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Cypen & Cypen
MARCH 17, 2011

Stephen H. Cypen, Esq., Editor

1.      STATES LOOKING TO MAKE DC SWITCH, BE CAREFUL WHAT YOU WISH FOR: Nearly drowned out by the battle raging in several states over moves to eliminate public employees’ collective bargaining rights is a push to shift public employees to a defined contribution system, according to Pensions & Investments.  At the moment, there is a defined contribution movement in 10 states, including Florida. “Unfortunately, politicians are using pension systems as a political weapon,” says Hank Kim, executive director of National Conference on Public Employee Retirement Systems. Not all mandatory defined contribution systems have been successful. Pension systems in three states that made the move to defined contribution systems later switched back:  North Dakota, Nebraska and West Virginia Teachers Retirement System. Once defined contribution plan proposals are more seriously evaluated, state officials quickly find out the costs are higher than keeping employees in a defined benefit plan.  For example, a study found that if Nevada Public Employees' Retirement System shifts to a defined contribution system as proposed by the Governor, it would cost the system $1.2 Billion more over the next two fiscal years than its obligation under its defined benefit plan. 

2.      CalSTRS RESPONDS TO LITTLE HOOVER COMMISSION REPORT: The Little Hoover Commission began its study of California’s public pension systems in April 2010 to understand the scale of the problem and develop recommendations to control growing pension costs in state and local governments. Over a six-month period, the Commission held a series of hearings at the State Capitol and conducted several other public meetings with stakeholders to address these issues.  In February 2011, the Commission issued its 106-page report (#204) entitled Public Pensions for Retirement Security. The full report is available at By letter dated March 8, 2011, California State Teachers’ Retirement System has responded to the report, concluding that implementing recommendations made in the report – even if it were possible to do so – would likely weaken, rather than strengthen, retirement security for California’s public educators. In fact, in some instances, the Commission’s recommendations could increase the total cost of providing retirement benefits. The report makes many of the same misdiagnoses others have made of the cause of the financial problems faced by public pensions. These misdiagnoses lead to impractical recommendations, which may reduce liabilities incurred by public pension plans, but do so at expense of the retirement security of school educators at an increased cost to school employers. A fuller and more accurate understanding of the issues can point to remedies that not only reduce liabilities, but do so without jeopardizing security of public employee pensions. Given the importance of this issue to literally millions of Californians, it is time to move past political rhetoric and focus on solutions that are truly responsive to the problems. Not only are there substantive legal weaknesses in the report, but it fails to convey the underlying drivers of this financial dilemma. The report opens with the assumption that underfunding is due primarily to “overly generous benefit promises, wishful thinking and an unwillingness to plan prudently,” a premise that fails to reflect any recognition of the financial market’s collapse and its underlying causes. Credibility of the report also suffers from broad generalizations that do not hold up when applied to specific plans. The CalSTRS benefit structure, on a comparative basis, is not “overly generous,” but rather provides a moderate benefit that replaces approximately 60% of pre-retirement income for educators – educators who receive no Social Security benefits for their decades of service. Although there are a number of misleading statements, most concerns surrounds two significant recommendations:   

Reducing future accruals of benefits for current employees. The most controversial and ultimately the most meaningless recommendation is that theLegislature should explicitly authorize reduction of future unaccrued retirement benefits for current employees.  However, the report cites no case in California in which a court has held that pension benefits payable to existing employees, even for future service, could be reduced without being accompanied by comparable new advantages. The report simply ignores layers of jurisprudence applying the U.S. and the California constitutional protections against impairment of contract obligations to pension promises made to public employees.  Under California law, an employee has a vested right not merely to preservation of benefits already earned pro rata, but also, by continuing to work until retirement eligibility, to earn benefits or their substantial equivalent, promised during prior service.

Integrating retirement benefits with Social Security. The report also recommends that public employers explore options for coordinating pension benefits with Social Security.  In case Social Security should ever become mandatory for public employees, such as California teachers who are currently not participating in the program, CalSTRS agrees that it is prudent to give some thought as to how their pensions would be coordinated with Social Security, and measure likely effects on California educators, their employers and the state. However, to suggest that integrating Social Security may become more advantageous, as employee and employer contribution rates continue to rise at levels higher than Social Security taxes, ignores reality.  To repeat a phrase used in the report, the math does not work. For example, if CalSTRS benefits were reduced to offset the benefit a member would receive from Social Security, the total cost of this coordinated benefit structure would be $1.8 Billion more each year to the member and the employer.  On the other hand, if the objective were to maintain total contributions and payroll taxes of a coordinated plan to the amount of contributions paid to CalSTRS, the average total benefit, including Social Security, paid to a CalSTRS member would be 33 percent lower than the benefit currently paid by CalSTRS alone.  

CalSTRS welcomes the opportunity to work with stakeholders and legislators to address the funding situation in a manner that respects the budget issues facing the state and schools, while maintaining financial security of educators in retirement -- something which the Commission readily acknowledged was appropriate. Such discussions about solutions, however, can only be successful if facts are clear to everyone with respect to the specific retirement system being discussed, and when people are not distracted by impractical recommendations.

3.      IMPROVED REGULATION COULD BETTER PROTECT 401 (K) PLAN PARTICIPANTS FROM CONFLICTS OF INTEREST: The United States Government Accountability Office was asked to describe circumstances where service providers may have conflicts of interest in providing assistance related to selection of investment options in connection with 401 (k) plans. GAO found that sponsors of 401 (k) plans face conflicts of interest from service providers assisting in selection of investment options because of third-party payments and other business arrangements.  For example, providers who help sponsors to establish and maintain their plans may receive third-party payments from investment fund companies.  The payments, sometimes called revenue sharing, create a conflict of interest because the provider may receive greater compensation from certain funds.  Moreover, providers are reported commonly to structure their relationships with sponsors in a manner that avoids being subject to fiduciary standards under the Employee Retirement Income Security Act. According to industry experts, many sponsors, particularly of smaller plans, do not understand whether or not providers to the plan are fiduciaries, and are not aware that the provider's compensation may vary based on investment options selected.  Such conflicts could lead to higher costs for the plan, which are typically borne by participants. In certain situations, participants face conflicts of interest from providers that have a financial interest when providing investment assistance.  For instance, although investment education is defined as generalized investment information, providers may highlight their own funds as examples of investments available within asset classes even though they may have a financial interest in the funds.  Participants perceive education as investment advice.  Thus, participants may not understand that the provider is not a fiduciary adviser required to act solely in participants' best interests.  Also, several industry experts expressed concerns that providers stand to gain higher profits from marketing investment products outside of plans to participants, a practice known as cross-selling.  As an example, if participants use their plan provider for Individual Retirement Account rollovers, they may not understand, because of insufficient disclosures, that fees are often higher for products offered outside the plan, and that the provider may not be serving as a fiduciary adviser.  Consequently, participants may choose funds that do not meet their needs and pay higher fees, reducing their retirement savings. While the Department of Laborhas taken steps to address the potential for conflicted investment advice provided to sponsors and participants, more can be done to ensure they receive impartial advice.  In fiscal year 2007 the Employee Benefits Security Administration began a national enforcement project that focuses on receipt of improper or undisclosed compensation by certain providers, but its enforcement efforts are constrained to fiduciary providers and limited by EBSA's approach for generating cases.  In addition, EBSA issued regulations to revise the definition of an ERISA fiduciary, and require enhanced disclosure of providers' compensation and fiduciary status.  These regulations, as currently specified, would help EBSA and sponsors detect and deter conflicted investment advice.  However, the regulations do not require that certain disclosures be made in consistent or summary formats, which may leave sponsors with information that is not sufficient or comparable. So, what else is new? GAO-11-119 (January 28, 2011)

4.      WORKERS’ PESSIMISM ABOUT RETIREMENT DEEPENS, REFLECTING THE “NEW NORMAL”:   In a sign that Americans are recognizing realities they face about their chances for a comfortable retirement, the 2011 Retirement Confidence Survey finds workers are more pessimistic than at any time in the last two decades RCS has been conducted. More than a quarter (27 percent) of workers now say they are "not at all confident" about retirement, up 5 percentage points from the level measured just one year ago. Reinforcing that trend, the percentage of workers saying they are "very confident" of a comfortable retirement ties with 2009 at 13 percent -- the lowest rate ever measured by RCS. The survey also found that roughly a third of both workers and retirees said they had to dip into their savings last year to pay for basic expenses.  Significantly, RCS also found that those with retirement savings -- like a 401(k) or an individual retirement account -- were far less likely than those without these accounts to tap into their savings. The 2011 RCS is the 21st annual, conducted by the nonpartisan Employee Benefit Research Institute, making it the longest-running annual retirement survey of its kind in the nation.  Among key findings from this year's RCS: 

  • Preparing for retirement. While 59 percent of all workers say they are currently saving for retirement, more than 56 percent say they have less than $25,000 in savings and investments, excluding the value of their primary residence and any defined benefit pension plans. About 30 percent of workers say they will need less than $250,000 to afford a comfortable retirement. Yet almost 45 percent are not too or not at all confident they and their spouse will be able to save as much as they think they need, and 70 percent say they are a little or a lot behind schedule in planning and saving for retirement. Over 40 percent say they determined their retirement savings needs by guessing. 
  • Paying for health care in retirement.  Workers are evenly split about being confident of having enough money to take care of medical expenses in retirement. 
  • Delayed retirement.  A significant number of workers (20 percent) say they now intend to retire later than they had planned.   
  • Forced early retirement.  Confirming findings from earlier surveys, 45 percent say they retired earlier than they planed, mainly because of a health problem or disability. 

EBRI is a private, nonprofit research institute that focuses on health, savings, retirement and economic security issues.  EBRI does not lobby and does not take policy positions.

5.      NOT ALL MILLIONAIRES FEEL WEALTHY!: Well excuuuuuse me. Fidelity Investments has released results of its fourth Fidelity Millionaire Outlook, an in-depth survey analyzing investing attitudes and behaviors of more than 1,000 millionaire households, which reveals that while millionaires’ near-term confidence in the U.S. economy remains negative, the outlook is at the highest level since Fidelity began tracking their sentiment in 2006.
Despite representing only 5 percent of U.S. households, because of the amount of wealth they control, millionaires have potential to influence financial markets as well as demand for products and services. In many ways, the average investor can learn from what millionaires are thinking or doing. For instance, millionaires tend not to panic and become gripped by inertia, while they are careful about spending and have well-developed financial plans. Despite the stock market’s positive performance over the past couple of years, the survey found that 42 percent of millionaires still do not feel wealthy, compared to 46 percent, who said they did not feel wealthy in 2009. In fact, among those who classified themselves as not feeling wealthy, the investable asset level needed to begin to feel wealthy is $7.5 Million.  Of the 58 percent of millionaires who say they feel wealthy -- up slightly from 54 percent in 2009 -- they began to feel so at $1.75 Million in investable assets, which is consistent with 2009 and up from $1.5 Million in 2008. The survey found that only 17 percent of millionaires say that the 2008-09 market downturn shook their investing confidence, and 68% do not expect market volatility to become the new norm.

6.      NAKED THERAPIST DISROBES DURING THERAPY SESSIONS: Women want to talk about their feelings, and men just want sex - or so Whether or not you subscribe to this long-standing presumption, one woman is putting it to good use. Meet Sarah White, the naked therapist. After studying the subject as an undergraduate, Sarah White was uninspired by modern psychology.  Taking matters into her own hands, she launched her website, The Naked Therapist, where she advertises $150 Skype therapy sessions.  While her clients talk it out, she takes it off. As if it were not obvious, most of the naked therapist's clients are men. Some are in throes of a mid-life crisis, while others are college students.  But it is all good for Sarah White, who believes that a naked woman can help a man focus so he can really dig down deep and speak about the big issues.  Or the small issues.   Understandably, sexual interaction between a licensed therapist and a patient is frowned upon by the American Psychoanalytic Association.  Sarah White is not a licensed therapist, meaning she is not breaking any professional rules.  But does her naked therapy break the law? Practicing medicine or providing therapeutic services without a license is a crime in every state.  In addition, some states criminalize the mere act of holding oneself out to be a licensed medical professional.  Sarah White likely does neither of these things. Basically, the naked therapist is being paid to strip, talk and offer suggestions, which is what many user-directed Internet porn sites already provide.  Further, her website clearly states that she is not licensed, and goes on to explain her educational background. So, whether or not you think the naked therapist is involved in soft-core porn or saving the souls of her clients, she probably is not breaking the law.  She does not, however, take insurance, so she might break-the-bank. What do we say? Clothes, but no cigar. 

7.      REMARKABLE QUOTES FROM REMARKABLE JEWS: Marriage is a wonderful institution. But who wants to live in an institution? Groucho Marx

8.      BLESSED ARE THE CRACKED, FOR THEY LET IN THE LIGHT:  A picture is worth a thousand words, but it uses up three thousand times the memory.

9.      PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.):   To steal ideas from one person is plagiarism. To steal from many is research. 

10.    QUOTE OF THE WEEK:    “Life seems to go on without effort, when I am filled with music.” George Eliot

11.    KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items? Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources. 

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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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