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Cypen & Cypen
MARCH 10, 2005

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


According to National Conference on Public Employee Retirement Systems, “The Voice for Public Pensions,” Citizens to Save California as part of its multi-million dollar petition drive to place Governor Schwarzenegger ‘s proposed constitutional amendments before voters, has hired an out-of-state firm to verify signatures. That firm, in turn, is outsourcing the work to India! As most of our readers already know, Governor Schwarzenegger is traveling the country to raise millions to finance his initiative to eliminate defined benefit plans for California government workers and replace them with private, 401(k)-type plans. And if you think this issue is limited to California, beware. In a recent interview, the Governator said “If we have pension reform in California, pension reform will happen elsewhere, too.” He’s baaaaaaack.


The fact that American households have debt is not a surprise: credit cards finance our purchases, car loans pay for our wheels, student loans help us with tuitions and mortgages buy our homes. Yet the size of the debt can seem shocking, according to a new paper from the Center for Retirement Research at Boston College. The aggregate burden runs to nearly $10 Trillion, twice the adjusted 1992 figure. Today, household debt is equivalent to more than 80% of the nation’s economy, up from about 60% 10 years ago. Filings for bankruptcy have also soared. In 1991, 6 out of every 1,000 adults filed for bankruptcy; the rate climbed to 9 in 2001. Households aged 50 to 62 represent about 20% of American households and hold a quarter of the total debt. About 11% of them have declared bankruptcy at some point in their lives. As a result, there is a question whether baby boomers will have a comfortable retirement and whether they will be able to pay back their obligations. However, important measures of financial vulnerability suggest that the growth of debt might not be that worrisome. The combination of extraordinary asset growth and historically low interest rates allowed households to increase their debt relatively painlessly: their net worth grew significantly, and the portion of income used to pay for debt did not increase. Although baby boomers might encounter a few bumps in the road, as a group they do not appear to have an immediate debt crisis.


On February 24, 2005, U.S. Department of Labor, Employee Benefits Security Administration, issued Advisory Opinion 2005-02A. The opinion responds to a request on behalf of an insurance company, asking guidance on the duty of insurance companies that provide health and welfare benefit insurance coverage to ERISA plans to furnish information to the plan administrator on commissions and fees paid to brokers, agents and other persons for disclosure on the Annual Return/Report of Employee Benefit Plan. Apparently, there had been a pattern in the insurance industry of underreporting commission and fee payments to brokers and agents. The opinion clarifies the Department’s position that commissions and fees required to be reported include all commissions and fees directly or indirectly attributable to a contract or policy between a plan and an insurance company, insurance service or similar organization. Included are commissions and fees paid by an insurance company where the broker’s, agent’s or other person’s eligibility for payment or the amount of payment is based, in whole or in part, on the value (for example, policy limits or premiums) of contracts or policies (or classes thereof) placed with or retained by an ERISA plan, including persistency and profitability bonuses. In such regard, it would not be permissible to conclude that payments to a broker or agent are required to be reported only when they would be considered a “sales commission” on an individual policy or contract. Further, non-monetary forms of compensation, such as prizes, trips, cruises, gifts, gift certificates, club memberships, vehicle leases and stock awards must be reported if entitlement to or the amount of such compensation was based, in whole or in part, on policies or contracts placed with or retained by ERISA plans. The fact that fees and commissions are paid from a separate bonus fund, and not directly from the insurance company’s general assets, does not provide a basis for failure to report. Finder’s fees and similar payments made by a third party to brokers, agents and others in connection with an insurance policy would be required to be disclosed by the insurer where the insurer reimburses the third party for such payment, either separately or as a component of fees paid by the insurer to the third party. So what’s the point of all this mumbo jumbo, particularly when public pension plans are not subject to ERISA and generally would not have this type of relationship with an insurance company? In a word: DISCLOSURE. Although not directly applicable to public pension plans, this advisory opinion can be applied to any service provider and the requirement that it make full disclosure.

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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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