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Cypen & Cypen
JANUARY 5, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


While a number of high-profile pension plan terminations have received widespread attention in recent years, a related and equally important issue is the degree to which companies that sponsor ongoing pension plans are “freezing” benefits. Until now, the available data on plan freezes came primarily from client surveys conducted by benefits consulting firms. The surveys do not adopt a uniform methodology or definition of the term “freeze,” which can mean closing the plan to entrants or ceasing accruals for some or all plan participants. Additional anecdotal evidence on plan freezes is available from news accounts of well-known companies that have frozen their plans in recent years (such as Verizon, IBM, Motorola, Sears and NCR). To gain a more complete and accurate picture of plan freezes, the Pension Benefit Guaranty Corporation analyzed the most recently available comprehensive data provided by plan sponsors themselves. The data indicate that almost one out of every ten single-employer pension plans insured by PBGC was hard-frozen as of the 2003 plan year. (“Hard-frozen” means no participants were accruing any new benefits under the plan.) Most of the hard-frozen plans are small plans. Only 2.5% of all participants and fewer than 2% of active participants in all PBGC-insured single-employer plans were affected by these hard freezes. From PBGC’s perspective and from a company’s financial perspective, the freezing of benefit accruals has little short-term impact. Plans continue to pay premiums based on the number of participants in the plan even though the companies’ workers are no longer accruing benefits. Companies with frozen plans are still required to make minimum required contributions to the plan. Because the companies’ workers are not accruing new benefits that have to be funded, over time it should be somewhat easier for sponsors of underfunded frozen plans fully to fund their plans. From a longer-term perspective, freezing plans and closing them to new entrants could have a significant effect on the defined benefit system. The data indicate that sponsors are more likely to have made a decision to terminate frozen plans than unfrozen plans. This fact, combined with closing of frozen plans to new entrants, even for those that do not terminate, suggests that the growth rate for total insured participants will slow or perhaps even reverse itself. As a result, PBGC’s flat-rate premium income will be less than it would have been had plans not been frozen or closed to new entrants. If funding levels of frozen plans improve, PBGC’s variable-rate premium income could also be reduced, making it more difficult for PBGC to recover from its current negative net financial position. (There is some relatively good news here, as improved funding also means less anticipated claims.) The study findings show that significant changes taking place in the defined benefit system are more widespread than indicated by the long-term and continuing decline in the number of defined benefit plans. And even the results of this study do not show the full extent of declined in the defined benefit system. While we know that nearly 10% of the remaining PBGC-insured plans were hard frozen as of 2003, an unknown number of additional plans have been frozen to a lesser degree or closed to new entrants -- and these number have almost certainly increased in the past two years. The entire 12-page report can be accessed at


At the time of dissolution of their marriage, Sandy Smith and David Smith entered into a marital settlement agreement, containing provisions relating to equitable distribution of certain of their assets, and containing a general release of claims. At the time, each party was named insured on certain life insurance policies having no present cash value, certain retirement plans, joint bank accounts and other financial accounts for which one spouse was designated primary beneficiary in the event of death of the other. The agreement identified the insurance policies in dispute, as well as various retirement plans, and indicated that Mr. Smith shall receive as his own, and the wife shall have no further rights or responsibilities regarding, such assets. The agreement, however, made no mention of the proceeds or death benefits of the policies or plans. Mr. Smith died, never having taken steps necessary to accomplish a change of beneficiary on the disputed policies and retirement plans in the manner required by the insurance companies and plan administrators -- even though he was clearly authorized to effect a change of beneficiary. (In fact, he even acquired some change of beneficiary forms, but never executed or filed them.) In the dispute between Mrs. Smith and her late husband’s estate that naturally followed, the trial court gave effect to the marital settlement agreement and general release language, holding that Mrs. Smith had waived her right to the disputed funds. On appeal, however, the district court of appeal reversed. The Florida Supreme Court has held that without specific reference in a property settlement agreement to life insurance proceeds or proceeds of retirement plans, the beneficiary is determined by looking only to the insurance contract or retirement plan. While it may be possible in a marital settlement agreement to waive one’s right as a beneficiary, that waiver can only be accomplished if the waiving party specifically gives up his or her rights to the “proceeds” or the “benefits.” Otherwise, one must look only to the beneficiary designation on file with the insurer or retirement plan administrator. Here, the late Mr. Smith did just what he needed to ensure that the proceeds would go to Mrs. Smith -- he did nothing. He had 18 months to execute a change of beneficiary form, but for whatever reason, he did not do so. Therefore, Mrs. Smith is entitled to proceeds of the life insurance policies and the retirement plans. Lesson learned: Do what you have to do today, because tomorrow may be too late. Smith v. Smith, 30 Fla. L. Weekly D2845 (Fla. 5th DCA, December 16, 2005).


Bloomberg News reports that consumer confidence rose in December to the highest level in four months, helped by falling gasoline prices and an improving labor market. The Conference Board’s consumer confidence index rose to 103.6 from 98.3 last month, highest since August’s 105.5. Confidence measures are returning to levels seen before three hurricanes struck the Southern United States, disrupting oil refineries, raising energy prices and throwing Gulf Coast residents out of work. The report indicated more Americans described jobs as “plentiful.” Economists had estimated the index would only rise to 103, based upon the median of certain forecasts.

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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