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Cypen & Cypen
NEWSLETTER
for
January 23, 2020

Stephen H. Cypen, Esq., Editor

1. FROZEN PENSIONS CALL FOR INTENTIONAL ACTION:
Pension Plans were originally a valuable tool for companies to attract and retain talented employees and were designed for the paternalistic employer to take care of their loyal employees into old age. Pension plans were good things created by good employers. However, in the past 30 years, changes in business and employment climate along with legislative obstacles have stripped away the attraction for corporate employers to sponsor pension plans, resulting in today’s environment of “frozen” pension plans.
 
Frozen pension plans are those that no longer give increases in benefits to participants. A company freezes the pension when it can longer stomach the expensive or unpredictable costs of the plan. Benefits earned by the participants generally can’t and won’t be taken away, but for myriad reasons, there is not enough wealth in the plan to cover all the benefits owed. So, the plan just sits there frozen while the company feeds it required monetary contributions, with the goal that eventually the assets in the plan will cover all benefits. This would be an acceptable state to maintain… if maintaining the plan didn’t also cost an exorbitant amount in annual administrative expenses.
 
Each year, pension plans must pay an “insurance premium” to the PBGC, an agency created by the government that pays pension benefits in the unlikely situation that a company can’t fund the pension plan. Premiums are based on head count in the plan, plus a percentage of benefit liabilities that are not yet funded. Frozen plans get no exception from this premium. Furthermore, legislation in the past ten years has significantly increased PBGC premiums.
 
Also each year, pension plans have administrative needs, as required by law, that consume valuable resources: an actuarial valuation report, benefit calculations, Form 5500 IRS filings, PBGC form filings, an accountant’s audit if the plan has more than 100 participants, notices and disclosures to participants, asset manager consulting, plan document/attorney fees, and more. Again, frozen plans are not exempt from these administrative requirements.
 
Frozen pension plans continue to exist because, in order to get rid of them (“terminate” them), the company must put enough money into the plan to cover all the benefits as either single sum payouts or annuities purchased from an insurance company, and often this amount is an onerous chunk that is either tied up in other capital uses or simply not available. So, as the alternative, companies continue to make annual contributions to the plan and pay the ongoing expenses, even though neither the employer nor the employees are gaining value from the plan. 

Company decision-makers realize the financial conundrum of their frozen pension plans, but usually do not have concrete numbers as evidence to make intentional decisions. In most cases, the numbers would convince leadership that finding resources to terminate the plan is a fiscally sound effort, even if it meant securing outside financing. Knowing there are parties involved in frozen pension plans who profit from maintaining the status quo, an employer may want to seek an analysis from an unbiased third party.  Cheryl Gabriel, CPC, Enrolled Actuary,  linkedin.com , January 13, 2020

2. NEW LAW MAY ENCOURAGE  BUSINESSES TO OFFER RETIREMENT PLANS:
A new law expanding retirement plan options for small businesses may encourage more companies to offer the benefits to their workers.  The Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act, won final congressional approval in the Senate last month and was signed into law by President Donald Trump.  One of the bill’s features makes it easier for small businesses to band together to offer 401(k) and other retirement plans. What are called Multiple Employer Plans lower the costs of administering a plan.  The high costs of more complex plans like 401(k)s have put them out of reach for many small businesses. These costs also reduce the returns employees get from their investments. So joining a plan with other companies theoretically will make it easier for small businesses to offer retirement plans.  The law also increases the maximum tax credit small businesses get for starting plans, to $5,000 from $500.  Half the workers in companies with fewer than 50 employees have access to retirement benefits, according to a Labor Department report.  “Most small businesses simply don’t have the funds or staff to offer and manage retirement plans,” said John Arensmeyer, CEO of the advocacy group Small Business Majority.  What’s not known at this point is whether multiple plans going forward will have costs low enough to persuade small-business owners to join. Owners do have other options, including Simplified Employment Pension, or SEP, plans that are less complex and cheaper than 401(k) plans.  Multiple employer plans are already offered by financial institutions and benefits companies. Small business owners can learn more about their retirement plan options in IRS Publication 560, Retirement Plans for Small Business. You can access it here:  https://www.irs.gov/forms-pubs/about-publication-560 .  Joyce Rosenberg, AP, The Washington Post, January 6, 2020

3.  DB PLAN SPONSORS FOCUSED ON COST AND FUNDED STATUS CONCERNS:
Since 2010, the S&P 500 increased by over 200% but barely kept pace with defined benefit (DB) plan liability growth due to discount rates falling more than 250 basis points and longer life spans as reflected in a new mortality table, Vanguard notes in a report about its  2019 survey of pension sponsors .  It points out that pension plan sponsors also faced three revisions to the funding regulations introduced by the Pension Protection Act of 2006 (PPA), a  quadrupling of Pension Benefit Guaranty Corporation (PBGC) premiums , and the growth of the pension risk-transfer business from approximately $1 billion per year to $25 billion per year. “These changes have caused plan sponsors to rethink the way they operate their pension plans, especially in the areas of plan design, asset allocation, investment policy, risk management and fiduciary partnerships, Vanguard says.
About one-third of plans are open and active (33%), frozen with no future benefit accruals (34%) and closed to new entrants (32%). Compared with 2010, significantly more pension plans are closed to new entrants and frozen to future benefit accruals in 2019, Vanguard found. However, the percentage of closed and frozen plans in 2019 is similar to that of 2015. The firm says this leveling off of the closing and freezing of pension plans shows that those plans that remained open and active following the global financial crisis, through the introduction of the more stringent funding and marked-to-market reporting requirements, and despite the increases in PBGC premiums are more likely to be dedicated to keeping that plan open in the future.
Nearly two-thirds of respondents stated they intend to make a change to their pension plan, but only 15% expect to make a plan design change where they would either close or freeze their pension plans. Nearly half of those surveyed are expected to execute a risk transfer , meaning they expect to purchase annuities for retirees, offer lump sums to terminated vested participants or terminate the plan. Reducing plan costs (68%), reducing the plan’s impact to the company’s financials (55%) and reducing cost volatility (52%) are the top reasons cited.  Thirty five percent of DB plan sponsors surveyed said their primary financial objective is minimizing volatility in plan contributions and funding ratio, while 30% said it is minimizing the long-term cost of the pension plan, and one-quarter reported it is obtaining full funding.
Given their concerns and objectives, Vanguard expected somewhat of a shift in their portfolios’ asset allocations from 2015, but this was not the case. The overall average asset allocation reported nearly mirrored that reported in Vanguard’s 2015 survey: 48% invested in equities, 39% in fixed income, 2% in cash, and 11% in alternatives such as hedge funds, private equities, and commodities. In the 2019 survey this shifted slightly to: 43% invested in equities, 38% in fixed income, 4% in cash, and 16% in alternatives.  In response to risk, Vanguard found DB plans are lengthening bond durations. The reported long-term bond allocation increased from 38% in 2015 to 44%, while the allocation to short- and intermediate-term bonds decreased by a similar percentage. Also, with respect to the fixed income sub-allocation, the corporate to Treasury allocation reported showed a slightly higher allocation to Treasury bonds than in 2015 (38% compared to 35%). Other Vanguard research has found that a long Treasury allocation of 20% to 35% combined with a long corporate allocation of 65% to 80% has the highest historical correlation and regression fit to the FTSE Pension Liability Index (FPLI).
The most common planned investment policy change was continuing to decrease the allocation to return-seeking assets, such as equity, and the increase of liability-hedging fixed income allocations.  However, some providers in the DB plan market believe allocations to return-seeking assets should not be decreased but rather more diversified .  Rebecca Moore, Plansponsor, November 13, 2019
4.  DC PLAN PARTICIPANTS STICK TO RETIREMENT-SAVING PATH REPORT:
Defined contribution plan participants remained committed to saving for retirement, according to the Investment Company Institute's latest report on participant behavior. Just 1.3% of plan participants stopped making contributions in the first half of 2019, down slightly from 1.4% in the same period the year before. Their withdrawal activity was also virtually unchanged. In the first half of 2019, 2.5% of participants withdrew funds from their retirement accounts, with 1.1% taking hardship withdrawals. That compares with 2.2% who withdrew money and 0.9% who took hardship distributions from their accounts in the first half of 2018. Loan activity was also in line with the previous year. In the first half of 2019, 16.3% of participants had loans outstanding, down slightly from 16.5% in the first half of 2018.  Participants also stayed put with their asset allocations as stock values rose. During the first six months of last year, 6.1% changed the asset allocation of their account balances, while 3.6% changed the asset allocation of their contributions. That compares with 7.1% who changed the allocation of their balances and 4% who changed the allocation of their contributions in the first half of 2018.  The report updates results from ICI's survey of a cross-section of record-keeping firms covering more than 30 million employer-based defined contribution participant accounts as of June 30. Margarida Correia, Pension & Investments, January 3, 2020
 
5.  FEDERAL EMPLOYEES' RETIREMENT SYSTEM - SUMMARY OF RECENT TRENDS:
This report describes recent trends in the characteristics of annuitants and current employees covered by the Civil Service Retirement System (CSRS) and the Federal Employees’ Retirement System (FERS) as well as the financial status of the Civil Service Retirement and Disability Fund (CSRDF).

  • In FY2018, 96% of current civilian federal employees were enrolled in FERS, which covers employees hired since 1984. Four percent were enrolled in CSRS, which covers only employees hired before 1984.
  • In FY2018, more than 2.6 million people received civil service annuity payments, including 2,132,713 employee annuitants and 514,266 survivor annuitants. Of these individuals, 67% received annuities earned under CSRS.
  • About one-third of all federal employee annuitants and survivor annuitants reside in five states: California, Texas, Florida, Maryland, and Virginia.
  • The average civilian federal employee who retired in FY2016 was 61.5 years old and had completed 26.8 years of federal service.
  • The average monthly annuity payment to workers who retired under CSRS in FY2018 was $4,973. Workers who retired under FERS received an average monthly annuity of $1,834. Employees retiring under FERS had a shorter average length of service than those under CSRS. FERS annuities are supplemented by Social Security benefits and the Thrift Savings Plan (TSP).
  • At the end of FY2018, the balance of the CSRDF was $915.3 billion, an amount equal to more than 10 times the amount of outlays from the fund that year. The trust fund balance is expected to reach $931 billion by the end of FY2029.
  • From FY1970 to FY1985, the number of people receiving federal civil service annuities rose from fewer than 1 million to nearly 2 million, an increase of 105%. Between FY1985 and FY2018, the number of civil service annuitants rose by 694,000, an increase of about 35%.
  • In FY2018, the number of civilian federal employees, including Postal Service employees, totaled 3.3 million workers. This was 254,000 fewer than the number of employees in FY2000, and 480,000 fewer than the number of employees in FY1994.
  • In FY2018, all CSRS employees were aged 45 or older, compared with 61% of FERS employees who were aged 45 or older (38.9% of FERS employees were younger than 45). Sixty-seven percent of CSRS employees were aged 60 or older, whereas 14% of FERS employees were in this age range.

For a general overview of current benefits and financing under CSRS and FERS, see CRS Report 98-810, Federal Employees’ Retirement System: Benefits and Financing.  For summary information on recent reform proposals related to CSRS and FERS, see CRS In Focus IF10243, Civilian Federal Retirement: Current Law, Recent Changes, and Reform Proposals. Congressional Research Service https://crsreports.congress.gov , CRS Report: 98-972, January 10, 2020
 
6.  PROTECTING SMALL BUSINESS FROM IMPOSTERS:
Opening a business requires planning, elbow grease, and probably some paperwork to register your new company with your state or local government. And that’s where some not-so-honest outfits may try to confuse you into thinking they’re from the government and that you need to pay money to complete your registration. Their mailings look like an official bill for documents to complete your registration – and may even include what looks like a government seal. To convince you it’s legit, the mailer may include your business identification number. To get you to pay, the mailer claims that you need to hurry up and pay or you could be in legal hot water. But here’s the thing: the people behind the mailers are not from the government and you probably don’t need the paperwork they’re talking about, at least not to complete your registration. At best, you’ll get overcharged. At worst, they could be scammers who steal your money or account information. What can you do to steer clear of these schemes?
 
Spread the word. The best defense is to be sure everyone at your workplace knows about this scam and how it works. Scammers open target several people in an organization to create confusion. Are you part of a business networking group or service organization? Help your fellow businesspeople and fill them in on these schemes.
 
Check all invoices closely. Be sure that you have clear procedures to approve expenditures, and that major spending can’t be triggered by an unexpected call, email, or invoice. If you get one of these mailers, you may need to check in with the people on your staff who are responsible for filing legal documents with the state.
 
Pay attention to how you pay. If someone tells you to pay with a wire transfer, reloadable card, gift card, or bitcoin, you can bet it’s a scam.  Laura Solis, Attorney, Federal Trade Commission Consumer Information,  consumer.ftc.gov , January 9, 2020
 
7.  WHY DO HEALTH INSURERS DENY CLAIMS?:
When you are ill and a doctor recommends a course of treatment, you naturally assume that your health insurer will reimburse the cost. That is not always the case, though, and it is not uncommon for benefits to be denied, especially if the costs are high. Examples of types of claims that are frequently denied include: 

  • Cancer care involving treatment such as stem cell transplantation, proton beam therapy, or newly developed high cost medications;
  • Air ambulance › transportation;
  • Residential treatment for behavioral health conditions; and
  • Emergency out-of-network treatment

Insurers even challenge emergency room visits if, after the fact, it appears such treatment could have been provided elsewhere. Decisions about whether services are covered or excluded begin with the terms of the plan or policy, which all contain explicit exclusions for non-covered services that are not medically necessary. Most insurers have also developed policies covering specific care or treatments, which can usually be researched on the internet. Such policies quickly become outdated with new medical advances, though, and some policies are simply inconsistent with accepted standards of medical care.
 
Another major source of denials or inadequate reimbursement is the growing popularity of association or so-called short-term health benefits policies that do not have to incorporate essential benefits mandated by the Affordable Care Act (ACA). If the premium cost for a policy appears too good to be true, be wary. Consumers buying individual health insurance policies should always ascertain the coverage they are purchasing meets the requirements of the ACA.
 
How Can Insurance Benefit Denials Be Challenged?  Just because an insurance company says no to a claim that does not mean the insurance company’s decision cannot be challenged.  If coverage was provided through your employer, you automatically have appeal rights under the Employee Retirement Income Security Act (ERISA) if you work in the private sector. Plans governed by the ACA are also mandated to require independent external review of benefit denials upon request.  When a doctor prescribes a drug or course of treatment that is not approved by insurance, the doctor should be prepared to justify the decision and may need to write a letter of medical necessity offering a rationale that not only explains why the treatment has been recommended, but also advises on why lower priced or less intensive alternatives are contra-indicated or would be ineffective.  Mark Debofsky,  www.debofsky.com , January 10, 2020
 
8.  U.S. ALCOHOL-RELATED DEATHS HAVE DOUBLED, STUDY SAYS:
More Americans are ordering more rounds, and that's leading to more funerals, according to a new study on alcohol-related deaths. Looking at data from the National Center for Health Statistics, researchers estimate deaths from alcohol-related problems have more than doubled over the past nearly 20 years.  Death certificates spanning 2017 indicate nearly 73,000 people died in the U.S because of liver disease and other alcohol-related illnesses. That is up from just under 36,000 deaths in 1999.  Some of the greatest increases were found among women and people who were middle-aged and older. 
 
The study comes from the National Institute on Alcohol Abuse and Alcoholism, which is part of the NIH. It was published on Wednesday in the journal Alcoholism: Clinical and Experimental Research.  Overall, researchers found men died at a higher rate than women. But when analyzing annual increases in deaths, the largest increase was among white women. "With the increases in alcohol use among women, there's been increases in harms for women including ER visits, hospitalization and deaths," Aaron White, who authored the paper, told NPR.  The research shows that in 2017, alcohol proved to be even more deadly than illicit drugs, including opioids. That year there were about 70,000 drug overdose deaths — about 2,300 fewer than those involving alcohol, according to the Centers for Disease Control and Prevention.
 
Only cigarettes are deadlier than alcohol: More than 480,000 people die each year in the U.S. because of smoking-related illnesses.  However, alcohol-related overdoses — either alone or with drugs — rose between 1999 and 2017. Other alcohol-related causes included heart disease, cancer and accidental injuries such as falls. The number of deaths caused by drunken driving over the same two decades declined. Other findings, as quoted in the study: 

  • 70.1% of the population aged 18 and older ... consumed alcohol in 2017, averaging approximately 3.6 gallons of pure alcohol per drinker.
  • While the overall prevalence of drinking and binge drinking did not change for men, there was a 10.1% increase in the prevalence of drinking and a 23.3% increase in binge drinking among women.
  • Increases in consumption were larger for people aged 50 and older relative to younger age-groups.

Vanessa Romo and Allison Aubrey, NPR,  www.npr.org , January 8, 2020
 
9. NEW YEAR, NEW CREDIT BLOG SERIES:
With the start of a new year, many of us want to get our finances in order.  We often think about budgeting, but what about credit? To help you get a handle on credit, we’ve put together a four-part blog series:  (1) why does your credit matter; (2) getting your credit report; (3) reading your credit report; and (4) fixing your credit report.
 
Before you dig in to work on strengthening your credit, you may wonder: what is credit and why does it matter? When people talk about your credit, they mean your credit history. Your credit history is a record of how you have used money in the past. That includes things like how many credit cards you have, how many loans you have, and whether you pay your bills on time.  Credit bureaus – like Equifax, Experian and TransUnion – compile this information into your credit report. Then, they sell the information in your report to creditors, insurers, and other businesses that use it to evaluate your applications for credit, insurance, or renting a home. How you handled your money and paid bills in the past will help companies decide if they want to do business with you.  That’s why your credit history can make a big difference when you apply for a loan or credit card, try to rent an apartment, attempt to buy or lease a car, or shop for rental or home insurance. Because lenders, landlords, and others care how you handle your credit, you should care too.
 
Your finances will go a lot more smoothly this year if you start by checking your credit report and correcting any mistakes that you see. Over the next few days, our blogs will walk you through, step-by-step, how to get, read, and correct your credit report. If you want a preview, check out this  video . Lisa Weintraub Schifferle, Attorney, FTC, Division of Consumer & Business Education,  consumer.ftc.gov , January 13, 2020
 
10. DID YOU KNOW WILL ROGERS SAID THIS?:
There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves.
 
11. INSPIRATIONAL QUOTES:
Your time is limited, so don't waste it living someone else's life. - Steve Jobs
 
12. TODAY IN HISTORY:
On this day in 1973, US president, Richard Nixon, appears on national television to announce "peace with honor" in Vietnam.
 
13. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.

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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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