to risk or exposure yet simultaneously allows ongoing employers to shift liabilities through the termination of under funded pension plans.

The economy in general, and private regulatory groups in particular, have added to this movement toward financial decision making. First, inflation placed major cost pressures on employers to focus on employee benefit cost inflation and its effect on corporate profitability. Second, employee desires for greater early age total compensation and capital accumulation programs with a degree of portability have affected corporate decision making. Third, the changing nature of pension liabilities attributable to ERISA and multiple actions of the Financial Accounting Standards Board have combined to move pension assets and liabilities toward the corporate balance sheet and therefore toward the realm of the Chief Financial Officer.

The Congress and this Committee should not be surprised by this trend. In fact, it has taken hold in government itself. Witness the Social Security Act Amendments of 1983 and current concern over the future of Medicare. Economics, demographics, and changing government policy guaranty that with each passing year, cost and financial effect will increasingly influence decisions in the entire realm of employee benefits, both public and private.

WHAT CAN BE DONE?

The issues are not as simple as Thomas C. Woodruff, Ph.D., has implied to the ERISA Advisory Council of the U.S. Department of Labor or this Committee. The issues are as complex as Michael S. Gordon so articulately pointed out to that Council and this Committee. They are not as easily partitioned as was implied by the title of your hearing, “Corporate Misuse of Pension Assets." They are complex. And, as Roger Thomas has articulately stated, they have far reaching implications for the future of retirement income security in America.

This Committee has a vital role to play. It has the opportunity to move Congress, for the first time, in the direction of articulating a national retirement income policy. I respectfully suggest that a broader approach would allow this Committee to most effectively contribute to future economic security of the aging. The Employee Benefit Research Institute stands ready to work with you in carrying out your mission.

4

FOOTNOTES

1 Sylvester J. Schieber and Patricia M. George, Retirement Income Opportunities in an Aging America: Coverage and Benefit Entitlement (Washington, D.C.: Employee Benefit Research Institute, 1981) and EBRI, Retirement Income Opportunities in an Aging America: Income Levels and Adequacy (Washington, D.C.: Employee Benefit Research Institute, 1982).

2 Economic Survival in Retirement: Which Pension Is For You? (Washington, D.C.: Employee Benefits Research Institute, 1982).

3 Pension Plan Termination Insurance: Does the Foreign Experience Have Relevance for the United States? (Washington, D.C.: Employee Benefit Research Institutie, 1979).

4 Retirement Income and the Economy: Policy Directions for the 80s (Washington, D.C.: Employee Benefit Research Institute, 1981), and America in Transition: Implications for Employee Benefits (Washington, D.C.: Employee Benefit Research Institute, 1982).

TABLE 1.-SUMMARY OF QUALIFICATIONS AND TERMINATIONS-Continued

* Increase from June 30, 1949 (see RR 101.4).

5 28 month period, average 2,507 plans per year.

*Does not include plans covering self-employed individuals (Keogh Act plans.)

Source: Charles D. Spencer Associates for 1930 to 1975, EBRI tabulations of IRS data for 1976 to 1982.

1975.

1976.

1977

1978.

1979.

1980.

1981

1982.

1983 1

TABLE 4. PENSION PLAN GROWTH BY TYPE OF PLAN-Continued

1 1983 is for 1/1/83 to 3/31/83.

Source: IRS Disclosure Data; EBRI tabulations.

TABLE 5.-CORPORATE AND SELF-EMPLOYED PENSION PLAN CREATIONS, TERMINATIONS AND NET

Statement of Luis Granados, Managing Director of the EMPLOYEE STOCK OWNERSHIP ASSOCIATION, WASHINGTON, D.C.

My name is Luis Granados. I am the managing Director of The ESOP Association, the national, nonprofit association of companies_with_Employee Stock Ownership Plans (ESOPs). We have approximately 550 members. Recommendations have been made that would curtail the growth of these plans, to the detriment of employees

and employers alike. We ask this Committee to reject these negative recommendations, and instead ask the Department of Labor positively to carry out the mandate of ERISA to provide needed guidance to ESOP companies who wish to follow the law.

None of the companies mentioned by other witnesses as currently, recently, or prospectively involved in litigation (such as Grumman, Harper & Row, Graniteville, and Amax) is a member of our Association. We thus come before this Committee with no specific litigative interest. The Committee should be mindful of the inescapable bias of those representing individual plaintiffs or defendants in pending litigation.

There has been so much Committee attention focused on one particular case, that involving Harper & Row, that one would think this to be a trial in absentia rather than a legislative hearing. Indeed, certain lines of questioning of government witnesses seem designed solely for the purpose of adducing evidence that might be used at this particular trial. We respectfully suggest that this Committee await the outcome of the Harper & Row trial before recommending legislative or regulatory action. It may well be that the outcome of this trial will set a legal precedent that will ease the concerns of Committee members without the need for additional legislation. It may also happen that the outcome of this trial would impeach the testimony of the parade of plaintiffs before this Committee, and color the Committee's thinking about the need for new legislation. We suggest that before tinkering with the system, the Committee give it a chance to work.

HISTORICAL BACKGROUND

The stock bonus plan, now often called the ESOP, was first defined in law in the Revenue Act of 1921. The defined benefit pension plan was not so recognized until five years later in 1926. Because both are employee benefit plans, the tax and labor laws governing them are the same in some respects, for example in the areas of participation and vesting standards. This commonality makes the law simpler to understand and administer. However, the laws also recognize important differences between the two types of plans. For example, defined benefit pension plans may not be more than 10% invested in employer securities, while the law requires certain ESOPS to be "primarily" invested in employer securities. Thus, from the very outset, Congress has made it clear that stock bonus plans (ESOPs) are not to be judged by the standard of how well they provide for retirement security.

In the 1950s, philosopher Mortimer Adler and investment banker Louis Kelso published a book entitled "The Capitalist Manifesto", addressing the question of concentrated ownership of capital wealth in a democratic society. (One percent of Americans own over half of the nation's individually held capital wealth, and 6 percent of Americans own over 80 percent of it.) Kelso and Adler felt it essential that the ownership of productive capital be spread out more evenly among average working Americans, and described a practical means of accomplishing this objective.

The mechanism Kelso used, called a "leveraged ESOP", involved the financing of capital expansion in such a way that ownership of the new capital would vest in employees of the enterprise, rather than in its existing owners. Financing the capital by having the company's stock bonus plan borrow money and use it to buy newly issued employer stock accomplished this objective in a manner advantageous to employees and their employers alike. The employees received beneficial ownership of stock without having to pay or even put at risk any of their own money for it. The employer realized tax advantages by making its loan principal repayments to an employee benefit plan (tax deductible) rather than directly to the lender (nondeductible). Kelso's investment banking firm put this plan to use in a number of cases, and it worked exceptionally well. Employees become owners of their company at no cost, and the company and its original owners were satisfied as well.

The original versions of ERISA passed by the Senate in 1973 would have ended the use of leveraged ESOPs by making their activities a prohibited transaction under ERISA Section 406(a)(1)(B), covering "extension of credit between a plan and a party in interest." This subsection was designed primarily to prevent employers from borrowing from their pension plans. But it also would have prevented companies from guaranteeing the debt of their ESOPs, and thus made it impossible for the ESOPS to borrow money. When Senator Russell Long offered an amendment exempting ESOPs from this prohibition, Congress was faced with a choice. On the one hand, it would save revenues (at least on a static basis) by ending the tax advantages of ESOP financing for employers. On the other hand, it could promote the Kelso-Adler goal of broadened capital ownership by providing an exemption for ESOPs, to enable the continuance of a practice with a twenty year history. Congress