case, 1 company already had 94 percent of all the international union's welfare-fund business. Carrier selection here was automatic. Four other funds (all in another international union) bought on the "advice"-and poor advice it was of a chosen instrument broker who handled the bulk of that international's welfare fund business. The subcommittee does not argue that all union group business ought to be on a low net cost, competitive bid, basis; competitive bidding on coverages involving $5,000 in premiums is often out of the question. But on cases producing $50,000 in premiums and more, the cost advantages of competitive bidding and an advance estimate of company retention (even though the retention estimate is not and cannot be legally binding) are obvious.

the

One trustee of a large welfare fund was questioned concerning scandalously high commissions paid to the agent. The reply was: "What difference does it make? The insurance company pays commissions." This man was completely ignorant of the basic group insurance formula: "premiums equal claims plus dividends plus retention," and of the fact that high commissions could only be reflected in lower benefits and dividends. The subcommittee believes that the insurance industry has a duty to inform and educate buyers about the fundamentals of group insurance. The subcommittee believes, too, that this duty is greatest in the union welfare fund field where trustees (who act by statute in a fiduciary capacity) must purchase insurance in behalf of thousands of small employers and hundreds of local unions for hundreds of thousands of beneficiaries. In the last 4 years, trustees and union officials have learned a great deal about group insurance-much of it by bitter experience. They need to know more if the best interests of the beneficiaries of these plans are to be served.

V. SCOPE AND EFFECTIVENESS OF EXISTING PUBLIC AND PRIVATE REGULATORY CONTROLS

A. INTRODUCTION

One of the basic problems confronting the subcommittee at the inception of its investigation was the lack of current and authoritative information concerning the adequacy of existing regulatory controls over the establishment and operation of private employee welfare and pension plans. In order properly to carry out the legislative mandate to the subcommittee, this was a problem that required

immediate attention.

Accordingly, a study was undertaken of applicable Federal, State, and private controls known to be available for the regulation of plans and funds of the type under investigation. An evaluation was made of the Labor Management Relations Act, 1947, certain State insurance, trust and investment laws, as well as the pertinent provisions of the constitutions of some 70 international unions.

The following is a statement of our findings based upon the aforesaid study.

B. FEDERAL CONTROLS

The Labor Management Relations Act of 1947 (29 U. S. C. 141) is the principal statutory source of Federal regulation of private employee welfare trust funds.

Section 302 of the act makes it unlawful for an employer to pay agree to pay money to any representative of any of his employees for any representative to accept or agree to accept such payment. tion 302 (c) (5) exempts employer payments to a trust fund ublished by such representative if certain conditions are met: 1) Payments from the trust fund must be for

(a) The benefit of employees, their families and dependents; (b) Medical and hospital care;

(c) Pensions on retirement or death;

(d) Compensation for occupational injuries or illness;
(e) Insurance to provide any of the foregoing benefits;
(f) Unemployment benefits;

(g) Life insurance;

(h) Disability and sickness insurance;

(i) Accident insurance.

) There must be a written agreement between employer and employee representative providing

(a) The detailed basis on which such payments are to be made; (b) Equal representation of employers and employees in the

administration of the fund with provision for the selection of an impartial trustee to act in the event of a deadlock; (c) An annual audit of the trust fund, the results of which shall be available for inspection by any interested person at the principal office of the trust fund;

(d) A separate trust fund for pensions or annuities from which no payments except for such pensions or annuities may be made.

ction 302 (d) provides that any person who willfully violates any e provisions of the section shall be subject to a fine of $10,000, or sonment for 1 year, or both.

gislative history

e legislative history of the Labor Management Relations Act, clearly indicates that it was the intent of the Congress to prevent ents by an employer to the union representing his employees ich welfare benefits as the union might see fit to provide. The ey bill, H. R. 3020, as reported by the House Education and Committee, made it an unfair labor practice for an employer ke payments

of any kind *** to any fund or trust

ished by a labor organization, or—

fund or trust in respect to the management of which, or the disbursefrom which such organization can, either alone or in conjunction with any erson, exercise any control directly or indirectly (sec. 8 (a) (2) (C) (ii) of 020, 80th Cong., 1st sess.).

language of the report accompanying H. R. 3020 is illustrative intent of the legislators at that time:

lause (C) (ii) of the same section (i. e., sec. 8) the bill forbids employers to or for unions, or to any funds or trusts established, maintained, or conby them, in whole or in part, directly or indirectly, royalties, taxes, and actions, instead of paying the money directly to workers in the form of ***. Certainly it is not in the national interest for union leaders to these great, unregulated, untaxed funds derived from exactions upon ers (H. Rept. No. 245, 80th Cong., 1st sess., p. 29).

During the ensuing floor debate on H. R. 3020, an attempt to amend the bill so as to permit employer contributions to certain types of trust funds was made. (See debate on Landis amendment, p. 3621 et subseq., Congressional Record, House, April 16, 1947.) The amend ment was defeated and the bill, as passed by the House of Repre sentatives, contained the original language as reported by the committee.

The Senate bill, S. 1126, as reported by the Committee on Labor and Public Welfare (Rept. No. 105, 80th Cong., 1st sess.), contained no provision for the regulation of private employee welfare funds other than a directive to the Joint Committee on Labor-Management Relations to undertake a study and investigation of

the desirability of welfare funds for the benefit of employees and their relation to the social security system (title IV, sec. 4C2, S. 1126, as reported). However, in the supplemental views on S. 1126 filed by Senators Taft, Ball, Donnell, and Jenner, an amendment adding the present section 302, entitled "Restrictions on Payments to Employee Repre sentatives" was proposed and later accepted by the Senate and the House. The language of the report accompanying this amendment further substantiates the theory that Congress intended to prevent the unrestricted use of employer-financed employee welfare funds by unions. The following appears in the aforesaid suppemental views:

The amendment proceeds on the theory that union leaders should not be permitted, without reference to the employees, to divert funds paid by the company, in consideration of the services of employees, to the union treasury or the union officers, except under the process of strict accountability.

And further:

The necessity for the amendment was made clear by the demand made last year on the part of the United Mine Workers that a tax of 10 cents a ton on coal be paid to the Mine Workers Union for indiscriminate use for so-called welfare purposes (S. Rept. No. 105, on S. 1126, Supplemental Views, p. 52).

Subsequently the House conferees agreed to the language of the Senate amendment and receded from the position that all contribu tions by an employer to an employee welfare fund be barred. Never theless, it is clear that the Congress in approving the language of the present section 302 felt it necessary to legislate against unilateral union control and management of employee welfare and pension funds. 2. Practical effectiveness of section 302

The question of how well section 302 has worked in practice is one to which the subcommittee has given attention. During the 7 years that have elapsed since the passage of the Labor-Management Relations Act, there has been a phenomenal growth in the number and size of employee welfare and pension funds. Investments and reserves have mounted into billions of dollars. Many millions of workers and their families have been covered by plans of one type or another. and the number of persons eligible for coverage is increasing daily, In terms of the public interest, it is now clear that the problem of proper administration and control of these huge funds is one sufficient importance to demand a careful evaluation of the effec tiveness of the controls written into the act by the Congress.

of

The subcommittee's investigation reveals that the intent of Con gress to provide joint control and administration through a board trustees composed equally of representatives of the employer and

eunion is, in many cases, being circumvented. There seems to be videspread feeling on the part of employer trustees that the trust d is a union fund; that the employer's responsibility ends with termination of collective bargaining over welfare benefits; that function of a trustee representing the employer in the fund's ninistration is a nominal one only. In a number of cases there s evidence of complete failure by employer trustees to exercise n the most elementary duties and responsibilities of a trustee. n one case, for example, the union and the employer association eed to set up an insured welfare fund providing life-insurance efits to employees. The union was granted the exclusive right to ct the insurance carrier. The resulting trust agreement met all formal requirements of section 302 of the Labor-Management ations Act, 1947. The fund was to be jointly administered by a rd of trustees composed of 2 representing the union and 2 repreing the employer. One of the union trustees was to serve as rman and one of the employer trustees was to be treasurer of board. The chairman was given full and exclusive power to int all committees and to hire and discharge all fund personnel. treasurer was authorized to approve all disbursements and to o accurate and complete records and accounts.

The union appointed its president and its secretary-treasurer to e as the union trustees; the employer named its counsel and an ial of the association to serve as employer trustees. Subsequently, union trustee who had been secretary-treasurer of the local union , and the employer trustee who had been counsel to the association ned. They were never replaced.

us, administration of the fund was left entirely in the hands of two remaining trustees, (a) the president of the union who also ed as chairman of the board of trustees, and (b) an official of the oyers association who also served as treasurer of the board of

ees.

is noteworthy that the formal requirements of section 302 were met in this case. Yet, in actual practice, the intent of Congress these funds be the subject of joint employer-union control was y frustrated, as will be seen from the following description of a interview with the employer-trustee and treasurer of the fund. frankly admitted that, in his opinion, his sole function as a e was to approve disbursements. He acknowledged that he had seen a copy of the trust agreement, that he had attended only eeting of the trustees (which occurred in 1951 at the inception e new welfare program), and that to the best of his information elief there had been no meetings of the trustees since that time. questioned about the financial condition of the trust fund, he he had never seen a financial statement of the fund's operations, as he aware that there had never been an independent audit of nd. He said he had no knowledge of whether or not the trust omplied with the tax requirements of the Internal Revenue e. Apparently this trustee was not too concerned about either sponsibilities as a trustee or as treasurer of the fund. When about monthly salary payments to a certain employee of the he trustee admitted that he did not know the employee and had no effort to determine what services, if any, this employee was compensated for because the amount of salary being paid was

only nominal and of no great consequence. He said: "I guess been a bad trustee."

I've

The other employer trustee, who had been counsel to the employer association, and who had resigned as a member of the board of trustees, was also interviewed concerning his experience with the fund. He stated that inasmuch as the collective-bargaining agreement and the trust indenture which gave the union and the union trustee almost complete control over the operation of the welfare fund, had been forced upon the employers, many members of the employer association felt that, in fact, this was a union fund and that the employers should not be held responsible for irregularities. He added that some employers believed that the union might eventually be discredited if permitted to exercise full control. Nevertheless, he said that in his opinion, the interests of the employers would be protected by reason of the authority of the employer trustee-treasurer to approve bursements.

dis

To sum up, here is a case that demonstrates the underlying fallacy of the theory that compliance with the formal requirements of the regulatory statute will insure adequate control. It points up the fact that a trusteed plan can be made the instrument of one of the parties in interest if there is a failure on the part of the trustees representing the other party to understand and exercise their duties and sibilities as fiduciaries. Nonfeasance, as demonstrated here, could be as damaging to the rights and interests of the beneficiaries as malfeasance.

respon

Some unions and employers have gone to considerable trouble in seeking to avoid compliance with the provisions of section 302. For example, one of the investigations by the subcommittee concerned the operation of a pension fund. This investigation revealed an interesting but rather complicated method of circumventing the act.

Negotiations in 1951 between the local union and the employer association resulted in a pension plan to become effective in April of that year. The plan is still in full force and effect. It is administered by union officials exclusively; employers have no representation of voice in the administration of the program. It is financed by employer contributions in the guise of a "wage increase" of $2.50 a week for each employee member of the union as provided by the collective-bargain. ing agreement. That agreement requires the employer to draw two checks to the order of each of his employees: one for $2.50 and the other for the balance of the employee's weekly earnings. The em ployers further agreed to forward and pay over the $2.50 check in accordance with a written assignment from each employee-payee, (It is noteworthy that this procedure was agreed to by the employer association against the advice of counsel who questioned the legality of the assignment under both the Labor Management Relations Act, 1947, and the applicable State law.)

The local union then obtained from its members written assignments designated "pension fund assignment cards" which were presented to the employers who were thereby directed to forward and pay over the $2.50 "wage increase" to the trustees of the pension fund. The fins. step in the procedure was obtaining from each member a power of attorney authorizing the trustee-assignees to endorse the name of the member on the check and deposit it to the account of the pension fund.

and

This case demonstrates the lengths to which some employers unions will go to avoid compliance with the letter and spirit of the