benefit market toward hybrid

plans (cash balance plans). The

following is a synopsis of the

Council’s final recommendations.

Note: The views of the Advisory

Council’s working groups do not

necessarily reflect those of the

Department.

Contingent Workforce Working

Group

• Continue vigorous enforcement by

the Labor Department and the

Internal Revenue Service of

ERISA Advisory Council

25th Anniversary Milestones in the ERISA Advisory

Council History

• Sec. 512 of ERISA created the Secretary’s Advisory Council on

Employee Welfare and Pension Plans, also known as the ERISA

Advisory Council.

• Issues the Council has addressed include:

– Selecting and monitoring of service providers;

– Examining fiduciary liability, and of employee stock option plans

(ESOPs);

– Examining retirement plan leakage; and

– Exploring the possibility of using surplus pension assets to secure

retiree health benefits.

existing laws to prevent the denial

of fringe benefits to statutory

employees misclassified as contingent workers.

• Modify existing labor and antitrust

laws that prevent contingent

workers’ access to multi-employer

plans that have traditionally served

employers and contingent workers

in the construction and garment

industries.

– Permit independent contractors

to organize and collectively

bargain on a single or multiemployer basis;

– Permit temporary and contract

company employees to organize

and bargain with their employers under the “community of

interest” standards developed by

the National Labor Relations

Board to define appropriate

units of workers for collective

bargaining; and

– Extend to independent contractors, temporary agency employees and contract company

workers the provisions of labor

law that permit employers and

employees in the construction

and garment industries to enter

into pre-hire agreements setting

the terms and conditions for

employment.

• Expand to the contingent

workforce the multi-employer plan

model, facilitating the availability

of health and retirement benefits

for small employers with temporary and intermittent workforces.

In addition to the construction and

garment industries, successful

examples of such plans are found

in state and local government and

in rural electrical cooperatives.

• Facilitate purchasing coalitions

that permit contingent workers to

obtain health and retirement

benefits at group rates.

• Require the Department to review

current statutory impediments to

group purchasing of health benefits

along the multi-employer model

with strong safeguards to assure

the adequate funding of such

arrangements.

• Ask the Internal Revenue Service

to review the Internal Revenue

Code Section (IRC) 403(b) retirement plan model for use as a

vehicle to permit employers of

contingent workers to contribute to
38 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

retirement accounts of those

workers.

• Require the Departments of Labor

and of the Treasury to review

whether removing the provision of

employee benefits as one of the

factors in the current 20-factor test

for determining employee status

would enhance the ability of

contingent workers to secure

health and retirement benefits,

without unacceptable offsetting

losses to the critical health and

retirement systems funded through

employment taxes, or other

fundamental worker protections.

• Recommend that the Department

of the Treasury review the Voluntary Employees’ Beneficiary

Association (VEBA) rules of IRC

Section 501(c)(9) and consider

allowing the inclusion of a greater

percentage of nonemployee

workers.

• Recommend that the Internal

Revenue Service amplify its

instructions and conduct public

information and education activities for taxpayers concerning the

deductibility of individual health

insurance costs.

Surplus Pension Assets Working

Group

• Extend permanently the provisions

of IRC Section 420, scheduled to

expire at the end of 2000. This

extension would continue to allow

for transfers of surplus pension

assets to fund current year medical

obligations when pension assets

exceed the greater of the full

funding limit and 125 percent of

current liability.

• Continue allowing for transfers of

surplus pension assets to fund

current year medical obligations

when pension assets exceed the

greater of the full funding limit and

125 percent of current liability.

• Replace the 5-year maintenance of

benefit requirement in the current

IRC Section 420 with a 5-year

maintenance of cost requirement.

While a majority of the working

group voted in favor of this recommendation, a significant minority

felt strongly that the maintenance

of benefits provision should be

preserved. The minority was

concerned that a substitution of a

maintenance of cost provision

would effectively permit or encourage a reduction in retiree health

benefits over time, particularly

considering anticipated higher

health care costs in the future.

• Expand IRC Section 420 to allow

for prefunding of medical obligations up to the present value of

post-retirement medical benefits

for current retirees when pension

assets exceed the greater of the full

funding limit and 135 percent of

the current liability.

• Expand the group for which retiree

medical benefits may be prefunded

by including active employees who

are eligible to retire (the majority

of the working group felt this issue

should be considered).

• Allow the use of future health care

inflation in determining the present

value of post-retirement medical

benefits.

• Require a qualified actuary to

certify that the present value of

post-retirement medical benefits

was determined using sound

actuarial assumptions and methods.

• Allow surplus pension assets to be

transferred either to a special IRC

401(h) sub-account within the

pension plan or to a VEBA established under IRC Section 419.

• Stipulate that investment income

on surplus pension assets transferred to a VEBA will not be

subject to unrelated business

income tax.

• Refer to a future working group or

other forum for additional study:

current law provisions on funding

of retiree health benefits and their

effect on the security of retiree

health plans; and current full

funding limits for defined benefit

pension plans and their impact on

the level of employer contributions

to pension plans.

Hybrid Plan Working Group

• Develop clearer, more candid

disclosure when a fundamental

change is made in a pension

program.

• Emphasize in enhanced disclosure

requirements information that

employees can understand and that

is likely to be useful to them;

distributing too much technical

information can defeat the purpose
Pension and Welfare Benefits Administration – 1999 Report to Congress ■ 39

as effectively as distributing too

little.

• Make it possible for employees

affected by a cash balance conversion to obtain information about

the specific impact on them that

will enable them to make a reasonable comparison between the old

and new plan formulas, on a

practical basis and within a reasonable time frame either before or

after the change.

• Include in any new disclosure

requirements safe harbors and

model language to ease the burden

on plan sponsors, and to protect

them and their plans from future

liability based on an employee’s

misunderstanding, as long as the

representations that are given

comply with legal and regulatory

standards.

• Encourage plan sponsors to

include plan design features when

traditional pension plans, especially those with surplus assets, are

converted to account-based plans.

These plan design features, to the

greatest extent possible, protect the

reasonable expectations of the

long-service participants in the

prior plan and their likely reliance

on those reasonable expectations.

• Clarify the legal and regulatory

basis for operating cash balance

and other hybrid pension plans,

and for converting traditional plans

to account-based plans. The rules

should fit the character of the

plans, so that all parties know the

“rules of the game”.

• Examine and revise technical

provisions in current law that are

specifically designed for annuitybased defined benefit plans, to the

extent it is demonstrated that they

inhibit plan provisions that would

provide equitable, broad-based

retirement income through account-based defined benefit plans.

• The Advisory Council takes no

position on the legal issues presented in the current litigation over

cash balance conversions.

• The Labor Department should:

– Develop and publish explanatory materials for employees

and for plan sponsors about

account-based defined benefit

plans, identifying in particular

the questions concerning the

impact on employees that need

to be considered in connection

with a conversion;

– Train its staff in the practical,

legal and actuarial aspects of

cash balance conversions, so

that they are equipped to field

questions from employees,

employers and the general

public; and

– Publicize the Department’s

availability to assist the public

in coming to grips with this new

phenomenon.

• Have policy makers consider the

concerns addressed by this Advisory Council’s 1998 Leakage

Report, which are more urgent,

given the increased availability of

lump sum payments that hybrid

plans offer.

• Absent a position on legislative or

regulatory steps beyond the cash

balance conversion issues discussed above, any steps considered

should be targeted to conversiontype transactions and not extended

to other types of changes to

defined benefit plans that would

further discourage the maintenance

and enhancement of broad-based

defined benefit plans as a basic

source of secure, lifetime retirement income for American workers.

ERISA Advisory Council

1999 Members

Accounting

Rebecca J. Miller

Partner, McGladrey & Pullen

Investment Management

J. Kenneth Blackwell

Secretary of State, State of Ohio

Actuarial Counseling Field

Michael J. Gulotta

CEO, Actuarial Sciences Associates,

Inc.

Employee Organizations

(including one representative from

a Multi-employer Plan)

Michael R. Fanning

CEO, Central Pension Fund, International Union of Operating Engineers

and Participating Employers

Judith F. Mazo

Senior Vice President and Director of

Research, The Segal Company

Judith Ann Calder

CEO, Abacus Financial Group, Inc.
40 ■ Pension and Welfare Benefits Administration – 1999 Report to Congress

Employer Organizations

(including one representative from

a Multi-employer Plan)

Rose Mary Abelson

Assistant Treasurer and Director of

Investment Trust Management

Northrop Grumman Corp.

Janie Greenwood Harris

Senior Trust Counsel, Mercantile

Bancorporation

Neil M. Grossman

Principal, William M. Mercer

General Public

(including one retiree)

**Dr. Thomas J. Mackell, Jr.

Senior Consultant, Massachusetts

Financial Services, Inc. and Simms

Capital Management, Inc.

Patrick McTeague

Partner, McTeague, Higbee,

MacAdam, Case, Watson & Cohen

Richard “Dick” Tani

(retired from) William M. Mercer

Investment Advisor

Eddie C. Brown

President, Brown Capital Management

Insurance Industry Field

Michael J. Stapley

President and CEO, DeSeret Mutual

Benefit Association

Corporate Trust

*Barbara Ann Uberti

Vice President, Wilmington Trust

Company

* Named Chair of Council for 1999.

**Named Vice Chair of Council for 1999.