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Cypen & Cypen
FEBRUARY 22, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


No fewer than three separate studies were published recently, essentially saying that the pension plans of larger employers are either fully or nearly fully funded (see C&C Newsletter for January 25, 2007, Item 2 and C&C Newsletter for January 25, 2007, Item 3), according to Nevin Adams, Editor of For several years, we have been struggling with the impact of the so-called “perfect storm” on pension plans. This catchy phrase was borrowed from the film of the same name and refers to the unusual combination of several forces of nature to create an exceptionally powerful storm across a very large area. The so-called perfect storm for pension plans also resulted from a rare confluence of factors: a slumping investment market, a “vacation” from funding that many plans took during a period when soaring investment returns made such actions unnecessary and an unprecedented decline in the interest rate of the 30-year Treasury Bond (after it was decided to stop issuing that security). In the intervening years, plan sponsors have benefitted from investment returns that exceeded projections. Also, plan sponsors have returned to the process of making regular, or even extraordinary, contributions to their programs. Finally, there is a return to something like a normal interest rate environment, coupled with use of a blended rate, rather than an artificially-distorted 30-year Treasury. Since the last storm broke, many plan sponsors have chosen to freeze or terminate their traditional pension plans. The above factors may have made their programs financially untenable. Still, Adams wonders how many were set on that path for no reason more valid than the relentless pillorying of the funding crisis in the media. In his humble opinion, the concerns expressed were always overblown. Bravo, Nevin.


According to a piece in Yahoo!Finance, a new version of the “tontine” investment vehicle may help individuals without traditional pension plans manage their retirements by decreasing the odds that they will outlive their finances. The tontine-hybrid was developed to address the specific dilemma retirees face when they must decide how quickly to withdraw and consume their investments. If they draw down their savings too fast, they risk spending all of their savings before they pass away. Drawing down too slowly means potentially foregoing a higher standard of living and dying with a significant pool of remaining assets. The tontine-hybrid described in a recent CFA Institute Financial Analysts Journal could be developed into a product if the laws are changed to legalize tontines. Tontines, which were first developed 350 years ago, are investment pools that pay dividends only to the surviving members of the pool The tontine-hybrid is similar to an anuity in that it provides a life income to a participant, and it allows retirees to diversify their life expectancy risks. However, because it does not require an insurance company guarantee, the tontine should provide higher payments than purchased annuities. The tontine-hybrid is different from the typical mutual fund in that the participant’s assets remain in the investment pool when the participant dies. Those assets will fund payments to participants who live longer than average, allowing the tontine-hybrid to provide annuity-like payments. Tontines can be sold directly to investors, or the vehicle could be embedded in cash balance type pension plans. This type of solution could help address the significant investment and budgeting challenges faced by retirees without defined benefit plans.


Apropos of the above piece, Wikipedia defines “tontine” as a “secret sharing algorithm which allows n people to share secret data, such that any k of them can reconstruct it by combining their keys.” Huh? Actually, a tontine is an investment vehicle that combines features of a group annuity, group life insurance and a lottery. The scheme is named after Neopolitan banker Lorenzo de Tonti, who is generally credited with inventing it in France in 1653. Some sources claim that similar schemes already existed in Italy, but there is no dispute that the popularity of the form was due to Tonti. The basic concept is simple. Each investor pays a sum into the tontine. The funds are invested and each investors receives dividends. As each investor dies, his or her share is divided among the surviving investors. This process continues until only one investor survives. Originally, the last surviving subscriber received only the dividends: capital reverted to the state upon his or her death and was used to fund public works projects, which often contained the word “tontine” in their name. In a later variation, the capital would devolve upon the last survivor, effectively dissolving the trust, and it is this version that is often been the plot device for mysteries and detective stories. While once very popular in France, Great Britain and the United States, tontines have been banned in Britain and the United States because of the incentive for investors to kill each other, thereby increasing their shares. Nevertheless, there are underground organizations in the United States that still use the tontine, and ownership of a business of property by joint tenancy with right of survivorship has much the same effect. We wonder if the Florida Lottery has thought of this one.


The Transamerica Center for Retirement Studies is a collaboration of experts assembled by Transamerica Retirement Services. The Center, which conducts the annual Transamerica Retirement Survey, has released its 8th annual edition. For the past seven years, the Center has conducted a national survey of U.S. business employers and workers regarding their attitudes toward retirement. The following, from the executive summary, deal only with the part involving workers:

  • American workers have a variety of financial priorities in their lives. Sizeable proportions name each of the following as their greatest financial priority right now: saving for retirement (23%), paying off their mortgage (19%), supporting children and/or parents (18%), paying off debt (18%) and just getting by, covering basic living expenses (16%).
  • Income also has an impact on priorities. Those making $100,000 and more are able to focus on saving for retirement (42%), while those making less than $50,000 frequently are focused on just getting by (32%). A plurality of workers (43%) expect their 401(k) account and/or IRAs to be their primary source of retirement income. Others are expecting to rely on other savings/investments, their company-funded pension plan and Social Security.
  • American workers have a preference for the Roth 401(k) method of paying taxes; that is, paying income taxes now and withdrawing funds at retirement tax free over the traditional 401(k) method of deferring tax payments until one is making withdrawals in retirement (44% vs. 28%).
  • Workers see health care benefits as the most important employee benefit that companies can offer, with nine in ten saying this is a very important benefit.
  • Seven in ten workers have a 401(k) plan at their company. Half as many have a company-funded pension plan.
  • Workers are more likely to choose excellent retirement benefits (59%) over higher salary (34%). (Interestingly, employers believe potential employees are more likely to choose higher salary (56%) over excellent retirement benefits (39%), so employers have misconceptions about potential employees’ priorities.)
  • One quarter of workers who could participate in their company’s employee-funded retirement plan do not. Among workers who are currently participating in their company-sponsored retirement plan, the median contribution is 8%.
  • Most workers are satisfied with their retirement plans, with an approximately even split between those who strongly agree they are satisfied and those who somewhat agree.
  • More than half of workers are currently saving for retirement outside of work. Types of investments most frequently used for retirement savings are savings accounts, IRAs, mutual funds, stocks, primary residence and certificates of deposit. Nearly half of workers started saving for retirement in their 20s; another one in four started saving in their 30s; while 13% started in their 40s or later.
  • A majority of workers feel they have a basic understanding of asset allocation principles as they relate to retirement investing. One quarter believe they have a very good understanding. (Based upon our experience, we would seriously question the underlying bases for these conclusions.)
  • One in three workers are not sure how much money they will need to have saved by time they retire. Two in ten say they will need less than $500,000; one in ten say between $500,000 and $1 million; two in ten say between $1 million and $3 million; and 14% say $3 million or more.
  • About half of workers feel they could work until they are 65 and still not have saved enough money to retire comfortably, while the other half believe they will have saved enough.
  • One quarter of workers would prefer not to think about retirement until the date nears. Hellllooo!


“When choosing between two evils, I always like to try the one I’ve never tried before.” Mae West

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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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