ERISA oversight report of the Pension Task Force of the Subcommittee on Labor Standards

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Title:
ERISA oversight report of the Pension Task Force of the Subcommittee on Labor Standards
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iii, 11 p. : ; 24 cm.
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English
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United States -- Congress. -- House. -- Committee on Education and Labor. -- Subcommittee on Labor Standards. -- Pension Task Force
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At head of title : 94th Congress, 2d Session. Committee Print.
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Issued Jan. 3, 1977.
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Committee on Education and Labor, House of Representatives.

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Table of Contents
    Front Cover
        Page i
        Page ii
    Introduction
        Page iii
        Page iv
    Main body
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
Full Text
~h+~iJ


94th Congress I
2d Session f


COMMITTEE PRINT


ERISA OVERSIGHT REPORT

OF THE

PENSION TASK FORCE

OF THE

SUBCOMMITTEE ON LABOR STANDARDS






COMMITTEE ON EDUCATION AND LABOR

HOUSE OF REPRESENTATIVES


12* i


JANUARY 3, 1977


Printed for the use of the Committee on Education and Labor
CARL D. PERKINS, Chairman


U.S. GOVERNMENT PRINTING OFFICE


WASHINGTON : 1977


I,
'I
'I


-1* ,


83-865













COMMITTEE ON EDUCATION AND LABOR


CARL D. PERKINS, Kentucky, Chairman


FRANK THOMPSON, JR., New Jersey
JOHN H. DENT, Pennsylvania
DOMINICK V. DANIELS, New Jersey
JOHN BRADEMAS, Indiana
JAMES G. O'HARA, Michigan
AUGUSTUS F. HAWKINS. California
WILLIAM D. FORD, Michigan
PATSY T. MINK, Hawaii (on leave)
LLOYD MEEDS, Washington
PHILLIP BURTON, California
JOSEPH M. GAYDOS, Pennsylvania
WILLIAM (BILL) CLAY, Missouri
SHIRLEY CHISHOLM, New York
MARIO BIAGGI, New York
IKE ANDREWS, North Carolina
WILLIAM LEHMAN, Florida
JAIME BENITEZ, Puerto Rico
MICHAEL BLOUIN, Iowa
ROBERT J. CORNELL, Wisconsin
PAUL SALMON, Illinois
EDWARD BEARD. Rhode Island
LEO ZEFERETTI, New York
GEORGE MILLER, California
RONALD MOTTL, Ohio
TIM HALL, Illinoisa


ALBERT H. QUIE, Minnesota
JOHN M. ASHBROOK, Ohio
ALPHONZO BELL, California
JOHN N. ERLENBORN, Illinois
MARVIN L. ESCH, Michigan
EDWIN D. ESHLEMAN, Pennsylvania
PETER PEYSER, New York
RONALD A. SARASIN, Connecticut
JOHN BUCHANAN, Alabama
JAMES M. JEFFORDS, Vermont
LARRY PRESSLER, South Dakota
WILLIAM F. GOODLING, Pennsylvania
VIRGINIA SMITH, Nebraska


SUBCOMMrrITTEE ON LABOR STANDARDS

JOHN H. DENT, Pennsylvania, Chairman


DOMINICK V. DANIELS, New Jersey
PHILLIP BURTON, California
JOSEPH M. GAYDOS. Pennsylvania
WILLIAM (BILL) CLAY, Missouri
MARIO BIAGGI, New York
JAIME BENITEZ. Puerto Rico
LEO ZEFERETTI, New York
GEORGE MILLER, California
ROBERT J. CORNELL. Wisconsin
PAUL SIMON, Illinois
CARL D. PERKINS, Kentucky,
.Er officlo


JOHN N.!ERLENBORN, Illinois
RONALD A. SARASIN, Connecticut
JOHN M. ASHBROOK, Ohio
ALPHONZO BELL, California
WILLIAM F. GOODLLNG, Pennsylvania
ALBERT H. QUIE, Minnesota
Ex officio


(I3)




























INTRODUCTION
The material that follows is an excerpt from the activity report of
the Committee on Education and Labor for the 94th Congre-. Except
for minor technical changes, the material is the same as it appeared
in the report of the full committee.
(M)


















Digitized by the Internet Archive
in 2013












http://archive.org/details/erisatre00unit









Pursuant to the directives of Rule X of the Rules of the Ho;.e of
Representatives and sections 3021 and 3022 of the Employee Retire-
ment Income Security Act of 1974 (Public Law 93-406, hereinafter
"ERISA"), the subcommittee held eight days of over.-ight hearinlg-
on the implementation of ERISA. In the course of th(.-e hearings, tlie
ERISA experience to date was carefully and extensively explored.
Both the successes and the shortcomings of ERISA, as well as ways in
which the law could be improved, were notedl by Members and wit-
nesses. The confusion and inefficiency in plan operation cau.-,'d by
the division of administrative authority in the agencies. were repeatedly
mentioned. In addition to these formal hearings, the staff of the Pen-
sion Task Force of this Subcommittee continuously monitored the
implementation of the substantive provisions of the Act.
It was apparent when ERISA wa .; enacted that some of the complex
legislative resolutions made in the course of the law's pa.--ioLr, would,
over time, prove less than perfect. Given the complexity of the sub-
ject matter and the involvement of both the Tax and Labor Commit-
tees, it was inevitable that parts of ERISA would need amending.
The Subcommittee accepts its share of responsibility for these po.--ible
legislative misjudgments. The statutory changes which this Subco1m-
mittee has recommended and continues to recommend are made with
an awareness of this responsibility.
The principal focus of our activity has been in those are is of EEISA
falling within the jurisdiction of the Subcommittee. In accordance with
the Rules of the House, as memorialized in the rule adopted for con-
sideration of H.R. 2 in the 93d Congress, 2d Session, the Committee
on Education and Labor is charged with exclusive jurisdiction and
oversight responsibility over Titles I and IV of the Act and retains
joint jurisdiction over the matters in Title III. In the collise of our
hearings, we have endeavored to avoid intruding into that area of the
Act (Title II) falling within the jurisdiction of the Committee on
Ways and Means. Because of the dual statutory provisions for pro-
hibited transactions, reporting and disclosure, and minimlint stand-
ards, our hearing record contains testimony denlincr both with matters,
within our jurisdiction as well as the provisions of Title II. We found
that as a practical matter, these issues do not confine themselves
easily to the jurisdictional division provided in the Act.
Our inability to restrict the scope of our oversight hearings to tho,-
elements of ERISA falling within the confines of Titles I, III, and IV
is symptomatic of the experience recounted by every witni-s who ap-
peared before us (including spokesmen for the Adminlistr ation). No
one who is affected by ERISA has been able to function in strict ac-
cordance with the premise underlying its jurisdictional .scheme. The
substantive standards embodied in the Act Oaire impo-ed ,.s elements of
tax policy and simultaneously as general social economic policy. The
Internal Revenue Service is directed to implement the stA.n(1ar(ds for
revenue collection purposes and the Departmintt of Labor anid private,
citizens are authorized to enforce then as general s-ocial economic p!(-
(1)






2

icy. As a practi cal matter tthe.e stanidart-, while identical on their
face, I~)roduce' different re-,ult: in identical factual situations. depending
01n whet her ItI ir enforctelment and interpretation is designed to protect
the federal r&'vnue l).il or regulate the conditions of employment for
the heiineit of the participants.
The untowaird side efTfects of dual administration have been a con-
st. at and recirrinh,,i themo in our hearing record, accompanied in many
instances by an expres,,ed desire to "make it work more effectively."
It oe isl, to rs tha the imperfections are a product of dual enforcement
itself, rather than the means chosen to imp ement this policy. We have
failed to reconcile the competing federal interests involved and the
re-,ult lias )eeil tlhe imposition of two largely inconsistent regulatory
s 'heme- over private employee benefit plans. The effect of this failure,
a.ide from delays in implementation, resulting from the agencies'
futile attenlmpts to reconcile their differences, has been to subject
the-e plans to a wrenching tug-of-war as the agencies in good faith
st,,rule to protect their legitimately, perceived, but conflicting,
interests. A fair reading of the record argues for a reappraisal of
"perfect" the division of the inherently indivisible.
We are prep:.red to accept responsibility for our role in fashioning
what is obviously an unworkable administrative arrangement. We are
aware of the opinion that this situation results from the parochialism
which infects both the agencies of government and private persons
interested in the field of employee benefit plans. This narrowness of
viewpoint is at the same time a cause and an effect of the failure to
precisely define the priorities in federal policy with respect to these
plans. We have for too long allowed these parochialisms to dominate
our consideration of policy.
Further analysis of the genesis of dual enforcement, beyond recogni-
tion of its unworkability, would be fruitless. We shall therefore devote
our efforts to an examination of the issues involved in any possible
solution to this situation, for we are convinced that further considera-
tion of ERISA's enforcement scheme will be needed. It is our inten-
tion to direct the attention of the House and our colleagues in the other
body to an analysis of the underlying issues involved. As we perceive
the matter, several issues are paramount.
First, the question of the nature of the Federal interest in employee
benefit plans needs to be evaluated. The framework of ERISA leaves
unre,-olvedl the competing revenue and social economic considerations
in federal policy. The historic federal preoccupation with these plans
as potential sources of revenue (or, more accurately, revenue losses)
ha:s not been disturbed by the Act. At the same time a comprehensive
scheme of social economic reform in the form of a body of contractual
and trust law governing the rights of the private parties involved has
been enacted into federal law. The result has been statutory and ad-
ministrative confusion and ambiguity.
T'le svmptons. of the defect are already serious. Moreover, private
party .and Department of Labor initiated litigation will shortly add
a new and potentially dangerous; dimension to the problem. At the
moment, the adver-,e effects are localized in the administrative
:t,'ivities of the arenie.s. As-; the'federal court system becomes active in
private litigation under Title I, the conflicts will, in our view, become
more ,ind more troublesome. These cases will be resolved within the








context of Title I under its equity-oriented principles of law. A-sum-
-ing, as we do, that substantial variations from the Internal Revenue
Service's interpretation of the Title II standards will be adopted by
the courts, the results may be chaotic.
Our concern is founded on our conviction that the courts c.Large(l
with adjudicating actions undertaken by private parties will view
ERISA (especially Title I) as having created a series of obligations
owed by plans and plan fiduciaries to the plan participants and bene-
ficiaries. It is likely that these courts, hearing cases in which aggrieved
participants are attempting to assert rights established under Title I,
will construe the ERISA duties and standards liberally in favor of
those plaintiff-participants who are the beneficiaries of the protective
provisions of the Act. The nature of the rights created and the causes
of action that will arise as plan participants seek to vindicate tho->e
rights require that courts view both the statute and the remedies for
breaches with the creativity and flexibility that is inherent in any
equity-oriented action. It is apparent that this flexibility will in some
instances create a tension with the recognized and letigimate need
in tax administration for uniformity and precision. Conflicts in inter-
pretation are bound to arise as the same provisions in ERISA are
analyzed in both a proceeding in which a tax provision is at issue and
a proceeding in which a participant's entitlement or a fiduciary's
conduct is at issue.
With respect to the inconsistent or conflicting interpretations that
may result, the Act is silent. We do not read Title I to support in any
way the proposition that the interests of participants are to be sub-
ordinated to the interests of the revenue agency. And we see little
likelihood that those charged with enforcing the Internal Revenue
Code will voluntarily subordinate their enforcement policies to inter-
pretations fashioned by courts more concerned with equitable
considerations.
We can only be hopeful that the administrative agencies and the
courts will successfully balance the participant interests and the reve-
nue interests as these conflicts and tensions develop. The Act, in its
silence on this important and extremely difficult issue, contemplates
such a balancing of the wholly legitimate, but frequently differing,
needs and perspectives. Only with such a balancing of interests can the
participant rights established in Title I and the revenue interests
recognized in Title II be achieved. Since the administrative and judicial
forums have failed successfully to resolve these competing participant
and revenue interests, then the Congress must of necessity actively
address the issue and legislatively achieve the balancing of interests
it has only implicitly addressed to date.
Fiduciary Standards
In the course of our oversight activities we have been inundated
with testimony and comments about the fiduciary standards pro-
visions of the Act and their implementation. For the purposes of
this report we have identified four provisions in the act which appear
to be the principal areas of attention.

I. Prohibited Transactions-Section 406
In general, Title I of the Act anserts jurisdiction over plans and
fiduciaries and all of its standards are limited in their effect to persons







and entities falling within the scope of those two defined terms.
Within the context of the "fiduciary standards" of ERISA, any per-
son who is not a fiduciary but who is a party in interest or, more
properly, a "disqualified person" escapes the jurisdiction of Title I
but is subject to the more limited "fiduciary standards" of Title II.
Part 4 of Title I contains a variety of provisions which in toto are
referred to as the "Fiduciary Standards." Among these provisions are
the prohibitions imposed on fiduciaries against dealing with parties
in interest in section 406(a) and against self-dealing contained in sec-
tion 406(b). Both of these subsections are restricted in their scope to
enjoining activity by a fiduciary. As a general comment we have
observed little adverse reaction to the policy of barring self-dealing
as articulated in section 406(b). The outright bar to "party in interest"
dealings in section 406(a) is another matter.
Thle advocate- of the section 406(a) prohibitions base their policy
preference on the relative ease of proving a fiduciary violation under
this provision, in contrast to the more extensive proof required under
section 404. This section (section 406) embodies what is characterized
as the "prophylactic approach," in that a broad range of conduct is
prohibited, without regard to the individual bona fides of the specific
transactions or relationships involved. Obviously the burden of
enforcement is greatly reduced in any action proceeding under section
406. The moving party need demonstrate only the existence of a trans-
action or relationship falling within the scope of the prohibition and
the absence of an applicable exemption. In contrast, an action brought
under section 404 will require a showing of imprudence or violation of
the exclusive benefit standard, a somewhat more difficult and cer-
tainly less objective burden of proof.
A further rationale is preferred for these prohibitions: certain trans-
actions and relationships offer such a potential for abuse that they
must be prohibited per se, unless after review, an agency can deter-
mine that no risk of abuse exists.
Of these two "arguments" the first represents little more than a
statement of the objectives of the proponents. In response we feel com-
pelled to adopt the view that the federal interest in easing its admin-
istrative burdens, by itself, cannot justify the adoption of unnecessarily
restrictive policies. The degree of control exercised over the activities
of a private citizen must be measured against the benefits to be de-
rived for all citizens. On the basis of our hearing record and the ex-
perience of the Department of Labor to date, it would appear that the
prohibitions in section 406(a) are overly broad. The number of innocent
and nonabusive transactions and relationships caught within section
406(a) far exceed those with abusive or pernicious overtones. The pro-
phylaxi- as it applies to party in interest transactions is overly broad.
In fairness it should be noted that section 408 of the Act does provide
a mechanism for obtaining administrative exemptions from the prohi-
bitions. At this time the Department of Labor has received almost 500
exemption requests and has processed slightly more than 10% of these.
The agency's backlog has been growing at an increasing rate over the
past two years. All indications are that it will continue to grow and
the Department will fall further behind in its attempts to keep pace
with this volume.
In view of the Department's inability to provide timely relief for
innocent parties caught up in the section 406(a) snare and the exces-






sive breadth of these provisions, we continue to support the amend-
ments proposed in H.R. 7597 as reported by the Committee on Edu-
cation and Labor in 1975.
II. Cofiduciary Liability
As a general proposition the duties of a fiduciary under ERISA
are the same as those imposed on one in a position of trust under the
common law. In certain instances the Act has departed significantly
from the common law approach. One of these departures is contained
in section 405 and represents a dramatic change in the obligations of
individual fiduciaries to oversee the activities of others serving in simi-
lar capacities. While there is some uncertainty as to the interpretation
of the section, it would appear that its purpose is to require some level
of oversight and supervision of each other by all fiduciaries.
Given the broad definition of "fiduciary" for Title I purposes and
the absence of an affinity bond between all the fiduciaries of any plan,
such a general requirement appears inappropriate. As the full Com-
mittee indicated in its report accompanying H.R. 7597 (House
Report 94-646, 94th Congress, 1st Session), the policy of section 405
needs to be changed to restrict the obligation of supervision and over-
sight to those who hold official positions of authority. The need for
this revision will become still more acute if courts, as may be expected,
interpret the "knowledge" requirement necessary to establish co-
fiduciary liability under section 405(a) in a manner consistent with the
interpretation of the term "knowledge" adopted by the draftsmen in
the comment to section1 297 of the Restatement of Trusts 2d:
"A third person has notice of a breach of trust not only when he
knows of the breach, but also when he should know of it; that is when
he knows facts which under the circumstances would lead a reasonably
intelligent and diligent person to inquire whether the trustee is a
trustee and whether he is committing a breach of trust, and if such
inquiry when pursued with reasonable intelligence and diligence would
give him knowledge or reason to know that the trustee is committing a
breach of trust."-Restatement of Trusts 2d, comment to section 297.
The presence of section 405(a), in conjunction with the widely held
view that this subsection will be interpreted expansively, has created
in many skilled and dedicated persons a feeling of excessive caution
and reluctance to assume a fiduciary status. This sentiment, we be-
lieve, is on balance detrimental to the interests of plan participants
and plan sponsors. Accordingly, it is felt that a statutory change in
section 405, making clear that fiduciaries have only a limited duty to
oversee the activities of their co-fiduciaries, is necessary.
III. Definition of Fiduciary
A recent court decision, Hibr'ria Bank v. International BrotfJicrlood
of Teamsters, Chazffers, War(lioiscmnen and HIelp r.: of America, 411
F. Supp. 478 (N.D. Cal. 1976), purports to narrow the definition of a
fiduciary by reading "di-cretionary" in the clause ". . any authority
or control respecting management or disposition of its asst," thereby
excluding asset custodians.
Additionally, the Department of Labor seems inclined to adopt a
similar view in its development of interpretive standards and regula-
tions under part 4. We believe that their efforts are designed to limit
the impact of the prohibitions in section 406, and the obligations








arising under section 405, to a narrower group and thereby limit the
dislocation created by these provisions. We strongly believe that the
jurisdictional foundation of ERISA, based on thie existence of the
fiduciary status, should not be altered by administrative fiat.
We are acutely aware of the extreme breadth of the definition of
fiduciary. As we have already noted some advocate restriction of its
scope as a solution to the problems arising under sections 405 and 406.
Unfortunately the effect of such a limitation also restricts the scope
of section 404 and affects the preemption scheme in section 514. In our
view, whatever problems exist in the prohibited transaction and co-
fiduciary provisions should be solved narrowly in the context of
sections 405 and 406.
We continue to support the amendment proposed in H.R. 7597 to
provide that a director, officer, or employee of a corporation or em-
ployee organization which itself is a fiduciary with respect to a plan
shall not themselves be deemed to be fiduciaries solely on account of
actions undertaken by them in their capacities as directors, officers, or
employees. In short, we believe ERISA should recognize the "cor-
porate shell" for liability purposes with respect to actions under-
taken by individuals in the course of their employment.
IV. Prudence, Sole Interest, and Exclusive Purpose-Section 404
Section 404 of the Act, in part, establishes the general duty of care
required of all who serve in an ERISA fiduciary capacity (the "pru-
dence" requirement). Additionally, this section limits the objectives
which may motivate fiduciaries' actions to those "solely in the interest
of participants and beneficiaries" and then further limits their ac-
tivities to those which are "for the exclusive purpose of . providing
benefits to participants and their beneficiaries; and . defraying rea-
sonable expenses of administering the plan . "
These requirements have an extensive history in the common law
of trusts as developed over the past two hundred years. The prudence
requirement embodies a standard for actions of a fiduciary which
purports to be completely objective, but there will always be a sub-
jective element in its application, arising from the wisdom of hind-
sight. By contrast, the sole interest and exclusive purpose require-
ments compel an examination into the subjective state of mind of the
fiduciary. His motivation in acting (or failing to act) itself becomes
the focus of critical review. It is a settled principle of trust law, fol-
lowed in ERISA, that an otherwise prudent action, undertaken for
an improper purpose, will taint the action and render the fiduciary
liable for surcharge (see Blankenship v. Boyle, 329 F. Supp. 1089
(D.D.C. 1971).
We are convinced that this requirement remains an appropriate
standard to impose on persons charged with fiduciary obligations. It
has been a precept of our policy with regard to employee benefit funds
that they are owned by their participants. The overriding purpose of
Title I is the preservation of their collective interests and the equitable
resolution of competing participant interests. The requirement of un-
swerving loyalty to their interests is the single most important char-
acteristic of fiduciary office and the capstone of this policy.
In contrast to our view, we find a body of opinion holding that these
plans should serve unrelated social economic policies. Some have






suggested that tnefe plans be tapped to allocate capital to marginal
stock issues; others advocate allocation to the housing market and
still others that these assets be made available to finance employers
capital expansion in return for stock ownership. We are sympathetic
to the objectives sought to be accomplished. However, we find our-
selves unable to endorse any proposal which advocates relaxation of
the protective standards granted participants under the standards in
section 404.
Vesting Discrimination
The Subcommittee is required to report on experience under ERISA
with a view to determining whether any of the three statutory vesting
provisions provide an opportunity for discrimination. Because the
effective date of the vesting provisions of the Act did not occur until
1976 for the vast majority of plans, and, to a lesser extent, because the
agencies have been unable to develop necessary regulations in a timely
fashion, few plans have entered the qualification process. Addition-
ally, delays in promulgating reporting regulations led the Depart-
ment of Labor to defer reporting deadlines. As a result, we have no
meaningful data to determine utilization patterns of the three stand-
ards, nor are we in any position to assess the actual impact of each
of these standards "in place" under actual operating conditions.
However, we have analyzed the standards themselves and are of the
opinion that their vesting effects are sufficiently similar under the
statutory scheme to eliminate any substantial threat of "standard
shopping" to disadvantage participants.
Portability
Even though no federal mandatory portability scheme has been
enacted, we have continued to monitor this issue in the normal course
of our oversight activities. We must admit that no progress has been
made in the past two years in developing a feasible approach to
implement mandatory inter-plan asset or liability transfers. As we
view portability, it remains in the category of an idea, which, in
abstract, possesses substantial superficial appeal. However, when
analyzed in the specific, the enormous expense and marginal utility
of the programs become apparent.
As we have indicated in previous reports, the principal purpose of
any portability scheme, preservation of benefit credits, is largely
achieved by a sound vesting program. As a protective scheme, porta-
bility expands on the rights granted by a vesting standard only to the
extent that physical transportation of assets, from one plan to another,
benefits the participant involved. It is our finding that such asset
movement is of no more than marginal advantage to participants and
may, because of the mechanics of any such scheme, actually work to
their detriment.
Mandatory portability, as distinguished from vesting, requires that
participants be given the right to transfer the present value of their
vested pension credits upon termination of coverage. The computation
of present value at termination will require that the competing in-
terests of those remaining in the plan and the withdrawing partici-
pant be reconciled on an equitable basis. In particular, the question
of appropriate interest rate assumptions presents enormous practical
problems in the context of these competing interests.








Additionally, the loss of mortality experience, by reason of with-
drawal of the current pension credits, will require a significant adjust-
ment in the present value of the withdrawing participant's benefit
credits. This adjustment will be necessary to avoid possible disadvan-
tage to the remaining participants, but will result in substantial in-
equities for some withdrawing participants and unjustified windfalls
for others.
We are reluctant to confess our inability to fashion workable pro-
posals to implement an idea with as much surface appeal as portability.
However attractive the concept may be, we feel compelled, on the basis
of our analysis, to take the position that the practical barriers to its
implementation on an equitable basis have not been overcome.
Termination Insurance anid Small Employers
We are also instructed under section 3022 of ERISA to review
the treatment of small employers under Title IV, Plan Termination
Insurance.
The Congress, in Title IV, declined to distinguish small employer
defined benefit plans from the treatment afforded defined benefit plans
in general. The only exception to this policy judgment was the exclu-
sion from coverage of plans of professional service employers with
le The Subcommittee believes this policy judgment regarding small
plans and termination insurance should not be disturbed. Except in
the professional service employer context, we have not become aware of
any Title IV provisions affecting small employers, the Pension Benefit
Guaranty Corporation, or small plan participants, in such a way to
warrant separate Title IV treatment for small plans. Further, it is
expected that the Corporation's required development by September 2,
1977 of a contingent liability insurance program, partial or complete,
voluntary or mandatory, or some program combining these possible
features, will substantially lessen the concerns expressed by defined
benefit plan sponsors of all sizes.
Preemption
ERISA, among its many provisions, provides for a significant ad-
justment in the regulatory roles of state and federal authority with
respect to the various elements of the employee benefit plan field. The
provisions of section 514 expressly reserve to Federal authority the
regulation of employee benefit plans subject to the jurisdiction of the
Act. In electing deliberately to preclude state authority over these
plans, Congress acted to insure uniformity of regulation with respect
to their activities. There was a recognition of the necessity for the
preservation of some state activity in this field and certain limited
exceptions were made to the broad preemption scheme. In general
these exemptions are designed to save state law as it is applied to en-
tititcs which are not employee benefit plans as defined in section 4(a)
and not exempt under section 4(b), to the extent that such regulation
does not relate to employee benefit plans.
From the early 1970's, the legislative activities which eventually pro-
duced ERISA involved various framings of preemption schemes. The
Subcommittee's hearing record prior to 1974 contains numerous
discussions of the propriety of one approach or another. Once it had
become clear that our policy would be the creation of uniform na-






tional standards, the problem was to extract these plans from the
regulatory schemes in the several states without creating untoward
side effects.
A number of states had undertaken to regulate employee benefit
plans as such; others had already made, or appeared ready to declare,
these plans subject to state control as insurers, trust companies, or in-
vestment companies. From a drafting standpoint the difficulty arose
in attempting to extricate these plans from the framework of state
insurance, trust and securities regulation even though their activities
might very well bring them within the sphere of conduct historically
subject to such regulation. On the one hand it was clear that the plans
subject to ERISA needed to be freed of the possibility of state regula-
tion; on the other, it was important to limit the effects of preemption,
in order to avoid disrupting state efforts to regulate the conduct of
other financial entities not subject to the federal Act.
This was accomplished by articulating a broad intention to preempt:
"Except as provided in subsection (b) of this section, the provisions
of this title and title IV shall supersede any and all State laws insofar
as they may now or hereafter relate to any employee benefit plan de-
scribed in section 4(a) and not exempt under section 4(b)." (ERISA,
section 514(a))
It is our understanding of this language that, with respect to regula-
tion of the activities of certain employee benefit plans (those subject
to ERISA jurisdiction), federal authority has been expressly extended
to occupy the field to the exclusion of state authority, subject to cer-
tain exceptions. These exceptions are designed to delineate affirma-
tively the limits of the "field" preempted by section 514(a), and
articulate a second, but distinctly subordinate, policy within the
section of preserving state authority insofar as it does not relate to
any plan "... described in section 4(a) and not exempt under sec-
tion 4(b)."
Based on our examination of the effects of section 514, it is our
judgment that the legislative scheme of ERISA is sufficiently broad
to leave no room for effective state regulation within the field pre-
empted. Similarly it is our finding that the Federal interest and the
need for national uniformity are so great that enforcement of state
regulation should be precluded.
Accordingly, it is our belief that the general policy of section 514
(a), excluding state regulation relating to ERISA covered plans,
should not be disturbed. However, it may be necessary to narrow the
exceptions to this policy which are described in Section 514(b). It
has come to our attention that our efforts to ensure minimum dis-
ruption of the regulatory efforts of the states in the fields of
insurance, banking and securities, generally are being construed
as a reservation of state authority over employee benefit plans
themselves. The argument is predicated on an interpretation of
the language ". shall be deemed . ." as used in section 514
(b)(2) (B) to limit the scope of the prohibition contained therein to the
use by State authority of a legal fiction to declare a plan to be insur-
ance, or a trust company, etc., where it is not. As this line of reason-
ing goes, those plans which actually contain the characteristics of
insurance, etc., would then remain subject to state regulation.
Such interpretation, while artful, is not supported by a fair reading
of the statute and legislative history. Faced with the conflicting and






Th


uncertain basis for regulation among the states, the "deemed" lan-
guage was utilized to create an irrebuttable presumption that these
plans are not insurance, trust companies, etc., for purposes of state
regulation. As a drafting technique the "deemed" is used in section
514(b) not to bar the use of a legal fiction by the states but to create
what may amount to a legal fiction in a given circumstance. The ir-
rebuttable presumption would not be overcome even if an employee
benefit plan engages in activities which bring it within the insurance,
trust, or securities activities generally regulated by a state.
Some have questioned the effect of the language of section 514(c)
insofar as it appears to them to limit the preemptive effect of section
514(a). Their reasoning appears to be that the state action preempted
and the field protected are narrowly restricted by this subsection's
definition of "State" and use of the phrase "terms and conditions."
We are impressed with the artfulness and tenacity of those who hold
to this view, but our reading of this provision leads us to a contrary
result. The clause beginning "which purports to regulate" modifies
only any agency or instrumentality and not "state" and
"political subdivision thereof." Additionally, the phrase "terms and
conditions" as used in this section, as elsewhere in ERISA, has a very
broad scope and is not properly limited to any narrow meaning that
may be ascribed to it under common usage in the insurance field. Ac-
cordingly, any activity by a state or political subdivision thereof, which
relates to employee benefit plans, qua benefit plans, is preempted by
section 514(a).
However, should our understanding of the language in section
514, when read in conjunction with the legislative history, not prove
correct or desirable, then of course further congressional action would
be necessary to protect the policy in section 514 (a).
It has come to our attention, through the good offices, of the Na-.
tional Association of State Insurance Commissioners, that certain
entrepreneurs have undertaken to market insurance products to em-
ployers and employees at large, claiming these products to be ERISA
covered plans. For instance, persons whose primary interest m in
profiting from the provision of administrative services are establish-
ing insurance companies and related enterprises. The entrepreneur
will then argue that his enterprise is an ERISA benefit plan which is
protected, under ERISA's preemption provision, from state regula-
tion. We are concerned with this type of development, but on the
basis of the facts provided us, we are of the opinion that these pro-
grams are not "employee benefit plans" as defined in Section 3(3).
As described to us, these plans are established and maintained by
entrepreneurs for the purpose of marketing insurance products or
services to others. They are not established or maintained by the
appropriate parties to confer ERISA jurisdiction, nor is the purpose
for their establishment or maintenance appropriate to meet the
jurisdictional prerequisites of the Act. They are .no more ERISA
plans than is any other insurance policy sold to an employee benefit
plan.
To the extent that such programs fail to meet the definition of an
"employee benefit plan," state regulation of them is not preempted
by section 514, even though such state action is barred with respect
to the plans which purchase these "products."




11


We remain convinced of the propriety and necessity for the very
broad preemption policy contained in section 514. To the extent that
the scheme of regulation is found to be deficient with respect to some
or all of the plans covered by the Act, we are prepared to consider
amendments expanding or modifying the federal standards. We will
be most reluctant to consider any remedy involving a limitation on the
preemptive scheme as it applies to the plans described in section 3(3)
of Title I.
We are mindful of the potentially harmful effects of an overly broad
interpretation of the term "employee benefit plan" when coupled with
the policy of section 514. As we have already noted, we do not believe
that the statute and legislative history will support the inclusion of
what amounts to commercial products within the umbrella of the def-
inition. Where a "plan" is, in effect, an entrepreneurial venture, it is
outside the policy of section 514 for reasons we have already stated.
In short, to be properly characterized as an ERISA employee benefit
plan, a plan must satisfy the definitional requirement of section 3(3)
in both form and substance. We must earnestly encourage private per-
sons, in particular the membership of the National Association of
State Insurance Commissioners, and urge the Department of Labor
to take appropriate action to prevent the continued wrongful avoid-
ance of proper state regulation by these entities.




UNIVERSITY OF FLORIDA
3IIHI 60lt1II 3I4tlllinUtl EIII
3 1262 09113 4162