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Cypen & Cypen
FEBRUARY 11, 2010

Stephen H. Cypen, Esq., Editor

1.         DB PLANS OUTPERFORM DC PLANS AGAIN:  Towers Watson has been comparing investment rates of return in defined benefit and defined contribution plans for more than 10 years, and DB plans have been the long-term victor. The analysis updates prior studies with investment returns for 2006 and 2007, as well as a snapshot of year-end returns for 2008.  In the last analysis, Towers Watson found that between 1995 and 2006, DB plans outperformed DC plans by an average of 1 percentage point per year. Earlier studies also found that, over time, DB plans attained higher returns than 401(k) plans.  In this year’s analysis, the results remain in line with past analyses:  DB plans outperform DC plans by roughly an average of 1 percentage point a year.  The current analysis of year-end 2008 also shows that, despite generally poor returns for both plan types during the financial crisis, median returns for DB plans remained about 1 percentage point higher than those for DC plans -- and some DB plans even reported positive returns.  Towers Watson initially included only companies that sponsored one DB plan and one 401(k) plan, each with at least 100 participants.  Analysis was limited to these companies in order to minimize effects on results of specific company or workforce characteristics uniquely associated with sponsorship of only one plan type.  This approach enabled Towers Watson  to concentrate on differences in rates of return more directly associated with retirement plan type.

 2.            STATE STREET SETTLES SEC CHARGES:  The Securities and Exchange Commission charged Boston-based State Street Bank and Trust Company with misleading its investors about their exposure to subprime investments while selectively disclosing more complete information to specific investors.  As is often the case, on the same day, State Street agreed to settle SEC's charges, by paying more than $300 Million, which will be distributed to investors who lost money during the subprime market meltdown in 2007.  The payment is in addition to nearly $350 Million that State Street previously agreed to pay to investors in State Street funds to settle private claims.  State Street led investors to believe that their investments were more diversified than a typical money market portfolio, when, instead, they were invested almost entirely in subprime investments that ultimately caused hundreds of millions of dollars in losses.  State Street sent investors a series of misleading communications beginning in July 2007 concerning the effect of the turmoil in the subprime market on the Limited Duration Bond Fund and other State Street funds that invested in it.  At the same time, however, State Street provided particular investors with more complete information about the fund's subprime concentration and other problems with the fund.  These other investors included clients of State Street's internal advisory groups, which provided advisory services to some investors in this fund and related funds.  Based upon such complete information, State Street's internal advisory groups subsequently decided to recommend that all of their clients, including the pension plan of State Street's publicly-traded parent company, redeem their investments from the fund and the related funds.  State Street sold the fund's most liquid holdings and used the cash it received from these sales to meet redemption demands of better informed investors, leaving the fund and its remaining investors with largely illiquid holdings.  Does the word “bagholder” sound familiar?  Investigating potential securities law violations arising out of the credit crisis remains a high priority for SEC. SEC Release 2010-21 (February 4, 2010). 

 3.            IRS DEBUNKS FRIVOLOUS TAX ARGUMENTS:  Internal Revenue Service has released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.  Anyone who contemplates arguing on legal grounds against paying his fair share of taxes should first read the 83-page document, The Truth about Frivolous Tax Arguments, available at  The document explains many of the common frivolous arguments made in recent years, and  describes the legal responses that refute these claims.  It will help taxpayers avoid wasting their time and money with frivolous arguments, and incurring penalties.  Here are some of the more comical ones, listed under the category of “Fictional Legal Bases”: 

A.            Internal Revenue Service is not an agency of the United States.

B.            Taxpayers are not required to file a federal income tax return, because the instructions and regulations associated with Form 1040 do not display an OMB control number as required by the Paperwork Reduction Act.

C.            African Americans can claim a special tax credit as reparations for slavery and other oppressive treatment. 

D.            Taxpayers are entitled to a refund of Social Security taxes paid over their lifetime.

E.            An "untaxing" package or trust provides a way of legally and permanently avoiding the obligation to file federal income tax returns and pay federal income taxes. 

IR-2010-018 (February 5, 2010).  Let’s face it:  anyway you slice it, Uncle Sam wants you. 
 4.            HOUSE BILL WOULD BRING REAL REFORM TO 401(K) INDUSTRY:  Financial Planner Russell Bailyn has written at length about problems within the retirement plan system here in America.  Now, in, Bailyn posits that the biggest drawback for employees is that the secure pensions of the 1980's and 1990's are, for the most part, being replaced by employee-funded 401(k) and 403(b) plans.  While it may seem like only an operational switch, it is actually a huge downgrade for most employees.  Instead of having definite figures to rely on for future financial security, workers have to rely on themselves to save and the markets to make their savings grow.  As we have seen over the past decade, the markets do not always do us favors. Most investors, especially those nearing retirement, would have been better off putting that money into a bank account with little or no interest from 2000 to now.  That alternative would have at least eliminated the panic and emotional madness that most investors have been experiencing.  Since one cannot predict what the markets will do in the future and trillions of dollars remain in retirement plan investments, the best one can do is hope for some real and genuine reform:  of all the areas that deserve reform within the retirement plan industry, disclosure of retirement plan fees should be high on the list.  Many participants have no clue about what costs they pay to participate in and maintain retirement plans.  Those costs are well hidden beneath secretive "expense ratios" and blended into the daily pricing of many investments we think is only reflecting market performance.  H.R. 2989, the 401(k) Fair Disclosure and Pension Security Act, is badly needed legislation that would do the following: 

  • Require 401(k) plans to disclose fees in one dollar figure taken from participants accounts in a worker's quarterly statement;
  • Require 401(k) service providers and plan administrators to disclose fees charged on 401(k) plans, broken down into four categories:  administrative fees, investment management fees, transaction fees and other fees;
  • Help workers understand their investment options by providing basic investment information, including information on risk, return and investment objectives;
  • Require plan administrators to offer at least one low-cost index fund to plan participants in order to receive protection against liability for participants' investment losses;
  • Require service providers to disclose financial relationships so companies that sponsor 401(k) plans can make sure there are no conflicts of interest;
  • Provide adjustments to pension funding rules to ensure plans can weather the economic crisis without being forced to choose between cutting jobs or freezing plans.

Any hope of serious reform depends to a large extent on what else is on the docket for lawmakers in the coming months.  If health care remains the focus, it means less time, attention and dollars dedicated to the retirement system.  If Republicans win some seats in the mid-term election that could also stall retirement plan reform.  No matter what, hope the Department of Labor recognizes the awful position so many Americans are in right now when it comes to their retirement plans and tries to bring a little common sense into the system. 

 5. HAS SEC SOFTENED STANCE ON PLACEMENT AGENT CRACKDOWN?:   U.S. regulators seem to have softened their stance on placement agents who are hired by investment managers to win contracts from public pension funds, according to  The Securities and Exchange Commission had last year proposed to ban such middlemen after the discovery that third-party marketers had bribed government officials with influence over contract awards at New York State Common Retirement Fund.  The proposed rule included a provision that would prohibit investment advisers from using third parties to exert influence designed to secure business on their behalf.  But, in a letter to the Financial Industry Regulatory Authority, SEC said it may consider better regulation of pay-to-play activities rather than an outright ban.  (This position is one we have taken all along:  see C&C Newsletter for April 30, 2009, Item 8, C&C Newsletter for May 14, 2009, Item 5, C&C Newsletter for May 21, 2009, Item 11  and C&C Newsletter for June 25, 2009, Item 2.)  The U-turn comes after a consultation process in which SEC received a lot of feedback in support of third-party agents.  SEC now suggests that an exception to the ban for registered broker-dealers acting as legitimate placement agents might be feasible if FINRA were to implement rules that would prohibit pay-to-play activities.  SEC is also very interested to learn whether FINRA would consider crafting and adopting such rules for its members.  Caveat:  we have not seen SEC’s letter to FINRA, apparently written by the director of SEC’s investment division. 

 6. SAINTS WIN; MARKET TO RISE:  The correlation between who wins the Super Bowl and the rise or fall of the stock market is a strange theory.  It has been studied extensively by financial experts at several major universities, and written about by economists in respected financial journals.  Although nobody can explain it, there does seem to be some mysterious connection.  When a team that has its roots in the National Football League or the National Conference wins the Super Bowl, the market tends to go up the year the game is played.  But if a team with its roots in the American Football Conference wins, the market is supposed to go down.  If the old theory holds true, then this one should be good for Wall Street.  The Saints and the Colts both have their roots in the National Football League.  Over time, the performance record of the Super Bowl theory is 79% accurate -- pretty darn good.  The theory was right 28 times in the first 31 years (1967 through 1997), and then had a few bad years before making a comeback for the better part of the 2000s.

 7. CALIFORNIA AG CALLS UPON CalPERS AND CalSTRS TO DIVEST FROM IRAN:  The California Attorney General has called upon the nation's two largest public pension funds -- California Public Employees' Retirement System and  California State Teachers' Retirement System -- to honor the state law that requires them to divest from companies doing business in Iran.  The California Public Divest from Iran Act was signed into law in October 2007, having been unanimously passed by the state Senate and state Assembly.  The law requires CalPERS and CalSTRS annually to report holdings in companies doing business in the defense, nuclear, petroleum and natural gas industries in Iran, and to divest from any company that fails to take substantial action to cease or limit operations in Iran.  Although CalPERS and CalSTRS both filed annual reports at the end of 2009, the reports failed to explain whether investments in companies with ties to Iran have been reduced; describe when the funds anticipate fully divesting from these companies; summarize investments transferred to funds that exclude these companies; and calculate divestment costs or losses.  In Florida, for firefighter and police officer pension trust funds, beginning January 1, 2010, the board of trustees must identify and publicly report any direct or indirect holdings that they have in any “scrutinized company,” and proceed to sell, redeem, divest or withdraw all publicly traded securities they may have in that company.  Divestment of any such security must be completed by September 30, 2010 (for firefighter plans) and by September 10, 2010 (for police officer plans).  Chapter 175.071(8), Florida Statutes (2009) and Section 185.06(7), Florida Statutes (2009).  A “scrutinized company” basically is one that does business in Sudan or Iran.  (See C&C Special Supplement for July 2, 2009.)

 8. CHICAGO COPS WILL FACE ALCOHOL TESTING:  Chicago Police lieutenants and captains would face random alcohol testing at any time, mandatory drug and alcohol testing whenever they fire their weapons and be prohibited from drinking four hours before duty, under contracts approved by a joint City Council committee.  Lieutenants and captains whose random Breathalyzer tests range from .02 to .04 will be taken off-duty that day, re-tested the following day and randomly tested for the next six months.  If they stay straight throughout that probationary period, according to the Chicago Sun-Times, their records will be wiped clean.  If they test positive again, they will be subject to disciplinary action by the Internal Affairs Division.  Lieutenants and captains whose first random alcohol test is over .04 will be immediately referred to IA, which has the option of offering the officer entry into a rehabilitation program.  Interestingly, Chicago police officers are arrested for DUI at a far lower rate than drivers as a whole, but a number of high-profile incidents have put the issue on the political front-burner.  Some City Council members expressed concern that City Hall may be overreacting to those incidents.  Bottoms up. 

 9. RETIRED NYPD OFFICERS QUESTION CRIME DATA:  More than a hundred retired New York Police Department captains and higher-ranking officers said in a survey that the intense pressure to produce annual crime reductions led some supervisors and precinct commanders to manipulate crime statistics, according to The New York Times.  The retired members reported that they were aware of instances of ethically inappropriate changes to complaints of crimes in seven categories.  Totals for those seven so-called major index crimes are provided to the F.B.I., whose reports on crime trends have been used by Mayor Michael Bloomberg and his predecessor, Mayor Rudolph Giuliani, favorably to compare New York to other cities and to portray it as a profoundly safer place (an assessment that a summary of survey results does not contradict). Some respondents said that they dispatched personnel to crime scenes to persuade victims not to file complaints or to urge them to change their accounts in ways that could result in downgrading of offenses to lesser crimes.  The survey, which involved an anonymous questionnaire, was done in coordination with the union representing most senior officers in the department.  The questionnaires were sent to 1,200 retired captains and more-senior officers; 491 responded.  The survey has its limitations:  it is unclear exactly when the retired senior officers left the department, making it impossible to determine whether any alleged manipulations came early on or had developed over years and across more than one mayoral administration.  Also, the questionnaires did not set out to measure frequency of any manipulation.

10. $6.1 TRILLION:  That digit is the dollar value of services consumed per year, which accounts for about two-thirds of total consumer spending.  Yet services are not widely taxed by state and local governments.  The reason is because sales taxes in the United States began to spread about 75 years ago when the service sector was a smaller share of the economy, and legislators have generally found it easier to raise existing sales tax rates than to extend the tax to new areas.  Sounds right to us. 

11. TWO INVESTMENT FIRMS SETTLE WITH NEW YORK AG IN PENSION FUND PROBE:  The New York Attorney General has announced agreements with Israeli venture capital firm Markstone Capital Group LLC and California-based placement agent firm Wetherly Capital Group LLC to resolve their roles in the Attorney General’s investigation into pay-to-play practices involving New York State Common Retirement Fund.  Both firms will adopt the Attorney General’s Public Pension Fund Reform Code of Conduct.  Markstone will return $18 Million to CRF, and Wetherly will return $1 Million and exit the placement agent business.  The firms are the eighth and ninth to adopt the Code of Conduct, which ends pay-to-play political contributions and selling of access to public pension money nationwide.  The Code of Conduct bans investment firms from hiring, utilizing or compensating placement agents, lobbyists or other third-party intermediaries to communicate or interact with public pension funds to obtain investments. 

12. IF FAMOUS CHARACTERS THROUGHOUT TIME HAD JEWISH MOTHERS:  THOMAS EDISON'S JEWISH MOTHER:  “Okay, so I'm proud that you invented the electric light bulb.  Now turn it off already and go to sleep!” 

13. FABULOUS RANDOM THOUGHTS:  I think part of a best friend's job should be to immediately clear your computer history if you die. 

14. QUOTE OF THE WEEK:  “No man ever listened himself out of a job.”  Calvin Coolidge  (And no man ever listened to Calvin Coolidge.)


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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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