Employee Retirement

Income Security Act

1996 Report to Congress

Employee Retirement

Income Security Act

1996 Report to Congress

U.S. Department of Labor

Pension and Welfare Benefits Administration

Jan.

Apr.

Qs & As

July

Oct.

Feb.

May

Aug.

Nov.

Mar.

June

Sept.

Dec.

Golden Hammer Award

Health Insurance Portability HIPAA and Accountability Act

Pension Payback Program

Women and Pensions:

What Women

Know and Do

Need to
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 Publication Hotline at:

1-800-998-7542

This material will be made available to sensory impaired

individuals upon request:

Voice phone: (202) 219-8921

TDD: 1-800-326-2577

This booklet constitutes a small entity compliance guide

for purposes of the Small Business Regulatory

Enforcement Fairness Act of 1996.

Introduction ...................................................................

1996 Highlights .............................................................

Message from the Deputy Assistant Secretary............

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

Enforcement ..................................................................

Participant Assistance/Public Education.....................

Exemptions....................................................................

Regulatory Activities.....................................................

Policy and Legislative Analysis....................................

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

Research.........................................................................

Health Care Task Force..................................................

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

Table of Contents

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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 includes administering and

enforcing 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-sector employee benefit plans

were being mismanaged and abused.

Since its enactment in 1974, ERISA has been

amended to meet the changing retirement and

health care needs of employees and their

families. The role of PWBA has evolved

continually to meet these challenges. In 1985,

the Consolidated Omnibus Budget

Introduction

1

Reconciliation Act (COBRA) was passed, and

PWBA was charged with issuing regulations

regarding certain notification requirements.

The Health Insurance Portability and

Accountability Act of 1996 (HIPAA) added

new responsibilities in the regulatory arena.

As a result, the agency established the Health

Care Task Force, which is designed to provide

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.

This report details the 1996 accomplishments

of the agency in executing its mission.
1996 Highlights

2

The Pension and Welfare Benefits

Administration counts the following among

its 1996 accomplishments:

The agency continued to correct abuse of

pension and other benefit plans through

enforcement and regulatory actions and

increased outreach efforts aimed at educating

pension plan participants about their rights

under the federal pension law.

In June PWBA obtained a guilty plea from the

former owner of a Farmingdale, N. Y.,

company, resulting in the largest criminal case

brought by the agency to address 401(k) fraud.

The agency’s Health Care Task Force was

established in September to provide technical

guidance on the application of ERISA

provisions to three new pieces of legislation:

the Health Insurance Portability and

Accountability Act of 1996 (HIPAA), the

Mental Health Parity Act of 1996 and the

Newborns’ and Mothers’ Health Protection

Act of 1996. The agency issued a booklet to

help employees and employers understand the

impact of these new laws.

In October PWBA announced $4.8 million had

been restored to the pension plans of 16,800

workers as a result of its Pension Payback

Program. The agency announced the paybacks

following a 6-month period when it allowed

employers to restore contributions to the

401(k) pension funds. Approximately 170

employers responded to the program,

voluntarily restoring contributions ranging

from $43,000 to $200,000.

As part of the agency’s customer service

standards, new goals were established to

address complaints and requests for

documents that decreased the response times

to written and telephone inquiries.

The agency’s Retirement Savings Education

Campaign continued to gain momentum

during the year by issuing public service

announcements and two new consumeroriented publications, one of which targeted

retirement saving for women. These efforts

were enhanced by issuing guidelines for

employers who provide investment

information to employees, and the issuance of

a brief publication aimed at helping workers

and retirees protect their health care in

retirement.

Several provisions of the President’s

Retirement Savings and Security Act were

enacted in 1996. The agency assisted in the

development of a strategy for this legislation

and in reviewing and offering recommendations

concerning the Administration’s position on

HIPAA, the Newborns’ and Mothers’ Health

Protection Act of 1996 and the Mental Health

Parity Act of 1996.

Finally, PWBA initiated a national survey

measuring the health insurance benefits of

workers and retirees, supported studies on

employee health benefits, and completed nine

additional studies ranging in scope from the

effects of public pension funds on investments

and employment to how the introduction of

401(k) plans impacts defined benefit plans.
As we reflect on 1996 and our many successes, we continue to

make great strides in carrying out our responsibilities under

ERISA. We have succeeded in addressing a new set of agency

initiatives to educate plan participants, to seek voluntary

compliance with ERISA regulations, and to continue to protect

workers’ pensions by preventing fraud and abuse.

We are proud of this year’s accomplishments: receiving the

Vice President’s prestigious Hammer Award; prosecuting the

largest criminal case brought by the agency to address 401(k)

fraud and obtaining a guilty plea from the former owner of a

Farmingdale, N.Y., company; and targeting specific audiences

with information on what they should know about pension

savings.

We are also proud of the agency’s contributions in helping to develop the strategy for the

President’s Retirement Savings and Security Act and in assisting with the development of

the Health Insurance Portability and Accountability Act of 1996, the Newborns’ and

Mothers’ Health Protection Act of 1996 and the Mental Health Parity Act of 1996.

As we move forward, we realize there are plenty of new challenges — new regulations to

write, new ground to break on the pension protection front, and more audiences to target

with pension and health benefits information.

We will continue to meet these challenges with the solid support of our capable legal and

research staff, accountants, pension advisors, benefit specialists, and professional and

support staff in every category.

The combined efforts of our agency in 1996 continued to secure and protect the pension,

health and employee benefit plans of millions of American workers.

Message from the Deputy Assistant Secretary

3

Deputy Assistant Secretary

Meredith Miller, PWBA
Overview of PWBA Office Functions

PWBA accomplishes its mission through the

collective efforts of seven major offices that

either administer policies or carry out

initiatives in the following areas: enforcement,

participant assistance, exemptions, regulatory

activities, policy and legislative analysis,

accounting and auditing, research and health

care. The agency also provides staff 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 offices, it conducts investigations

to detect civil and criminal violations of Title I

of ERISA, related Labor Department

regulations and criminal laws relating to

employee benefit plans.

Office of Program Services

One of the primary ways PWBA satisfies its

mission of protecting pension, health and other

benefits in private-sector employee benefit

plans is by helping plan participants and

beneficiaries understand their rights, and

employers and plan sponsors understand their

obligations, under the federal pension law.

This function is executed through the Office of

Program Services’ (OPS) Division of

Technical Assistance and Inquiries in the

Washington, D.C., office, and the 15 PWBA

field offices throughout the nation. When

participants write, call or visit one of these

offices, they receive individual assistance from

benefit advisors who explain their rights under

the law and help them obtain improperly

denied benefits.

Public education is also a significant part of

the responsibilities of PWBA. Through OPS’s

Division of Public Affairs, 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.

The Division of Public Affairs also serves as a

liaison between the agency and the news

media. It 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;

hosts and arranges briefings on the agency’s

mission and U.S. pension law for foreign

delegations; and arranges speaking

engagements throughout the country for the

Assistant Secretary and other departmental

officials who deliver the agency’s message on

pension and retirement issues.

Through the OPS’s Division of Public

Disclosure, the agency provides the press and

the public with basic financial information on

employee benefit 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’s

two divisions are responsible for class

exemptions and the administration of the

individual exemptions program.

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

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exemptions from these prohibited transaction

restrictions 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 (FERSA), 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 Legislative

Analysis

The Office of Policy and Legislative Analysis

provides leadership and coordination of

employee benefit plan policy analysis, longterm policy development and legislative

analysis. The office prepares technical

analyses of legislative and policy proposals for

PWBA policy-making officials. The office

also prepares congressional and executive

departmental briefings, and proposed

testimony and regulatory analyses; monitors

congressional hearings and other legislative

activity; prepares speeches and handles

inquiries and requests for technical assistance

related to ERISA.

Office of the Chief Accountant

The Office of the Chief Accountant is

responsible for enforcing the reporting and

disclosure provisions of ERISA and

administering an audit program to assure

compliance with the fiduciary requirements of

FERSA.

The office also has established several

proactive programs designed to help educate

plan professionals and encourage voluntary

compliance through reduced fines.

Office of Research and Economic

Analysis

The Office of Research and Economic

Analysis plans and administers an employee

benefits research and economic analysis

program to support PWBA policy and program

priorities. It is also 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.

5
ERISA Advisory Council

The Advisory Council on Employee Welfare

and Pension Benefit Plans 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 law.

Three members must represent employee

organizations — with at least one representing

participants of a multiemployer plan. Three

must be selected from employer organizations,

with at least one representative of employers

maintaining or contributing to multiemployer

plans; and three members must be selected

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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.

The remainder of this report discusses the

1996 agency accomplishments.
In 1996, PWBA opened 4,726 civil

investigations and 132 criminal investigations.

PWBA investigations resulted in 96

indictments. Overall, the enforcement

program recovered more than $399 million for

private benefit plans.

The Employee Contribution Project yielded

substantial results in 1996. In June, the former

owner of Job Shop Technical Services, Inc. in

Farmingdale, N.Y., pleaded guilty to

embezzling $2.7 million from his workers’

401(k) plan, a plea that represented the largest

case at the time in a nationwide anti-fraud

campaign initiated by the agency.

The agency’s innovative Pension Payback

Program, launched in March, gave employers

a 6-month grace period to contribute, with

interest, funds deducted from employees’

paychecks that were not deposited in 401(k)

plans within required time periods. Employers

in compliance with the program avoided

potential ERISA and Internal Revenue Code

civil or federal criminal sanctions, including

civil injunctions, incarceration or criminal

fines, excise taxes, and civil monetary

penalties. Participation in the program was

limited to employers who had not engaged in

the most egregious conduct.

Other Agency Initiatives

MEWAs

Multiple Employer Welfare Arrangements

(MEWAs) — which pool small employers to

create a larger entity with stronger negotiating

power to purchase health or other welfare

benefits — remained a national enforcement

initiative. The agency continued its

enforcement emphasis on identifying abusive

and fraudulent MEWAs and worked to shut

them down. The agency worked closely with

Enforcement

the Department of Labor’s Office of the

Solicitor to help identify these operations.

HIPAA

The new Health Insurance Portability and

Accountability Act of 1996 (HIPAA) greatly

expanded the scope of ERISA’s PWBAenforced health plan standards. Although

enforcement actions based on the new

provisions did not begin until July 1997, the

agency began devoting significant resources in

1996 to provide field offices with the

necessary technical training to respond to

customer service needs and to establish

required enforcement coordination between

the Departments of Labor, Health and Human

Services and Treasury — the three primary

agencies responsible for administering and

enforcing the law.

Investigations into cases involving investments

in derivatives and enforcement actions to

resolve violations in connection with

purchases of annuities were also active in

1996.

In addition to the national projects discussed

above, the agency continued to devote a

significant portion of its enforcement

resources to the investigation of criminal

violations involving employee benefit plans.

Criminal Cases

Criminal cases investigated by the agency in

1996 included both large and small plans,

pension and health plans, MEWAs, single

employer plans, including 401(k) plans, and

Taft Hartley plans. Investigations spanned the

U.S. and defendants ranged from business

owners to service providers. The following list

is a sampling of these cases.

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United States v. Sprei

1-19-96

New York, N.Y.

Solomon Sprei, a Brooklyn insurance broker,

was sentenced to 18 months imprisonment and

ordered to make restitution of $1.8 million for

leading insurance companies to believe that

group health policies they issued covered

members of two unions with histories of lowhealth costs. Instead, Sprei sold the insurance

to the general public, who consisted of mostly

elderly, high-risk individuals, who were not

union members. He promised the victims lowcost insurance by calling them “associate

union members.” In exchange for a fee of $14

per person per month, one of the unions

allowed Sprei to use its name. When the

insurance companies discovered the scheme,

they canceled the coverage. As a result of

Sprei’s actions, Empire Blue Cross/Blue

Shield claimed losses of $11 million. State

Mutual Life Assurance of Worcester, Mass.,

claimed losses of $5 million, CNA of Chicago

claimed losses of $3 million to $5 million, and

Prudential Newark also claimed several

million in losses. A co-conspirator who

worked at one of the companies previously

pleaded guilty to the fraud. The case was

investigated by PWBA, OIG’s Office of Labor

Racketeering, the U.S. Postal Inspection

Service and the FBI.

United States v. Corace

6-12-96

New York, N.Y.

Ralph Corace, an official of Job Shop

Technical Services, Inc. was sentenced to 37

months imprisonment and fined $60,000 for

failing to deposit employee contributions owed

the company’s 401(k) plan. The investigation

uncovered up to $2.7 million in contributions

from as many as 300 participants that were

embezzled. Job Shop operated as an employee

leasing company for engineers and

consultants. The 401(k) plan had $4.3 million

in assets and covered 755 leased professionals

throughout the U.S. Restitution was not

ordered in view of a pending parallel civil

litigation in which that matter is being

addressed. The parallel criminal and civil

cases were investigated by PWBA.

United States v. Mett and Wiseman

6-27-96

Honolulu, Hawaii

William Mett and Marvin Wiseman, owners of

Center Arts Galleries, were charged in a 16-

count indictment with embezzling and

converting to their own use more than $1

million in assets from their companysponsored defined benefit and profit sharing

plans. They were also charged with making

false statements on an ERISA-required annual

report regarding the disposition of plan assets,

and with violating ERISA’s bar provision for

continuing to serve as plan trustees after a

prior fraud conviction. Allegedly, they

withdrew money from plan accounts and

deposited the funds to a company account.

The company paid Mett a salary of $378,000

and Wiseman got $515,000. The defendants

also allegedly used $100,000 to pay attorneys

who defended them in an earlier fraud trial.

This is the first case in which defendants were

charged with the ERISA bar provision

violation resulting from a PWBA

investigation. PWBA was assisted in the

investigation by the U.S. Postal Inspection

Service.

8
United States v. Somerstein et al.

7-23-96

New York, N.Y.

Stuart Somerstein and his wife Marianna,

owners of Somerstein Caterers, and two others

were charged with defrauding the employee

benefit fund of Hotel and Restaurant

Employees Union Local 100 by underreporting

the amount of contributions due the fund.

They also allegedly mailed false claims and

inflated inventories to insurance companies.

In addition, Stuart Somerstein was charged

with embezzling $155,000 from a companysponsored pension plan. This case was

investigated by PWBA, the Department of

Labor’s Office of the Inspector General, the

U.S. Postal Inspection Service and the Nassau

County police and fire departments.

United States v. McLain et al.

5-9-96

Detroit, Mich.

Former Cy Young award winner Denny

McLain, Roger Smigiel and Jeffrey Egan were

charged with conspiracy, pension plan theft,

money laundering and criminal forfeiture in

connection with a defined benefit plan

sponsored by the Peet Packing Company, a

small meat packer in Chesaning, Mich.

McLain and Smigiel bought Peet in January

1994 and immediately appointed themselves

plan trustees. They directed a former bank

trustee to transfer more than $12 million of

plan monies to a new bank custodian, and

directed the new custodian to transfer more

than $3 million of the money to a shell

company, Vanguard Investments, Inc., which

was deliberately named to cause confusion

with the well-known Vanguard Group mutual

fund company. To “launder” the money, Egan,

who served purportedly as the plan’s financial

advisor, issued a $2.5 million cashier’s check

made payable to Peet, which McLain

deposited into a new company account. Egan

used backdated loan documents signed by

McLain and Egan to make the $2.5 million

look like a legitimate mortgage loan from the

second shell company to Peet. The money was

used for both company and personal expenses.

Egan pleaded guilty in September to

embezzlement. In December, a jury found

McLain and Smigiel guilty on the

embezzlement, conspiracy and mail fraud

charges. The court will decide the money

laundering and forfeiture charges. This case

was investigated by PWBA and the FBI.

United States v. Kenemore, Jr., et al.

8-16-96

Dallas, Texas

Lawrence Kenemore, Jr., a fraudulent MEWA

operator, was sentenced in August to a 19-year

jail term — one of the longest sentences

resulting from a case in which PWBA was

involved. The sentence followed a 24-count

indictment charging Kenemore, his wife, son

and five individuals, and included

embezzlement, mail fraud, false statements

and money laundering. He was found guilty as

charged by a jury in May.

Kenemore was the manager and controller of

ATG Association of Trust and Guarantee,

which he created and used to market a

fraudulent benefit program. He and his

accomplices created three bogus labor unions

to induce employers to contribute money to

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what they had been told were trust funds for

worker compensation and health coverage for

their employees. A bogus third-party

administrator was also created and used to

deny or delay payment of worker

compensation and health claims. Employers

contributed approximately $1.7 million.

Approximately $300,000 was deposited into

health plan accounts. The defendants used the

remaining amount for themselves.

All of the defendants were convicted and have

been sentenced. Four of the defendants were

sentenced only to probation. In agreeing to

both the prosecution and defense motions for

“downward departures” from the sentencing

guidelines, the judge said that Kenemore

“sucked the culpability from the other

individuals in the cesspool surrounding

himself.” His wife and two defendants were

each sentenced to a year imprisonment.

Kenemore’s lengthy sentence represented an

“upward departure” due to liens he filed

against the judge, prosecutors, investigators

and others involved in the case. The liens

were considered an obstruction of justice.

This case was investigated by PWBA, the FBI,

IRS and the Texas Attorney General’s Office.

United States v. Giordano

8-15-96

Little Falls, N.J.

Charles Giordano, former president of

Teamster’s Local 125 of Little Falls, N.J., was

sentenced to 20 months imprisonment, ordered

to make restitution of $80,000, and to forfeit

future pension and health benefits amounting

to $530,000. His sentencing resulted from

engaging in “kickback” activity while serving

as a trustee for the union’s pension and health

plans. He used his position to have the

pension plan invest $2 million to finance a

Florida real estate project. He was paid

$50,000 cash for his assistance. He also used

his position to get service providers to the

pension and health plans to pay him

“kickbacks” of $337,620 in order for them to

keep plan business. Five individuals who paid

the bribes have pleaded guilty, and all but one

have been sentenced. This case resulted from

an investigation conducted by PWBA, the FBI

and the IRS.

United States v. Palumbo Brothers,

Inc. et al.

10-03-96

Chicago, Ill.

A 35-count indictment was returned charging

two trucking firms and six individuals in a $20

million scheme involving a federally funded

highway project and a scheme to cheat

workers out of approximately $3 million in

wages and employer contributions to their

union pension and health plans. The schemes

spanned more than two decades in which the

defendants allegedly created false weight

tickets for trucks transporting materials and

tickets for nonexistent truck loads.

In the labor scheme, they allegedly falsified

payroll records to reflect fewer hours worked

than was true, which cheated members of the

Teamsters and Laborers unions by reducing

the amount of employer contributions to union

fringe benefit plans. This case is the result of

an investigation conducted by the FBI, the

Illinois State Police and Department of

Transportation, the Inspector General’s Office

of the U.S. Department of Transportation and

PWBA.

10
Civil Cases

The following is a sampling of the civil cases

investigated in 1996. Specific agency

initiatives that a case targets are identified in

parenthesis at the end of the narrative.

Reich v. John Hancock Mutual Life

Insurance Company

12-17-96

Boston, Mass.

John Hancock Mutual Life Insurance

Company in Boston agreed to repay $650,000

to its investment incentive pension plan

following claims by the Department that the

plan paid improper fees to the insurer’s

investment management subsidiary, according

to a settlement with the Department. The plan

covered 9,953 participants and had more than

$500 million in assets in 1993.

The Department’s suit, filed in March, alleged

that Hancock retained its subsidiary to manage

a portion of the plan’s assets in March 1986

and allowed the plan to pay more than

$615,000 in fees to that subsidiary.

The company also agreed that it would not

cause any of its plans to pay service fees to

Hancock or its subsidiaries other than for

reimbursement of direct expenses. In a

separate agreement, Hancock agreed to pay the

government $130,000 in civil penalties.

Reich v. Carroll

11-27-96

Boston, Mass.

In the first case under federal civil pension law

in which the search and seizure of records has

been allowed, a federal court in Boston

granted, and the U.S. Department of Labor

executed, a search warrant in a case involving

the administrator to a pension plan for

franchises of ITT Sheraton Hotels. The plan

covered more than 420 participants and had

more than $2.5 million in assets as of

November 1996.

The administrator was placed in the custody of

the U.S. Marshals Service in October for

defying a court order to testify and produce

documents subpoenaed by the Department.

The search warrant was requested following a

court hearing in which the administrator

refused to participate.

Reich v. Hall Sprinkler Company

10-7-96

Dallas, Texas

The Department settled a lawsuit against Hall

Sprinkler Company alleging the defendants

made direct loans of $370,000 in plan assets to

the plan sponsor and failed to collect

participant loans. The bulk of the loans,

$173,000 plus interest, allegedly were made to

members of the Hall family. Additionally, the

plan sponsor allegedly failed to deposit

employee contributions and participant loan

payments made through payroll deductions to

the trust.

The plan was established in 1966. It had 49

participants and assets totaling $1.2 million in

1989.

Settling defendants include the company, its

president, Ronald C. Hall, and the estate of his

mother, Vera S. Hall, who, until her death, was

the corporate secretary-treasurer. Although

11
the consent order barred Ronald Hall from

serving any employee benefit plan covered by

the Employee Retirement Income Security Act,

he will be allowed to continue as trustee for

the profit-sharing plan until its assets are

liquidated and reallocated to other participants

of the plan. Hall and his mother’s estate will

also forfeit their individual account balances to

the plan.

Hall Sprinkler Company and its profit-sharing

plan trustee agreed to restore more than

$634,000 in assets to the plan under a consent

order obtained by the Department.

(Employee Contributions Project)

Reich v. Autrey

8-29-96

Jacksonville, Fla.

The Department filed a lawsuit in 1994

alleging that the trustees of the National

Electrical Contractors Association/

International Brotherhood of Electrical

Workers (NECA-IBEW) invested plan money

in a St. Augustine, Fla., development project.

The investment allegedly was made in

exchange for contracts promising to repay the

principal and interest.

The plan’s investment guidelines placed limits

on the percent and quality of plan investments

in such fixed income securities, such as this

real estate investment. The trustees also were

alleged to have failed to obtain adequate

financial security for the investment, which

resulted in financial losses.

The trustees made full restitution of $4 million

to the plan as part of a judgment obtained by

the Department.

Reich v. Hassenmiller

9-08-96

Wallingford, Conn.

The Department filed suit against 14 trustees

of a former securities broker for the

Connecticut Plumbers and Pipefitters pension

fund to recover more than $3 million in losses

from overly risky investments in derivatives.

The lawsuit sought recovery of all losses, plus

any gains the fund’s assets would have earned

had the defendants invested plan funds in

other appropriate financial instruments. It also

seeks to remove the trustees from their

positions with the fund and permanently bar

them from service to any plan governed by

ERISA.

The trustees and broker, Steven G.

Hassenmiller, allegedly purchased 77

collateralized mortgage obligations (CMOs), a

class of derivatives, for the plan, which

covered 2,475 participants and had $106

million in assets.

In addition, the trustees improperly delegated

to Hassenmiller discretion in setting the timing

and price of the purchases and sales for the

fund’s CMO investments; never required

Hassenmiller to comply with the fund’s

requirements regarding investment managers;

never established investment guidelines with

which Hassenmiller had to comply as required

by the fund’s documents; failed to properly

appoint, monitor and remove Hassenmiller as

an investment manager and advisor; and failed

to effectively monitor the fund’s investments

in CMO investments.

12
The trustees hired Criterion Investment

Management to assume management of the

mortgage-backed securities from Hassenmiller.

On Criterion’s recommendation, the entire

fund portfolio in CMOs was sold at a total loss

of approximately $5.5 million. (Derivatives

Project)

Reich v. Guckin

7-11-96

Philadelphia, Pa.

A federal court granted the Department’s

petition seeking a temporary restraining order

removing Joseph J. Guckin as trustee of the

Penjerdel Refrigeration Company 401(k)

retirement plan and temporarily replacing him

with an independent fiduciary. The company

was a mechanical contractor in Philadelphia

for commercial heating and air conditioning

systems. The 401(k) plan covers 12

employees and currently has approximately

$164,000 in assets.

Guckin, who was also sole owner of Penjerdel

Refrigeration’s successor, Penjerdel

Engineering Company, allegedly failed to

collect $140,718 in unauthorized loans made

by the plan to himself and Penjerdel

Engineering, according to the Department’s

lawsuit. He also diverted $43,969 in employee

contributions and failed to collect $37,225 in

matching plan contributions owed to plans for

1989 and 1991.

The lawsuit seeks a court order requiring

Guckin to restore more than $222,000 in

restitution to the plan, permanently barring

him from managing any plan governed by

federal pension law and appointing an

independent trustee to manage the plan and

distribute its assets, if appropriate. (Employee

Contributions Project)

Reich v. Devine

7-05-96

New York, N.Y.

The Department sued the trustees of the New

York District Council of Benefit Funds for

misusing more than $37 million in assets of

the pension, annuity, vacation and welfare

funds of the New York District Council of

Carpenters. Participating employers contribute

to the plans under collective bargaining

agreements.

The lawsuit alleged the fund trustees violated

ERISA by: transferring more than $37.6

million from the pension, annuity and vacation

funds to the welfare fund; failing to collect

money transferred to the welfare fund; failing

to enter into leases and collect rent owed to the

pension and apprenticeship funds by the

District Council, union locals and other funds;

and for compensating employees Alan Burns

and Dominick Lavacca without monitoring the

services they provided to the funds; and failing

to obtain reimbursement for services

performed for the Council at the plan’s

expense.

The lawsuit seeks a court order requiring that

the trustees restore all plan losses resulting

from their improper actions, requiring the

funds and the unions repay any funds that

were improperly received by them and

correcting all prohibited transactions.

13
Reich v. Livingston

4-03-96

New York, N.Y.

A consent judgment obtained by the

Department ordered the former trustees of a

welfare and health plan, sponsored by the

defunct District 65 United Auto Workers, to

repay the plan more than $6 million.

The ex-trustees allegedly failed to: 1)

evaluate, marshal and maintain adequate levels

and reserves sufficient to fund benefit

obligations; 2) adequately and timely adjust

eligibility requirements and benefit levels to

the flow of contributions received; 3) monitor

and manage the plan’s fiscal condition and

solvency; and 4) implement appropriate cost

containment measures.

In addition, the defendants allegedly permitted

plan administrative costs to exceed reasonable

levels by, among other things, allowing

personnel on the plan’s payroll to perform

substantial services for the union.

Reich v. Strong Capital Management

6-06-96

Menomonie Falls, Wis.

Under a consent judgment obtained by the

Department, Strong Capital Management, Inc.

(SCM), agreed to pay $5.9 million to

approximately 101 plans. A Department

lawsuit, filed simultaneously with the

judgment, alleged that SCM directly

exchanged and transferred the assets of plan

clients with the accounts of other plans,

mutual funds and accounts of other clients.

SCM conducted at least 1,598 cross-trades of

securities among the accounts of plans

managed by the firm and other clients.

SCM also allegedly failed to obtain separate

representation on behalf of the plans in making

the cross trades. Sponsors of the plans will

receive recoveries of $40,000 or more under

the judgment.

Reich v. Hayden

7-01-96

Boston, Mass.

The Department filed suit against Frederick

Lee, president of Lee Publications, Inc. and

pension plan trustees Jack Hayden, Robert

Moyer, Albert Leach and Bruce Button for

actions that left Lee Publications in debt to its

own plan.

Lee allegedly failed to deposit employee and

employer contributions into the company’s

pension plan. The trustees allegedly failed to

ensure that these contributions were deposited

in the plan account.

In an attempt to rectify the debt, Lee and the

trustees accepted a $250,000 mortgage note

secured by property owned by the company,

according to the lawsuit.

In a later transaction, the plan loaned Lee

Publications more than $252,000. In exchange

for that loan, the company gave the pension

plan a first mortgage on another companyowned property.

Lee and the trustees agreed to restore more

than $483,000 in losses to the Lee

Publications, Inc. pension plan to resolve the

lawsuit. Additionally, the consent judgment

barred all defendants from serving in positions

of trust for plans which are governed by

ERISA and ordered the defendants to appoint

14
an independent trustee for the pension plan

within 30 days. (Employee Contributions

Project)

Reich v. Pacific Lumber

5-10-96

Scotia, Calif.

As part of a preliminary settlement with the

Department and private litigants, Pacific

Lumber, its officers and subsidiaries agreed to

deposit $7 million into a settlement fund for

2,681 participants and beneficiaries.

The company, its parent and subsidiaries

sponsored the defined benefit plan for

approximately 6,000 participants before

terminating the plan in 1986 to recover more

than $62 million in surplus pension assets

after Maxxam, Inc. acquired Pacific Lumber.

More than $37 million in plan assets were

used to purchase annuities from Executive Life

Insurance Company to provide the benefits of

the terminated plan. In 1991, Executive Life

was placed in receivership by the state of

California.

The Department’s lawsuit charged Pacific

Lumber, Maxxam, Inc. and corporate

executives with imprudently selecting

Executive Life to purchase the annuity contract

for the plan. The lawsuit alleged the

defendants purchased the annuity from

Executive Life despite negative findings by

their own insurance expert on the insurer’s

ability to pay claims.

Under the preliminary settlement, the court

will appoint an administrator to oversee the

settlement fund and distribute its assets to

participants and beneficiaries. (Annuities

Project)

Reich v. Fiore

4-15-96

Dallas, Texas

The Department was awarded a temporary

restraining order placing a $10 million

fraudulent health and welfare benefits

program, operated by the International

Association of Entrepreneurs of America

(IAEA), under the control of an independent

fiduciary. The association’s 333 employer

members had established employee benefit

plans providing health and occupational illness

and injury benefits to approximately 16,000

employees.

From November 1992 to 1995, the association

collected more than $25 million in employer

and individual contributions. The

Department’s complaint alleged approximately

$10.3 million was diverted to or used by the

defendants and entities controlled by them.

The Department’s lawsuit also alleged the

defendants used more than $1 million in trust

assets to make unsecured or under-secured

loans to personal friends and their companies.

The temporary restraining order froze the

assets of certain defendants, removed them

from their positions as fiduciaries or service

providers and appointed an independent

fiduciary to operate the trust pending further

order of the court.

In addition, the Department obtained a partial

settlement with defendant Ross Fuller, who

had served as trustee, administrator, committee

member and investment adviser, and his

company, Stockton Fuller and Company, Inc.

and benefit review committee members

William T. Charvenak and Norman Rosenberg.

15
9 6

4,726

132

3,979

86

Both civil and criminal cases and recoveries or indictments may continue from one calendar to the next (i.e., a case opened

in 1996 may not be settled until 1997). The numbers in the chart above represent totals for the 1996 calendar year.

They resigned from their positions and have

been enjoined from dealing with employee

benefit plans governed by federal pension law.

The lawsuit alleges the defendants failed to

provide an actuarially sound basis to fund

benefits promised plan participants and

beneficiaries and failed to set aside sufficient

reserves to ensure payment of legitimate

claims. As a result participants and their

beneficiaries have and will continue to incur

claims that will never be paid by the trust.

The defendants also allegedly used the trust’s

assets for their personal gain while defying

state and federal court orders to submit to state

regulation. There are pending legal actions

with at least 10 states regarding IAEA.

(MEWA Project)

Reich v. Bank of America

4-08-96

San Francisco, Calif.

As part of a settlement reached with the

Department, the Bank of America paid $4

million to two pension plans of Norcal Waste

Systems, Inc. The $4 million restores all

losses suffered by the pension plans in

connection with poor investment practices.

The complaint alleged that Bank of America

was negligent in failing to investigate the

safety of the investment, as well as the

relationship between the plans, Norcal and its

subsidiary. The complaint also alleged that

Bank of America illegally accepted an

instruction from Norcal officials to make the

investment when the bank’s trust agreement

made it solely responsible for making the

investment decision.

The settlement does not bar the bank from

further service to ERISA plans. Instead, the

settlement preserves the Department’s ability

to investigate the bank’s management of other

ERISA plan accounts during the past 6 years.

16
)

Subject of Inquiries

Calendar Year 1996

Technical Assistance

Initiatives

PWBA continued to provide the highest

quality service to its customers in 1996 by

expanding existing initiatives and

implementing new ones. Customer service

standards implemented in 1995 to decrease

response times to written and telephone

participant inquiries were broadened to

include goals for handling complaints and

document requests, as well as requests for

advisory opinions and exemption

determinations.

A new audio-forms telephone system was

implemented in April 1996. It is an

improved customer-friendly system that

allows individuals to get prompt automated

answers to common questions and immediate

access to a pension advisor if they need

individual attention.

Extensive publicity from the implementation

of a combined service/enforcement initiative

that targets abuse of participant contributions

to 401(k) and other employee benefit

programs resulted in increased calls to

PWBA for information

and technical assistance.

In 1996, results from the

agency’s customer service

satisfaction survey

revealed that:

98.8 percent of the

nearly 106,000

individuals who called

for assistance received

a return call by the

end of the business

day.

Participant Assistance/Public Education

CY 1996 Inquiries Summary

Telephone 116,180

Written 18,485

Benefit Recoveries

$16.3 Million

Fiscal Year 1996

Total: 135,452

NOTE: Data is annualized - based upon data available.

Visitors 787

86 percent of the more than 19,500

individuals who wrote the office

received a response within 30 days.

17




Retirement Savings Education

PWBA’s successful Retirement Savings

Education Campaign, launched in 1995,

continued to gain momentum. The agency and

the American Savings Education Council

(ASEC) increased educational materials

available to individuals, groups and

organizations. In addition to the campaign’s

signature brochures Top 10 Ways to Beat the

Clock and Prepare for Retirement and What

You Should Know About Your Pension Rights,

the agency issued Women and Pensions —

What Women Need to Know and Do. This

brochure provided women with a checklist of

questions and action steps for retirement

planning. Labor Secretary Robert B. Reich

spoke at a Working Women’s Summit event

attended by more than 2,000 executive and

professional women, which was sponsored by

the Labor Department to draw attention to

women in the workplace.

In October, the agency underscored its

commitment to protect and preserve American

workers’ retirement incomes through

education and vigorous law enforcement, and

released the consumer booklet, Protect Your

Pension. It provides guidance on how to read

and understand a plans’s annual financial

report and explains the general rules governing

plan contributions and investments. A major

portion of the booklet discusses useful tips

workers can use that may indicate that ERISA

has been violated, which includes becoming

aware of such factors as consistent investment

losses over several years or too much money

being concentrated in one type of investment.

The agency also distributed public service

announcements (PSAs). A series of seven

PSAs were distributed nationally and placed in

more than 8,000 magazines and newspapers.

The agency also distributed two million copies

of retirement savings brochures and booklets;

made available the Top Ten Ways brochure

through the Consumer Information Center’s

catalog via mail order; and engaged the

Secretary and Assistant Secretary to speak

nationally to varied groups to keep the

retirement savings message in the forefront.

Other Educational Initiatives

In addition to the Retirement Savings

Education Campaign, PWBA launched several

new initiatives in 1996 designed to either

better prepare working Americans for

retirement or to foster pension security.

In June the agency finalized an interpretative

bulletin giving employers clearer guidelines

about investment information they can provide

employees. The bulletin was developed by the

agency in response to requests from employers

about what they can tell employees without the

information being considered investment

advice. The guidelines could help the more

than 20 million workers who invest in 401(k)

retirement funds and who must make choices

regarding how to allocate their money among

various investment options.

The categories of information and materials

that the bulletin stipulated employers and

service providers can give to workers, without

giving rise to fiduciary status, and therefore

without liability for losses from their

investment decisions, include: 1) general

financial and investment information that has

no direct relationship to specific investment

alternatives available to participants; 2)

materials that help participants assess the

relevance of hypothetical asset allocation

models to their investment situation;

and 3) interactive materials and information

18
that allows participants to design and assess

multiple asset allocation models.

The agency prepared a new edition of a

booklet entitled Trouble Shooter’s Guide to

Filing the ERISA Annual Reports. The booklet

was designed to facilitate compliance by the

public with the laws and regulations that apply

to annual reports by employee benefit plans.

In August the agency released Questions and

Answers: Recent Changes in Health Care

Law. The booklet is designed to help

employees and employers understand their

19

rights and obligations under the Health

Insurance Portability and Accountability Act

of 1996 and addresses frequently-asked

questions pertaining to HIPAA, the Mental

Health Parity Act of 1996 and the Newborns’

and Mothers’ Health Protection Act of 1996.

These publications, along with other

educational materials, are available on the

Internet on PWBA’s home page at http://

www.dol.gov/dol/pwba
In 1996, PWBA devoted time to several issues

raised through requests for class exemptions.

Many of these issues related to streamlining

the exemption process in cases where the

agency believed that the appropriate findings

could be made. Specifically, PWBA published

a final class exemption permitting a wide

variety of transactions that involve large

pension plans managed by in-house managers.

PWBA also granted a class exemption, called

the Class Exemption to Permit Certain

Authorized Transactions between Plans and

Parties-in-Interest (EXPRO), which reduces

the time necessary to process those exemption

applications that represent the types of routine

transactions previously considered by PWBA.

Under the final class exemption, transactions

can be entered into in as little as 78 days from

the date the Department acknowledges receipt

of the applicant’s submission.

A number of employers who sponsored plans

that held guaranteed insurance contracts

(GICs) requested permission to purchase the

GICs from their plans or to loan money to their

plans in circumstances where the insurer was

insolvent. As a result, PWBA approved eight

exemption applications involving requests

from employers to loan money to plans or

either guarantee or buy GICs from plans to

prevent losses or delays in benefits.

PWBA published a final class exemption that

was necessary for the implementation of a

voluntary compliance program designed to

encourage employers to voluntarily restore

delinquent participant contributions plus lost

earnings to pension plans.

In addition, the agency processed over 40 good

faith waivers imposed under Sec. 502(l) of

ERISA. This section imposes a 20 percent

Exemptions

penalty on any person who has been found to

have breached his fiduciary responsibilities.

The agency also granted an exemption for the

lending of securities, under certain “exclusive

borrowing” arrangements, to Smith Barney or

any affiliate that is a U.S. registered brokerdealer, by employee benefits plans to which

Smith Barney acts as a securities lending

agent.

In addition, PWBA proposed a class

exemption that would permit the receipt of

services at reduced or no cost by an individual

from a broker-dealer according to an

arrangement in which the individual’s IRA or

Keogh plan is taken into account for purposes

of determining eligibility.

PWBA also granted an exemption that permits

the purchase and sale of “emerging market”

securities, and certain repurchase agreements

relating thereto, between Chase Manhattan

Bank (Chase) or an affiliate and IBM Pension

Plans for which Chase or an affiliate is a

service provider.

In 1996, the agency received 235 exemption

applications, granted 108, denied or withdrew

116 and had 187 pending by year’s end.

In other actions, PWBA granted six

exemptions that permitted employee benefit

plans to invest in asset-backed securities; three

that permitted the conversion of collective

investment funds into mutual funds; and an

exemption for the demutualization of an

insurance company and the sale of

collateralized mortgage obligations (CMOs) .

These included:

20
Exemptions for asset-backed

securities

96-11 January 31

ContiFinancial

Services Corp.

96-12 March 12

World Omni Financial

Corp. and its Affiliates

96-22 April 3

First Union Corp.

96-84 November 13

HSBC Securities, Inc.

96-92 December 17

BA Securities, Inc.

96-94 December 30

First Chicago NBD

Corp.

Exemption in connection with the

demutualization of an insurance

company

96-87 December 12

Blue Cross and Blue

Shield of Virginia

Exemptions for the conversion of

collective investment funds into

mutual funds

96-1 January 31

First Hawaiian Bank

96-54 July 22

Wells Fargo Bank N.A.

96-74 October 2

Chicago Trust Company

Exemption for the sale of CMOs

96-52 July 12

First Virginia Banks

Exemptions for GICs

96-28 April 24

Associated Claims Sale by Plan

Management 401(k)

Plan

96-30 May 6

Aultman Retirement Sponsor Guarantee to

Plan Savings Plan

96-44 June 4

Sprague Electric Co. Sale by Plan

Retirement and

Savings Plan

96-53 July 12

Amsouth Sale by Plan

BancorporationThrift

Plan

96-58 July 22

Fieldcrest Cannon Sponsor Guarantee to

Retirement Savings Plan

Plan for Salaried/

Hourly Employees

96-67 August 27

Cablevision Industries Sale by Plan

Profit Sharing Plan

96-72 September 18

MEI Technology Sale by Plan

401(k) Plan

21
96-81 October 25

Rexam Retirement Loan to Plan

Savings Plan

EXPRO Grants

96-01E November 11

Morrison Knudsen Sale of securities to a

Plan party-in-interest

96-02E November 25

Ironwood Capital Plan investment in

asset-backed

securities

96-03E December 9

Deutsche Bank Plan investment in

asset-backed

securities

Other Significant Exemptions

96-14 March 12

Morgan Stanley and Co. Inc. and Morgan

Stanley Trust Company. Permits: (1) the

lending of securities to Morgan Stanley and

Co. and affiliates of Morgan Stanley Trust

Company (MSTC) by employee benefit plans

for which MSTC serves as a directed trustee

(or custodian) and securities lending agent;

and (2) the receipt of compensation by MSTC

in connection with these transactions.

96-17 March 22

General Motors Hourly Rate Plan and

General Motors Retirement Plan. Permits

transactions including the acquiring,

managing, developing, leasing, financing or

sale of real property or the borrowing or

lending of money between the plan and

various parties-in-interest at the direction of a

GM in-house manager.

96-35 May 10

NBD Bancorp. Permits the merger of two

collective investment funds (CIFs) maintained

by NBD Bancorp, a company that is a

fiduciary with respect to each plan holding

assets in the different CIFs.

96-59 July 31

PaineWebber. Permits the provision of asset

allocation services by a PaineWebber division

to the independent fiduciary or directing

participant of an ERISA section 404(c) plan,

which may result in the selection of

PaineWebber portfolios for investment.

96-75 October 2

Pacific Mutual Life Insurance Company.

Permits the sale to plans of a synthetic

guaranteed investment contract (GIC) offered

by the Pacific Mutual Life Insurance Company

that is also an investment adviser, and/or

provides other services with respect to such

plans.

96-76 October 17

Teachers Insurance and Annuity Association

of America (TIAA). Permits the purchase and

sale by TIAA of units of participation in a real

estate separate account established and

operated by TIAA from plans in the event of a

net withdrawal from such account for the

purpose of providing liquidity to investing

plans or participants.

96-80 October 25

Lehman Brothers. Permits the sale of

collateralized guaranteed investment contracts

(GICs) by Lehman to employee benefit plans

with respect to which Lehman Brothers is a

service provider.

22
96-87 December 12

Blue Cross and Blue Shield of Virginia.

Permits the receipt of cash and/or common

stock issued by Trigon HealthCare, Inc., a

wholly-owned subsidiary of Blue Cross and

Blue Shield of Virginia, by a plan policyholder

(other than a plan sponsored by the company

or its affiliated) in exchange for the plan

policyholder’s membership interest in the

company.

96-90 December 17

Smith Barney Shearson Prototype Defined

Contribution Plan. Permits the past

acquisition, holding and exercise by the

Highland Federal Bank plan of stock purchase

rights that were issued by the Highland Federal

Bank, the plan sponsor.

Significant Published Proposals:

Morgan Stanley and Company. This proposal

would permit the British affiliate of a U.S.

registered broker-dealer to: 1) engage in

principal transactions on behalf of plans, in the

same manner permitted for U.S. registered

broker-dealers under section II of class

exemption prohibited transaction exemption

(PTE) 75-1; 2) engage in the lending of

securities that are plan assets, in the same

manner permitted for U.S. registered brokerdealers under class exemption PTE 81-6; and,

3) extend credit to plans to permit the

settlement of securities transaction provided

that the subject transactions satisfy a number

of conditions equivalent to those found in PTE

75-1.

The Chase Manhattan Bank. This proposal

would permit 1) the granting to Chase, as the

representative of lenders participating in a

credit facility, of security interests in limited

partnership interests owned by certain

employee benefit plans with respect to which

some of the lenders are parties-in-interest; and

2) the agreements by the plans to honor capital

calls made by Chase in lieu of the

partnership’s general partner.

Federated Investors. This proposed class

exemption would permit plans to purchase

shares of a registered investment company in

exchange for plan assets transferred in-kind

from a bank maintained collective investment

fund (CIF), where the bank that serves as a

fiduciary of the plan is also the investment

adviser for the registered investment company.

23
During 1996 PWBA:

Published for public comment a

proposed rule relating to the

elimination of various regulations and

interpretive bulletins that had been

determined to be obsolete. PWBA

identified 34 regulations for

elimination or reinvention, in whole or

in part.

Published a final rule revising the

definition of when participant monies

paid to or withheld by an employer for

contribution to an employee benefit

plan constitute “plan assets” for

purposes of Title I of ERISA. The

revised rule shortened the time period

during which employers may hold

employees’ 401(k) contributions

before depositing the funds in

employees’ accounts.

Issued Interpretive Bulletin 96-1

describing the Department’s views

concerning the circumstances

whereunder giving investment-related

information to participants and

beneficiaries in participant-directed

individual account plans will not

constitute “investment advice” under

Title I of ERISA. This bulletin helps

employers and others who provide

investment information to know what

standards apply in determining

whether an education activity may

give rise to fiduciary status.

Regulatory Activities

Published a Request for Information

in the Federal Register soliciting input

from the public regarding the

development of regulations providing

guidance on amendments of Title I of

ERISA effected by the Small Business

Job Protection Act of 1996 that limit

the liability of insurers with regard to

certain types of contracts issued to or

for the benefit of employee benefit

plans.

24








In 1996, PWBA worked for the enactment of

the President’s Retirement Savings and

Security Act. Significant portions of this

legislation were enacted as part of the Small

Business Job Protection Act of 1996, Public

Law 104-188, including the creation of a new

kind of pension plan for small businesses

known as the SIMPLE plan. Other changes

included the simplification of the

nondiscrimination rules, distribution rules,

expansion of 401(k) plans to tax exempt

organizations, and other miscellaneous

simplification provisions.

PWBA assisted in reviewing, analyzing and

presenting recommendations of the

Administration’s position concerning health

reform legislation affecting employee health

plans. Significant portions of the President’s

health reform initiative were enacted in 1996

as part of the Health Insurance Portability and

Accountability Act of 1996, the Newborns’

and Mothers’ Health Protection Act of 1996

and the Mental Health Parity Act of 1996.

These laws established new minimum

standards limiting exclusions based on preexisted conditions, prohibiting discrimination

against participants and beneficiaries based on

health status, provided minimum standards for

hospital stays for mothers and newborns and

Policy and Legislative Analysis

25

Key Testimony

June

Assistant Secretary Olena Berg before

the House Economic and Educational

Opportunities Subcommittee on Issues

in Pension Reform.

July

Deputy Assistant Secretary Alan

Lebowitz before the Subcommittee on

Human Resources and Governmental

Relations of the Committee on

Governmental Reform and Oversight on

Organized Crime and Labor

Racketeering in Employee Benefits.

provided parity in the application of certain

limits to mental health benefits.

The definition of an “investment manager” was

modified as a result of the National Securities

Markets Improvement Act of 1996, with

technical assistance from PWBA.
During 1996, PWBA continued its

multifaceted program to improve enforcement

of ERISA’s reporting and disclosure

requirements and to encourage timely

compliance with the law. In additional to

traditional enforcement initiatives involving

civil penalties, the agency engaged in a

program to encourage proactive voluntary

compliance, continued to coordinate with the

accounting profession, instituted additional

educational outreach seminars and looked at

ways to assess the quality of employee benefit

plan audits.

Reporting Compliance Program

The reporting compliance program is divided

into deficient filers late-filers, and non-filers.

Penalties are imposed on plan administrators

for failure to submit complete and accurate

Form 5500 Series annual reports with the

Department. In 1996, approximately $13

million in civil penalties was assessed against

plan administrators under the agency’s

reporting compliance program for filing

unsatisfactory Form 5500 Series annual

reports. Approximately $25 million was

assessed for late filings and non-filings.

PWBA’s Delinquent Filer Voluntary

Compliance (DFVC) Program encourages plan

administrators to file previously unfiled Form

5500 Series annual reports and to resolve late

filer penalties. In addition, plan administrators

of “top hat” plans and apprenticeship and

training plans who missed their filing

deadlines were encouraged to submit

statements and elect an alternative method of

compliance in lieu of annual reports.

The DFVC Program simplified the filing

process and reduced the financial hardship for

voluntary compliance for small business

Accounting and Auditing

through smaller fines. In 1996, almost 3,200

plans chose to take advantage of the DFVC

program, and the program collected more than

$9 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

1996 guide for auditing employee benefit

plans. The updated guide, published in May,

incorporated new audit and accounting

requirements issued by the Financial

Accounting Standards Board (FASB). The

guide’s purpose is to improve compliance with

ERISA’s audit, reporting and disclosure

provisions.

Educational Outreach

Under the sponsorship of the International

Foundation of Employee Benefit Plans, PWBA

initiated an educational outreach program.

Through a series of workshops, the agency

presented both the Form 5500 filing

requirements and an overview of the

Department’s enforcement program. The

agency conducted 14 such workshops during

1996, with an additional 13 workshops being

planned for 1997.

The educational outreach program earned the

agency staff a National Performance Review

Hammer Award for reinventing government.

The outreach team’s efforts improved pension

plan administrators’ compliance with the

reporting and disclosure requirements of

ERISA. Its efforts also resulted in reducing

penalties paid by businesses, savings millions

of dollars in compliance costs.

26
The agency performed 52 on-site reviews and

analyses of audit work papers that support the

accountant’s reports.

Thrift Savings Plan Audits

PWBA conducted approximately 30 fiduciary

compliance audits of the Thrift Savings Plan

(TSP) as required by the Federal Employees’

Retirement System Act. Audit procedures

were designed to strengthen the security of the

$46 billion held in 2.3 million TSP accounts of

federal workers and to enhance opportunities

for greater net earnings by recommending

improvements in the TSP system.

The innovative program was created by the

PWBA Chief Accountant’s office to educate

the employee benefit plan community about

ERISA requirements.

Referral of Substandard Audit Work

Through December 1996, PWBA referred 264

cases of potential deficient accounting and

auditing work to the American Institute of

Certified Public Accountants’ Professional

Ethics Division. Seventy-eight cases were

either referred to the AICPA’s trial board, or

the accountant reached a settlement

agreement. One hundred ten cases resulted in

remedial corrective action letters. No

violations were found in 11 cases, while 24

cases were closed for other reasons.

Sixty-nine cases were referred to state boards

of accountancy in instances where the AICPA

lacked jurisdiction over the accountant or the

accountant was not properly licensed.

Performance of Onsite Workpaper

Reviews

ERISA requires the administrator of each

ERISA-covered plan to engage an

independent public accountant to conduct an

annual audit of the financial statements of the

plan. The audit is to be performed in

accordance with generally accepted auditing

standards and is to state whether the financial

statements have been prepared in conformity

with generally accepted accounting principles.

To ensure employee benefit plan audits

comply with professional standards, the

Department conducts an ongoing quality

control program for improving the audit work

performed by independent public accountants.

Plan Audit Reviews - 1996

Number of reporting 3,074

compliance cases

Reviews of auditor’s

work papers 52

Plan Audit Reviews -

Cumulative through 12/31/96

Total audits referred 333

State licensing boards 69

AICPA 264

Resolutions - AICPA 223

Referred to AICPA trial

board or settlement 78

Letters for corrective action 110

No deficiencies 11

Closed for other reasons 24

27
Research

In 1996, PWBA published data and statistics

from the annual reports of the Form 5500 that

covered the 1992 plan year. Highlights show

the number of active participants in all private

pension plans increased 4 percent from 61.5

million in 1991 to 64.2 million in 1992. The

number of defined contribution plan active

participants increased 9 percent from 35.8

million in 1991 to 38.9 million in 1992, with

all of the increase due to growth in 401(k) plan

participants.

PWBA supported, with several other federal

agencies, the Panel on Retirement Income

Modeling of the Committee on National

Statistics of the National Academy of

Sciences. The panel was established to review

the state-of-the-art of retirement income

modeling and make recommendations to

inform policy-making entities on retirement

income security. As part of its work, the panel

commissioned papers reviewing such topics as

individual labor supply and savings behavior.

These were published in 1996 in a volume

titled Assessing Knowledge of Retirement

Behavior.

PWBA’s research program supported studies

on employee health benefits that produced two

papers. One, on medical savings accounts,

was published in the Journal of the American

Medical Association and a second, on selfinsured plans that analyzed the effects of the

Kennedy-Kassebaum provisions on portability,

was published in Health Affairs.

PWBA initiated a national survey to measure

the health insurance benefits of workers and

retirees to be fielded as a module of the Survey

on Income and Program Participation (SIPP).

Under its small research contracts program,

nine final reports were received and 12 new

contracts were awarded.

Research Studies

The Effect of Taxes in a

Nested Logit Model of 401(k)

Offer and Participation Rates

Health Insurance Coverage of

the Unemployed

Macroeconomic Determinants

of ERISA Plan Investment

Policies

The Effects of Public Pension

Fund Investments on

Employment: A Few Empirical

Estimates

Does 401(k) Introduction

Affect Defined Benefit Plans?

Employer-Provided Health

Benefits Among Middle-Aged

Americans: Coverage Patterns

and Transitions

Asymmetric Information in

Health Care and Health

Insurance Markets: Evidence

from the National Medical

Expenditure Survey

Health Insurance Coverage of

Children of Working Parents

An Evaluation of the

Retirement Income Prospects

of Divorced Women

28


















Health Care Task Force

PWBA’s Health Care Task Force was

established in September 1996 in response to

the enactment of several significant health

care laws during the 104th Congress. The

Health Care Task Force was established to

plan, direct and carry out a program for

providing technical guidance on the

provisions of Title I of the Employee

Retirement Income Security Act of 1974

(ERISA), as amended by 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, as well as other health

care laws affecting group health plans. The

Health Care Task Force is responsible for

providing regulations, interpretive bulletins,

opinions, rulings, forms, training, technical

assistance and other guidance to facilitate

compliance with and enforcement of the

health care portability, nondiscrimination and

other provisions of Title I of ERISA relating to

group health plans that are administered by

the Department of Labor.

Following is a summary of the most

significant regulatory issues developed by the

Health Care Task Force during 1996.

Technical Bulletin 96-1

PWBA issued a technical bulletin describing

changes that HIPAA made to the continuation

coverage requirements of the Consolidated

Omnibus Budget Reconciliation Act of 1985

(COBRA) and provided a model notice that

employers and plan administrators could use

to comply with HIPAA’s requirements. Plan

sponsors and employers could comply with

the statute by simply mailing out the model

notice.

Requests for Information

PWBA issued a Request for Information (RFI)

in the Federal Register on how best to

implement the portability, access and

renewability provisions under HIPAA. The

RFI provided the public with the opportunity

to submit comments and provide input prior to

the promulgation of compliance-related

guidance on HIPAA’s statutory provisions.

PWBA carefully considered the public

comments received on behalf of employees,

dependents and others seeking health

coverage, as well as employers, plan

administrators and insurance issuers in

developing the interim compliance-related

guidance under HIPAA.

29
Continue to support the Pension Audit

Improvement Bill, S1490, to require

specific training for auditors of

qualified plans.

Direct the Department to study the

advisability of limiting the amount of

employer securities held in defined

contribution plans.

The Impact of Alternative Tax

Proposals on ERISA EmployerSponsored Plans

Asked the Secretary to encourage

congressional committees and leaders

to actively seek out a wide range of

views on how such reform might

affect pensions and saving for

retirement.

Recommended that the Secretary raise

issues relating to the impact of tax

reform on the private pension system

within the Administration and with the

public at large. A majority of the

committee recommended formation of

a national commission on retirement

policy to study private pension and

benefit issues.

Asked the Secretary to direct the

Department to conduct an analysis of

the regulatory and legal issues that

would arise if tax laws are changed to

eliminate the tax preference for

employer contributions to qualified

pension plans.

Asked the Secretary to consider

sponsoring research and public

discussion, alone or in conjunction

ERISA Advisory Council

In 1996 the Advisory Council on Employee

Welfare and Pension Benefit Plans focused on

the following initiatives: the utilization of

third-party trustees to protect plan participants,

the impact of alternative tax proposals on

ERISA employer-sponsored plans and

guidance in selecting and monitoring service

providers.

The following are final recommendations

presented by these three working groups.

The views of the working groups do not

necessarily reflect those of the Department.

Exploring the Utilization of ThirdParty Trustees to Protect Plan

Participants

Take necessary steps to implement a

requirement of automatic issuance of

periodic ERISA plan participant

statements.

Amend Department regulations to

provide for mandatory reconciliation

of participant records and trust records

in defined contribution plans, and a

certification to that effect in summary

annual reports (SARs).

Assure, where legally required

financial statements are not filed or are

deficient, that the Department has

sufficient resources available to

investigate and remedy the

noncompliance.

Direct the Department to study special

issues and concerns in the reporting

and administration of plans with less

than 100 participants.



30











 




with academic experts and

nongovernmental organizations, on the

many questions that have only partly

been researched and analyzed.

Guidance in Selecting and Monitoring

Service Providers

The Department should develop and

disseminate educational materials to plan

sponsors, participants and service providers

that include information on:

31

The duties of fiduciaries;

The legal effect of a plan fiduciary’s

delegation of responsibilities to

service providers;

Sample questions a fiduciary should

ask potential service providers; and

Sources concerning various types of

service providers.








Accounting

Marilee Lau

KPMG Peat Marwick, LLP

Investment Management

Jim Hill

Treasurer, State of Oregon*

Actuarial Counseling Field

Zenaida M. Samaniego

Equitable Life Assurance Society

 of the United States

Employee Organizations

David G. Hirschland

International Union United Automobile,

 Aerospace and Agricultural Implement

 Workers of America, United Auto

 Workers*

Employer Organizations

Richard McGahey

Neece, Cator, McGahey & Associates, Inc.

Carl S. Feen

CIGNA Financial Advisors

General Public

Edward B. Montgomery

University of Maryland

 Department of Economics*

Victoria Quesada

Attorney-at-Law

James O. Wood

Louisiana State Employees’

 Retirement System (LASERS)

Employer Organizations

(Multiemployer Plans)

Glenn W. Carlson

Arthur Andersen & Co.*

Insurance Field

Kenneth S. Cohen

Massachusetts Mutual Life Insurance

Corporate Trust

Judith Mares

Mares Financial Consulting, Inc.*

Employee Organizations

(Multiemployer Plans)

Vivian Lee Hobbs

Arnold & Porter

Employee Organizations

(Multiemployer Plans)

Joyce A. Mader

O’ Donoghue & O’Donoghue

Investment Counseling

Thomas J. Healey

Goldman, Sachs, Co.

ERISA Advisory Council 1996 Members

*Terms for these members expired in November 1996.

32