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Cypen & Cypen
January 21, 2016

Stephen H. Cypen, Esq., Editor

1. INVESTMENT RETURNS -- DB VERSUS DC: Center for Retirement Research at Boston College has produced a new brief discussing a comparison between defined benefit plan investment returns and defined contribution plan investment returns. Pension coverage in the private sector has shifted from defined benefit plans, where professionals make investment decisions, to 401(k) plans, where participants are responsible for their own investment strategy. The supposition is that individuals are not very good at investing their own money, and face high fees. The question is whether this supposition is borne out by the facts.  In other words, are returns on defined contribution plans markedly lower than those on traditional defined benefit plans? The brief first discusses alternative ways to measure rate of return. The second section reports, under a variety of definitions, returns on defined benefit and defined contribution plans for 1990-2012 from the Department of Labor’s Form 5500. The third section explores asset allocation of defined benefit and defined contribution plans and its potential impact on returns. The fourth section presents regression results of the relationship between returns and plan type (defined benefit or defined contribution), controlling for plan size and asset allocation. The fifth section discusses the extent to which fees may explain the lower return in defined contribution plans. The final section reports on Individual Retirement Accounts -- the assets in these accounts now exceed holdings in either defined benefit or defined contribution plans, largely due to rollovers from employer-sponsored plans. The bottom line is that, during 1990-2012, defined benefit plans outperformed defined contribution plans by 0.7%. Since this differential remains even after controlling for size and asset allocation, the likely explanation is higher fees in defined contribution accounts. The available data suggest that IRAs produce even lower returns than defined contribution plans, which implies trouble ahead given the, massive amount of money that is being rolled over into IRAs. December, 2015, Number 15-21.

2. TEN STATES WHERE MOST PEOPLE DO NOT GET RETIREMENT BENEFITS: U.S. News and World Report says if you receive retirement benefits through your job, consider yourself to be among the more fortunate half of the population. Only about half of full-time employees participate in a workplace retirement plan, according to Pew Charitable Trusts. While 58% of workers are eligible for retirement benefits, just 49% of employees sign up for the retirement plan. However, access to retirement benefits varies considerably by state and the industry that people work in. There are 17 states where less than half of workers participate in a retirement plan. Here are the states where workers are the least likely to have retirement benefits:

  • Florida. (Big surprise). Just 38% of full-time employees in the sunshine state participate in retirement benefits, the lowest of any state. Florida is also the state where the smallest proportion of workers (46%) is offered a retirement account or other type of retirement benefit by their employer.
  • Nevada. Over a quarter (27%) of Nevada's full-time workers are employed in the leisure and hospitality industries, which are among the types of employers least likely to provide retirement benefits. Only 39% of workers in Nevada participate in a workplace retirement plan. About half of employees (51%) are eligible for retirement benefits at work.
  • Arizona. Some 41% of Arizona workers participate in a retirement plan through their job. That is 11 percentage points less than the 52% of full-time employees who are offered retirement benefits at work.
  • New Mexico. Over a third of New Mexico employees work for small businesses with fewer than 50 employees, which are typically less likely to provide retirement benefits than larger companies. Just under half (49%) of New Mexico workers have the opportunity to sign up for retirement benefits at work, but only 41% of employees use their retirement accounts.
  • Texas. Exactly half of the Texas workforce is eligible for some form of workplace retirement benefit. However, only 41% of employees participate in a retirement plan. Texas has 3 million full-time private-sector employees without access to an employer-based retirement plan.
  • California. Just over half (51%) of California workers qualify for retirement benefits at work, but only 44% of workers actually use the plan. It is estimated that 4 million full-time private-sector employees in California do not have a workplace retirement plan.
  • Louisiana. Over a quarter of Louisiana workers earn less than $25,000 per year, which makes it difficult to fund a retirement account. Some 44% of Louisiana employees participate in a retirement account or pension, compared with 53% of people who are eligible to do so.
  • Arkansas. Retirement saving in Arkansas is also hindered by the 28% of full-time workers who earn less than $25,000 per year. This helps to explain why there are 10 percentage points more Arkansas workers who are eligible to participate in retirement benefits (55%) than who actually save in the plan (45%).


  • Georgia. Some 45% of Georgia workers participate in a pension, 401(k) plan or similar type of retirement benefit. Slightly more workers (53%) have the option to use a retirement plan if they take action to join one and can afford to save in it.
  • Mississippi. Over half (55%) of workers in Mississippi are eligible to join a retirement plan. However, only 47% of Mississippi workers actually use their retirement benefits.

Retirement benefits are most prevalent among people who live in the Midwest and New England. In Minnesota and Wisconsin, the states with the highest retirement benefit participation, 61% of workers have joined their workplace retirement plans. Employees without retirement benefits at work have the option to save for retirement in a traditional IRA, Roth IRA or myRA. These retirement accounts offer similar tax breaks to 401(k) plans, but the contribution limits are much lower.

3. FIDUCIARY OBLIGATIONS IN SETTING DISCOUNT RATE OF PUBLIC PENSION PLANS: International Foundation of Employee Benefit Plans Benefits Magazine says public pension plan trustees must demonstrate loyalty and prudence when they determine current contribution levels necessary to fund the plan, using a discount rate based on estimated investment returns on the fund’s assets. Funds tend to base rates on strong historical returns, understating pension obligations.  Raising rates on low risk or risk free bonds suggests aggregated estimated liabilities for all U.S. funds public funds at $5.17 trillion, above a $2.87 trillion estimate of collective liabilities based on assumed rate of investment return. Though using extremely low risk bond rates to discount plan liabilities may more accurately reflect benefit value, it does not fully capture the cost of funding the benefits. Ideally, the discount rate should be based on the risk level the plan can fairly assume along with reasonable estimates of future investment performance. Trustees act prudently when they use a reasonable estimated rate of return for setting the discount rate. While higher risk may invite volatility in returns, strategies can be used to moderate that volatility.

4. 401(K) MUTUAL FUNDS FAIL FIDUCIARY PRUDENCE TEST: The Prudent Investment Advisor Rules recently analyzed the top ten mutual funds and 401(k) plans, revealing that seven of the ten funds failed to pass the simple fiduciary prudence test. Funds were evaluated based on their past five-year performance between 2011-2015. The findings should alert both 401(k) sponsors and plan participants to the possible implication, in terms of prudent investing and potential liability issues. The results of the test can be found at  The specific results of the fiduciary prudence test are as follows:
Fund:                                                               Score:
Fidelity Growth Company K                    8.15
T. Rowe Price Blue Chip Growth             7.66
T. Rowe Price Growth Stock                   5.28
Vanguard PRIMECAP                             5.04
American Funds Growth R-5                           NA
American Funds Fundamental R-6                  NA
American Funds Washington R-6           NA
Dodge & Cox Stock                                 NA
Fidelity Contrafund K                              NA
Fidelity Low Price Stock K                       NA

5. IS DB SHIFT TO DC JUST A GAME OF WHACK-A-MOLE?: Plan sponsors have moved from DB to DC plans to escape funding liability, but that liability may be back in DC plans, according to National Association of Plan Advisors. The term “DB-ization” of DC plans seemed to be very positive, at first. With automatic features, workers are automatically enrolled into a company’s retirement plan, using professional managed investments that can automatically escalate. Though the funding liability shifts to the participant, it seemed like the perfect answer for Chief Financial Officers. With little cost, work or liability, they can say that they are helping workers prepared for retirement. Task completed, time to move on to more important matters. No wonder it is so hard to engage CFOs in their DC plans. When something seems too good to be true, it usually is. If workers have not properly funded their DC plan, when it comes time to retire, they continue to work. Older workers who do not have their hearts, hands and minds into their jobs pose a real problem. Not only are there higher health care and disability costs, but salaries and absenteeism are higher and productivity is lower, as is morale among younger workers. Do you really want to employ older workers eager to retire, making premium salaries with low productivity? Like a whack-a-mole, companies may have thought they got rid of retirement plan funding liability when they moved to DC plans from DB, only to find that they have implicitly taken on a different kind of funding liability. Not all older workers are bad: there are certainly situations where the premium paid to experienced professionals in a job not diminished by age is well worth it. However, DC plans that shift retirement funding liability to workers may create a liability that most CFOs did not anticipate -- a good thing for experienced plan advisors that have solutions for creating improved outcomes -- and potentially an engaged CFO.

6. HOW WILL STATE UNFUNDED PENSION LIABILITIES UNDER GASB 68 AFFECT BIG CITIES?: Beginning in 2015, under new provisions of the Governmental Accounting Standards Board, the unfunded actuarial accrued liability for public pension plans moved from the footnotes of financial statements to the balance sheets of employers. In addition, localities that participate in “cost-sharing” state plans are now required to report their share of that plan’s unfunded liability on their books.  A new brief from Center for Retirement Research at Boston College explores implication of the latter shift. The discussion proceeds as follows. The first section describes the new GASB provisions. The second section illustrates, in detail, our method for applying GASB 68. The third section presents the estimated impact of GASB 68 on the 92 cities in the sample that are participating in cost-sharing state plans, as well as the overall impact on our full sample of 173 cities. The fourth section compares individual results for selected cities. The final section concludes that forcing cities to recognize their share of the state’s unfunded liability may lead them to take more interest in having these liabilities paid off. SLP #47 (January 2016). A virtually identical issue brief has been published by Center for State & Local Government Excellence:

7. EMPLOYEE PLANS SURVEY: The IRS Advisory Committee on Tax Exempt and Government Entities is seeking your input on the major changes to the Employee Plans determination letter program that will be effective January 1, 2017. The ACT is governed by the Federal Advisory Committee Act, Public Law 92-463. The ACT is an organized public forum for discussion of relevant employee plans; exempt organizations; tax-exempt bonds; and federal, state, local and Indian tribal government issues. The ACT enables the IRS to receive regular input on the development and implementation of IRS policy concerning these communities. The ACT members provide observations about current or proposed IRS policies, programs and procedures, and suggest improvements through a yearly final report. This year, the ACT Employee Plans Subcommittee is focusing its work on the impact of the IRS decision to stop accepting determination letter applications for most individually designed retirement plans other than for initial qualification and plan termination (see IRS Announcement 2015-19 and Notice 2016-03). The Subcommittee appreciates your help in understanding the scope of the issues that may result from the IRS determination letter program changes. Please take the time to complete this survey and share the survey link with others

8. THREE RULES FOR RETIREMENT SAVERS DURING FALLING MARKETS: With the markets in free fall, now is a perfect time for retirement savers to panic according to, which is probably not a good thing. Well known financial blogger Roger Wohlner, in his particularly witty style, suggests investors take four steps to cope with the rather unsettling markets. In short, Wohlner suggests investors breathe, reflect, review and go shopping. In many ways, his is the kind of sound advice we would expect to hear from an experienced veteran. And Wohlner is not alone. Richard Zeitz, President of Bravias Financial, located in East Brunswick, New Jersey, says, “With over 21 years of industry experience, I have been through many falling or extremely volatile markets, and the rules, tips, and mistakes are typically the same, and often repeat. Obviously, when the market is free-falling many people tend to panic and act by impulse by selling off some positions. Advice regarding falling markets ranges dramatically based on age of the investor and time horizons.” With that in mind, let us look at some of the more common rules, tips, and mistakes industry pros advise, share and warn retirement savers about. The three most important rules all long-term investors must abide by during falling markets:

  • Do not panic, do not sell and, above all, do not try to time the market: What is the first thing most casual long-term investors do at the sign of a falling market? They allow their emotions to take over and begin contemplating what most investment advisers will call the absolutely worst decision they could make. They think of selling. What, then, is the rallying cry of these seasoned professionals? Do not panic. Do not sell. During down markets there will be a lot of short term noise that can negatively affect your long term decisions. Truth be told, there are perfectly normal psychological reasons why investors have a knee-jerk response when they see a falling market. That does not mean folks should succumb. Do not sell-out, as tempting as it may seem. People often forget they were just as irrationally excited when the market was going up as they are irrationally anxious when they see the market going down. Behavioral economists call it “recency” -- the tendency to extrapolate recent events far into the future as if current trends will continue. But, as the saying goes, what goes up must come down and, likewise, what goes down must go up. To this effect, leave your investments as they are and do not be tempted to sell. Markets will go up eventually.
  • Falling markets present buying opportunities: One of the most regrettable decisions made by 401(k) investors following the 2008/2009 stock market debacle was to sell their equity positions. That those retirement savers are still playing catch-up while those who held onto their stocks are well ahead of the game provides a real-life example of the benefits of disciplined long-term investing.  Market return data show how stocks do well in the long-term, even compared to “safe” investments like bonds. Recognize that markets generally go up, but not straight up. Since 1926, the equivalent of the S&P 500 has advanced in 68 of the 90 years, so on an annual basis the market advances 75% of the time. But, since 1950, the market has only advanced on 52.6% of the days. Since 1950, the worst 20 year rolling period for the S&P 500 was from 1959 through 1968, and during that period the market advanced at the rate of 6.52% compounded annually. The best 20-year rolling return was from 1980 through 1999 when the market advanced 17.88%. And note, this best 20-year period included the stock market crash of 1987! Since 1950, the worst 20 year rolling period for long-term corporate bonds was from 1950 through 1969 and the annual compound return was a paltry 1.34%. The best 20-year rolling time period for corporate bonds was 1982 through 2001 and was 12.13% compounded annually (by the way, over that same period, large cap stocks returned 15.24%). The best way to build long-term wealth is to invest in equity securities. What does this suggest long-term investors should do in falling markets? Falling markets typically present some buying opportunities; shares are obviously cheaper, so for those who are dollar cost averaging, it can be a great time to grow their portfolio.
  • Stay the course: This one is only logical. Your retirement savings plan is really predicating on your own personal situation, not the present condition of the economy or the investing markets. Stay the course. If you felt comfortable owning an investment last week, you should certainly feel comfortable owning it today when it is 6% cheaper. If your situation does not change, there is little reason for you to react to a falling market (except for the second rule above). Keep investing/contributing (even consider increasing contributions) to take advantage of volatility (concept of “buying low). It is vital to remember saving for your retirement is “all about you.” We are often taught it is immodest to think in this way, but retirement saving is one area where we can dispense with avoiding the ego. Keep things in perspective relative to market history and keep things in perspective relative to your personal goals. Once you have taken the time and effort to come up with a plan, a falling market offers no real reason to change it. Stick with your long term plan. Presuming you or your adviser have made a long term investment plan, and set up your portfolio according to it, then there is really nothing to do that will add long term value.

9.  SAN DIEGO APPEALS PENSION OVERHAUL THREAT: San Diego will appeal a state labor board ruling that casts doubt on the city’s aggressive pension cutbacks approved by voters in 2012 according to The San Diego Union-Tribune. The City Council voted unanimously in closed session to appeal the Public Employment Relations Board’s December 29, 2015 ruling, which orders the city to spend millions creating retroactive pensions for roughly 2,000 employees hired since the pension cutbacks took effect (see C & C Newsletter for January 7, 2016, Item 4). The ballot measure, known as Proposition B, replaced guaranteed pensions with 401(k)-style retirement plans for most new city hires. The PERB ruling said former Mayor Jerry Sanders and other city officials illegally put Proposition B on the ballot without conferring with labor groups. City Attorney Jan Goldsmith said Tuesday that an appeal was necessary because PERB got it wrong. Even people who opposed Proposition B understand that the PERB decision is an unconscionable overreach that gives union leaders the power to thwart the public’s will. The people’s right to initiative is guaranteed by the California Constitution. This right cannot be bargained away in a back room, or stolen from the people by a government agency. It is critical that the city receive clarity from the appellate court on the implementation of Proposition B and how retirement programs must be administered for its employees. This clarification can only be provided by the court. Labor leaders in late December praised the PERB ruling and urged city officials to accept defeat so they could rein in the potentially spiraling costs of ongoing litigation. Many city budget projections and proposals rely on future pension savings created by Proposition B, so any softening or elimination of the measure could have a significant effect. The case will now head to California’s Fourth District Court of Appeal, and possibly the state Supreme Court after that. Since the litigation was filed, city officials have raised questions about how to comply with what the city’s labor unions are seeking. Those questions include whether employees without pensions would have to retroactively pay thousands in matching pension contributions they have not been making over the past three years, and whether the city’s contributions to 401(k) plans for employees without pensions would mitigate how much the city owes them retroactively. The city has hired roughly 2,000 employees without pensions since the cutbacks took effect in July 2012. The PERB ruling would require the city to backfill pensions for those workers, pay them 7% interest as a penalty and cover their attorney’s fees.

10. VOYA AND ARA CALL ON DOL TO OFFER RELIEF TO PRIVATE SECTOR RETIREMENT PLANS AS FOR STATE RUN PLANS AND PRIVATE SECTOR EMPLOYEES: Voya Financial states and agrees there is a urgent need to expand access to workplace retirement savings plans to address the retirement savings gap; however, Voya believes that the Department of Labor’s proposal is not an effective solution, and would create new challenges for small businesses and their employees. published Voyas letter; and a letter from American Retirement Association In its comment letter to DOL, Voya’s says the proposal would enable a 50-state patchwork of government administered retirement savings vehicles with inconsistent state and local regulations, low annual contribution limits, no opportunity for employer contributions and limited access to retirement planning and advice. This patchwork will be difficult, or impossible, to dismantle, once built, and if other layers of systems or requirements are added at the federal level in the future, there will be an even more confusing “50 plus one” patchwork of state and federal standards, rather than a single, streamlined standard. Voya contends that retirement readiness is best achieved through a combination of automatic enrollment, sufficiently high limits for employee contributions, and flexibility for employers to match contributions, access to high quality retirement planning advice and availability of an appropriate range of investment alternatives. It urges DOL to withdraw its proposal and instead seek the uniform federal solution that encourages employers to offer 401(k)s and similar recruitment savings plans, which it says, have long track records of helping Americans successfully prepare for retirement. Similarly, in its comment letter to DOL, American Retirement Association says it is concerned that the proposed rule creates different standards for payroll deduction IRA programs administered by a state and those administered by private sector providers outside of          a state program. ARA contends that lack of a private sector alternative operating alongside the various state programs would be contrary to the overall objective of increasing assess to worker place retirement savings programs. The proposed rule is available at:

11. MOODY'S SAYS MOST STATES SEE PENSION LIABILITY DECREASE IN 2014: reports twenty-seven states saw a decline in pension fund liabilities in fiscal year 2014, boosted by strong investment returns. The median annualized return for the period ended June 30, 2014, was 16.1%. Across all 50 states, adjusted net pension liabilities rose 0.39% to an aggregate $1.3 trillion, as 23 states reported liability increases due in part to accounting changes or lagged reporting, which did not yet reflect 2014's strong investment performance. Looking at adjusted net pension liability as a proportion of government revenue, Moody's found that the median ratio dropped to 59% in fiscal year 2014 from 60% in 2013 thanks to state revenue growth. Illinois, Connecticut and Kentucky continued to report the highest ratios of pension liability at, respectively, 297%, 213% and 185%. Nebraska, Wisconsin, New York and Tennessee continued to report the lowest liabilities-to-revenue ratios at, respectively, 11%, 14%, 23% and 23%. Looking at states' contribution levels, Moody's found 36 states contributed greater than 90% of their actuarially determined contribution levels in fiscal 2014; 12 contributed between 60% and 90%; and two (New Jersey and California) contributed less. New Jersey and California contributed 18.6% and 48.2% of their actuarial determined contributions.

12. MILLIMAN: 100 LARGEST CORPORATE PLANS’ FUNDED STATUS INCHES UP IN 2015: The 100 largest U.S. corporate pension plans ended 2015 with a funded status of 82.7%, down 60 basis points from November but up 120 basis points for the year, the Milliman 100 Pension Funding index showed according to Liabilities declined 0.64% over the month and 4.48% over the year to $1.705 trillion. Discount rates rose six basis points over the month and 38 basis points over the year to 4.22%, which helped reduce plan liabilities. Asset values declined 1.33% over the month and 3.09% over the year to $1.41 trillion. Investments returned -0.93% over the month and 1.15% in 2015. The good news is that pension funded status improved in 2015, the bad news is that this improvement was underwhelming and we are basically in the same place we were a year ago, despite cooperative interest rates. The funded status of the 100 largest U.S. corporate DB plans is still down 560 basis points from 88.3% as of December 31, 2013. If the pension funds achieve a median 7.3% asset return and the discount rate remains at 4.22%, the funding ratio would increase to 84.8% by the of 2016 and 87.1% by the end of 2017, Milliman predicts.

13. FPPTA WINTER TRUSTEES SCHOOL: The Florida Public Pension Trustees Association’s Winter Trustee School will take place on January 31, through February 3, 2016 at the Hilton Orlando Lake Buena Vista, Lake Buena Vista, Florida. A link on FPPTA’s web site,, will take you to the Hilton Orlando Lake Buena Vista site to make your room reservations. You may access information and updates about the Conference at FPPTA’s website. All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of the Chapters 175 and 185 pension plans should take advantage of this Conference.

14. SO YOU THINK YOU KNOW EVERYTHING: A snail can sleep for three years.

15. TODAY IN HISTORY: In 1903, Harry Houdini escapes from Halvemaansteeg police station in Amsterdam.

16. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.

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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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