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Cypen & Cypen
MARCH 15, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


According to a Wall Street Journal piece, facing pressure from rivals and regulators, Merrill Lynch & Co.’s pension-consulting arm is changing the way it handles part of its fees. With the change, Merrill has also been refunding money to some of its pension fund clients, with refunds ranging from a few thousand dollars to hundreds of thousands of dollars, and totaling about $2 Million. In some cases, Merrill both provided advice to pension funds about what money managers the fund should use and collected brokerage fees from those money managers, raising the prospect of a conflict of interest. This issue had been in the sights of the Securities and Exchange Commission for several years. Critics said that pension funds often were unaware of the dual nature of the relationship or how much money Merrill was earning from its relationship with the funds. In late 2005, the SEC subpoenaed information from the Florida operation of Merrill’s pension consulting group. Among the changes that Merrill is providing are statements to pension funds that spell out the amount of trading commissions from the pension funds’ money managers that are used to offset consulting services fees that otherwise would be paid in cash by the pension funds. In addition, Merrill is reducing the trading required to cover those fees. Merrill also said it has changed the policy regarding its handling of fees collected from mutual funds, known as 12b-1 fees. Merrill had been keeping a portion of those fees to offset a pension fund’s consulting fees, a practice criticized by observers as improper. Merrill said it will no longer retain any portion of the 12b-1 fees. Along with the changes, Merrill has been writing checks, partly to cover what it said were errors but also as rebates tied to the commission and 12b-1 fee changes. For example, Merrill has made the commission ratio change retroactive to January 1, 2003. Obviously, pension fund-clients of Merrill that have not received a check should be asking why not and those that have should determine whether or not it is the full compensation to which they are entitled.


The City of Tarpon Springs sought review of an award of benefits to Vaporis by application of the “firefighter’s presumption,” Section 112.18, Florida Statutes. That section provides as follows:

Any condition or impairment of health of any ... firefighter ... caused by tuberculosis, heart disease, or hypertension resulting in total or partial disability or death shall be presumed to have been accidental and to have been suffered in the line of duty unless the contrary be shown by competent evidence. However, any such firefighter ... shall have successfully passed the physical examination upon entering into any such service ..., which examination failed to reveal any evidence of such condition. ...

Vaporis began employment as a firefighter on January 27, 1986. His initial employment physical was partially administered ten days before he began working and the remainder of the physical was completed fifteen days after he began working. Almost twenty years later, Vaporis suffered a heart attack and applied for workers’ compensation benefits, seeking to take advantage of Section 112.18, Florida Statutes. The judge of compensation claims awarded workers’ compensation benefits, holding, contrary to the city’s position, that Vaporis successfully passed the examination upon entry into service as a firefighter. The trial judge also found that the city fell far short of establishing that some other specific hazard or non-occupational hazard was the cause of Vaporis’s disease. In reversing, the district court of appeal upheld the determination that the examination was successfully passed upon Vaporis’s entry into service as a firefighter, but reversed because the judge of compensation claims erroneously applied a greater burden of proof to the city than required by law. The court held that the firefighter’s presumption merely switches the burden of proof from claimant to employer, and may be overcome by, as the statute plainly states, “competent evidence.” All that the statute requires to overcome the presumption is competent substantial evidence that convinces a judge of compensation claims that the disease was caused by some non-work-related factor, not that it was caused by any sort of specific hazard or non-occupational hazard as the judge of compensation claims erroneously concluded. The case was remanded to the judge of compensation claims to consider the evidence under the proper burden of proof. City of Tarpon Springs v. Vaporis, 32 Fla. L. Weekly D678 (Fla. 1st DCA, March 12, 2007).


A recent Segal Advisory notes that the international fixed income securities market has grown dramatically since the early 1960s. (Without getting too specific, United States tax policy was the driving force behind this growth.) Dealers and brokers from many countries now trade issues in various currencies, structured in a number of innovative ways, and issued to investors worldwide. The market size, or total number of outstanding international debt issues, was approximately $22.7 Trillion as of September 2006, up substantially from $12 Trillion in 2004. As of September 2006, the United States represents approximately 36% of the global bond market, or approximately $8.2 Trillion, and international bonds represent the remaining 64%, or approximately $14.5 Trillion. Despite the explosive growth in the international fixed income securities market, only a small percentage of pension plan sponsors’ assets are in international fixed income investments. The advisory outlines factors that pension plan sponsors considering international fixed income securities should take into account: relative historical returns, comparative risks/return analysis and diversification. In addition, it describes the categories and characteristics of this investment class (Eurobonds, foreign bonds and global bonds). The conclusion is that international bonds have developed into a well-established, well-regulated capital market. Because of their correlation with other asset classes, international bonds may have a favorable impact on pension plan portfolios. However, like any asset class under consideration, plan sponsors should evaluate international bonds based on the role those investments can play in the overall investment strategy. When possibly adding new asset classes to an already diversified portfolio, plan sponsors should consider the return needs and risk tolerance of a plan, as well as any guidelines and restrictions.


Internal Revenue Service has announced there will be no change in interest rates for the calendar quarter beginning April 1, 2007. Interest rates are as follows:

  • eight (8%) per cent for overpayments (7% in case of a corporation);
  • eight (8%) per cent for underpayments;
  • ten (10%) per cent for large corporate underpayments; and
  • five and one-half (5 1/2%) per cent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. The interest rates just announced are computed from the federal short-term rate based on daily compounding determined during January 2007. IR-2007-054 (March 12, 2007).


Our long-time readers know that most public pension plans, at least in Florida, cannot honor Qualified Domestic Relations Orders (see C&C February, 1997, Special Supplement). On the other hand, Section 206(d)(3) of Title I of the Employee Retirement Income Security Act of 1974, as amended, and the related provisions of Section 414(p) of the Internal Revenue Code of 1986, establish a limited exception to the prohibitions against assignment and alienation contained in ERISA Section 206(d)(1) and Code Section 401(a)(13). Under this limited exception, a participant’s benefits under a private pension plan may be assigned to an alternate payee, defined as the participant’s spouse, former spouse, child or other dependent, pursuant to an order that constitutes a Qualified Domestic Relations Order within the meaning of those provisions. Such QDROs, in addition, survive the federal preemption of state law imposed by ERISA Section 514(a) by virtue of ERISA Section 514(b)(7). The subject document contains an interim final rule issued under Section 1001 of the Pension Protection Act of 2006, which requires the Secretary of Labor to issue, not later than one year after date of enactment of PPA, regulations clarifying certain issues relating to timing and order of domestic relations orders under Section 206(d)(3) of ERISA. The rule contained in the document provides guidance to plan administrators, service providers, participants and alternate payees on QDRO requirements under ERISA. The rule is being adopted in response to the specific statutory directive contained in PPA. The interim rule is effective April 6, 2007, but interested persons are invited to submit comments until May 7, 2007 for consideration by the Department of Labor in developing a final rule. (Federal Register, March 7, 2007, Volume 72, Number 44, Pages 10070-10074.)


Employers continue to underestimate the high value that employees place on retirement benefits compared to salary, according to a recent survey by the Transamerica Center for Retirement Studies. Reviewed by CCH, the Eighth Annual Survey revealed that 56% of employers believed employees would choose a higher salary over excellent retirement benefits, while only 34% of employees agreed with that statement. Data from the 2006 survey also indicated a lack of communication in the workplace when it comes to benefits packages, compensation and investment education, which could make it more difficult for employees to get the tools they need successfully to save for retirement. Very little dialogue occurs between employers and employees on retirement issues: only one in five employees (22%) have spoken to their supervisor or human relations department about their retirement benefits in the last twelve months. Coincidentally, 77% of employers believe their employees would prefer not to think about retirement until they near retirement age, while 73% of employees disagreed with the statement. Among employees whose company does not offer a retirement plan, 62% of employees said they would leave their job for a similar position with an employer that offers a retirement plan. Better communication also may drive up participation and savings rates among all employees, which could help make it easier for employers to pass nondiscrimination testing. The survey found that 26% of employees are not participating in their employee-funded retirement plan. By encouraging employee participation, a company is also increasing the likelihood that management will be able to contribute the maximum limits allowed by Internal Revenue Service or the plan.


Mark Kritzman, who teaches financial engineering at Massachusetts Institute of Technology, has done the math and concluded with high fees, hedge funds do not add up to attractive investments. The “2/20" hedge fund fee formula typically used by hedge funds makes index funds look like a better bet for investors. Kritzman crafted a hypothetical hedge fund portfolio of ten imaginary hedge funds, and after doing a series of calculations based on a variety of factors, concluded that the hedge fund portfolio would have annualized after-fee returns of 8.6%. Kritzman defended his low-ball figure, even as hedge fund data indicate annualized returns over the past decade of 10.6%, by noting that his estimates are probably accurate since poor performing funds generally do not report to data bases. Interestingly, Kritzman took his model and found that based on certain assumptions regarding stock index and bond index funds, an investor would do better to avoid hedge funds altogether for long-term gain. That changed, however, when he created a model where there was no performance fee but just a flat 2% management fee; then, he would recommend 74% of allocations to the hedge fund basket and 26% to index funds. As for funds of hedge funds, with their extra layer of fees, Kritzman says the optimal allocation is a lot lower than you think it should be.


In last week’s item about McDonalds, we used the tag line “Hold The Pickle, Hold The Lettuce...” (see C&C Newsletter for March 8, 2008, Item 7). We knew that slogan was for Burger King, not McDonalds. However, it sounded catchier than anything we could remember about McDonalds. Of course, one of our astute readers, who claims to have “worthless knowledge clogging his brain,” called us on it. Wendy’s, anyone?


“If the nation’s economists were laid end to end, they would point in all directions.” Arthur Motley

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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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