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Cypen & Cypen
March 28, 2013

Stephen H. Cypen, Esq., Editor

1.     BRAINARD SAYS PLIGHT OF PUBLIC PENSIONS NOT SO OMINOUS: Writing for BNA Pension & Benefits Reporter, Keith Brainard, Director of Research at the National Association of State Retirement Administrators, responded to an earlier BNA article that painted an ominous picture of the current state and future of public pension plans.  Fortunately, the actual condition of pension plans covering the vast majority of employees of state and local government is far better. The previous piece’s pessimism relies on a careful selection of sources, and disregards use of credible experts. It also errs in treating public pensions as a single, uniform entity, and by overlooking the effects of substantive pension reforms approved in recent years by nearly every state.  The earlier author begins by contending that states and local governments failed to fund public pension promises.  In fact, most states and cities in recent years have paid all or most of their required pension contributions; some have not. As with most public pension issues, the answer is not black and white, but rather, varies widely from state to state and plan to plan.  In her book State and Local Pensions, What Now? (See C & C Newsletter for February 14, 2013, Item 5), Alicia Munnell, director of the Center for Retirement Research at Boston College, states:
       A relatively small group of states -- Illinois, Kentucky, Louisiana, New Jersey, and Pennsylvania -- could be considered bad actors in terms of pension funding… . These states have led many observers to conclude that public pension plans generally have been mismanaged. But an equally large number of states -- Delaware, Florida, Georgia, Tennessee, and New York -- have done a good job in terms of providing reasonable benefits, paying the ARC (annual required contribution), and funding. They, like all entities, have been battered by the financial collapse and ensuing recession, but their funding status should improve as the economy recovers.
According to the Public Fund Survey, the average annual required contribution received by public pension plans since 2001 has been nearly 90 percent. This number includes many plans that have consistently received 100 percent or more of ARC and some that have consistently received far less. An overarching image of public pensions depicted by the first author is that all public pension plans are unsustainable and in poor condition. In fact, a wide range exists in public pension funding levels and conditions, even within some states. In its 10th Annual Public Pension Funding Review, Loop Capital states:
      Despite the continued clamor, our view remains fundamentally the same as last year: the public pension plan problem is state specific and not systemic in nature; the pace of improvement across the states is uneven, with some states making little or no progress while others advance; each state has its own unique path to recovery.
The treatment of public pensions as a single, uniform entity is similarly addressed by Nuveen Asset Management:
     Though headlines and various reports may discuss municipal issuers and their pension obligations as a uniform problem, the reality is that the municipal market remains highly individualized and does not lend itself to sweeping generalizations.
The author of the previous piece also cites estimations of liabilities that are calculated through use of a so-called risk-free interest rate. When calculating pension liabilities, the lower the interest rate, the higher the liabilities. Because the Federal Reserve Board’s current monetary policy is artificially keeping interest-rate yields near record lows, this method for assessing liabilities produces a record and artificially high calculation. The $5 trillion estimate of aggregate liabilities cited by the other author is based on an interest rate of 3.36 percent. This rate is substantially lower than not only the rate used by public pension plans, but it is also far lower than the rate used even by corporate pension plans. Moreover, this calculation has little practical value: it is not helpful for determining a pension plan’s required contributions or how a pension fund should invest its assets. In reality, this approach reveals more about the nation’s bond market than anything else.  The charge of ‘‘lax accounting practices’’ used by public pensions presumably refers to the manner in which they calculate their liabilities. Rather than using current interest rates, public pensions calculate their liabilities using expected long-term investment return, typically 7.5 percent to 8 percent. This method is intended to promote stability and predictability in the cost of the plan and to ensure each generation of taxpayers pays for the cost of public services it receives. During the past 10-, 20- and 25-year periods, public pension funds have met or exceeded their expected long-term investment returns.  The use of the long-term expected investment return has also been endorsed by the Governmental Accounting Standards Board. After several years of consideration and debate, GASB recently issued new standards for how public pensions determine and report their liabilities.  GASB heard from a wide variety of industry observers and participants, and considered all perspectives. Ultimately, GASB rejected the economists’ preferred method for valuing pension liabilities, instead preserving the use of the plan’s long-term expected investment return as long as the plan is projected to have assets. A former director of the Pension Benefit Guaranty Corporation recently said ‘‘the discount rate should not be based on the interest rates we see right now. It should be based on what we think those liabilities are likely to cost over decades. An average, or a smoothed, interest rate makes much more sense.’’  The national benefits consulting firm Milliman said it believes a discount rate of 7.65 percent is appropriate for public pensions.  States and cities have a long track record of making changes necessary to maintain sustainability of their pension plans.  Investment markets continue to recover, and public pension funding levels will improve as a combination of lower benefits, higher employee contributions and rising investment markets reduce unfunded pension liabilities and pension costs.
2.       DOUBLE-TAXED ON PLAN LOANS?: A 403(b) plan participant asked if she would be “double-taxed” on a loan she had taken. (A 403(b) plan is very similar to a 401(k) plan in the tax advantages it offers for retirement savings, but for different groups of employees – public education organizations, some non-profit employers, cooperative hospital services organizations and self-employed ministers.)  The answer is yes and no!  The loan is double-taxed in the sense that the loan repayments are made from a participant’s own after-tax income, and the collective sum of those payments is taxed again upon distribution of a participant’s account balance. However, when the participant initiates the loan, he actually receives a check for the principal amount of the loan, which is tax-free. Thus the “double-taxation” of loan principal is negated by the fact that the participant received the loan proceeds on a tax-free basis; in essence, the participant is only taxed once on loan principal.  Interest, however is another story.  Since the check issued to the participant includes only the principal amount of the loan, interest is indeed taxed twice, since it is paid back to a participant’s account from after-tax income, and is also taxed upon distribution. (Remember, too, if the loan had been taken from a third party the participant would be repaying it with after-tax monies, as well.  So, in reality, that factor is neutral compared to taking a loan from a bank.)  There are two more significant disadvantages of taking a loan:
•         Opportunity cost.  Loan proceeds only earn interest on the loan until redeposited into the account. Though it is possible that the loan proceeds would have earned less money for the term of repayment if funds had remained in the participant’s account, it is also quite possible that the funds could have earned a significantly greater amount than the interest rate. The opportunity to have earned a greater investment return is known as opportunity cost, and the effect, with compounding, can be quite significant, especially for younger borrowers who are many years removed from retirement.
•         Foregone savings cost.  If the required repayments force a participant to reduce his elective salary deferrals to the plan, retirement savings will be impacted by the missing deferrals. The impact is again especially pronounced for younger borrowers, as well as those who participate in a matching plan and would no longer receive the maximum matching contribution due to the deferral reduction.  (Again, this factor is neutral if a participant was going to borrow from another source anyway.)
If a participant defaults on a plan loan, of course, she will also be subject to immediate taxation on the unpaid principal as a “deemed distribution” and possibly the early distribution excise tax.  Nevertheless, to be fair, there are advantages to borrowing from a retirement plan: no credit check, the crediting interest payments back to the borrower in the form of retirement account savings, etc. Thus, a participant should perform a careful analysis of the advantages and disadvantages of taking a 403(b) plan loan prior to borrowing. 
3.       EBRI 2013 RETIREMENT CONFIDENCE SURVEY: Employee Benefit Research Institute has released its 2013 Retirement Confidence Survey, showing that perceived savings needs outpace reality for many people.  From the executive summary:
•         The percentage of workers confident about having enough money for a comfortable retirement is essentially unchanged from the record lows observed in 2011. While more than half express some level of confidence (13 percent are very confident and 38 percent are somewhat confident), 28 percent are not at all confident (up from 23 percent in 2012 but statistically equivalent to 27 percent in 2011) and 21 percent are not too confident.
•         Retiree confidence in having a financially secure retirement is also unchanged, with 18 percent very confident and 14 percent not at all confident. 
•         One reason that retirement confidence has remained low despite a brightening economic outlook may be that some workers are waking up to a realization of just how much they may need to retire. Asked how much they believe they will need to save to achieve a financially secure retirement, a striking number of workers cite large savings targets -- 20 percent say they need to save between 20 and 29 percent of their income, and nearly one-quarter (23 percent) indicate they need to save 30 percent or more.
•         Aggressive as those savings targets appear to be, they may not be based on a careful analysis of their individual circumstances. Only 46 percent report they and their spouse have tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement. 
•         Retirement savings may be taking a back seat to more immediate financial concerns: just 2 percent of workers and 4 percent of retirees identify saving or planning for retirement as the most pressing financial issue facing most Americans today. Both workers and retirees are most likely to identify job uncertainty (30 percent of workers and 27 percent of retirees) and making ends meet (12 percent each). 
•         Cost of living and day-to-day expenses head the list of reasons why workers do not contribute (or contribute more) to their employer's plan, with 41 percent of eligible workers citing this factor. 
•         Debt may be another factor standing in the way: 55 percent of workers and 39 percent of retirees report having a problem with their level of debt, and only half (50 percent of workers and 52 percent of retirees) say they could definitely come up with $2,000 if an unexpected need arose within the next month. [Think about that one.] 
•         Worker confidence in the affordability of various aspects of retirement continues to decline. In particular, increases are seen in the percentage of workers not at all confident about their ability to pay for basic expenses (16 percent, up from 12 percent in 2011), medical expenses (29 percent, up from 24 percent in 2012), and long-term care expenses (39 percent, up from 34 percent in 2012). 
•         Just 23 percent of workers (and 28 percent of retirees) report they have obtained investment advice from a professional financial advisor who was paid through fees or commissions. Of these workers, 27 percent followed all of the advice, but more disregarded some of it and followed most (41 percent) or some (27 percent).
4.       MEETING THE RETIREMENT CHALLENGE:  Deloitte has published a paper dealing with new approaches and solutions for the financial services industry. The fact that so many Americans are not adequately prepared for retirement has been widely documented. However, in considering potential solutions to meet this challenge, the role of financial institutions is often overlooked.  The financial services industry has certainly devoted considerable resources to this effort. In 2011 alone, the industry spent $1.14 billion to advertise a growing number of products and services designed to address retirement and investment needs, up 4.9 percent from the year before. Furthermore, there are hundreds of thousands of financial professionals of various stripes -- financial planners, advisors, brokers and insurance agents -- educating, marketing and offering retirement advice to millions of Americans.  So why is it that, despite this substantial focus on retirement products and services, the industry's efforts have fallen short? Why are there so many who do not have a formal plan for retirement, and do not work with professionals to help them prepare such a plan? And why is there such a fundamental disconnect between the financial services industry and the consumers who so acutely need such advice and solutions?  To help the financial services industry come to grips with this conundrum, the Deloitte Center for Financial Services conducted a survey among nearly 4,500 consumers from a wide range of age and income groups. The goal was to generate insights into how financial institutions might develop new approaches and solutions by better understanding the attitudinal and behavioral constraints preventing consumers from taking more control of their retirement destiny.  The survey findings reinforce that many people are quite aware that they are not doing enough on their own to prepare for retirement. As a result, they feel far less secure about their long-term financial future. The survey also identified a number of reasons why the inertia on retirement planning persists, despite extensive efforts by insurers, banks, mutual funds and brokerage firms to help consumers address the challenge.  Analysis of the survey data revealed five main barriers inhibiting many Americans from making a more disciplined approach to setting retirement goals and putting in place the required mechanisms to achieve a secure future. These interconnected barriers are
•         Conflicting priorities: while retirement is a leading concern for a majority of the survey respondents, many cited difficulty balancing such long-term needs with other, often more immediate financial priorities.
•         A failure to communicate: financial institutions often do not effectively reach those who may need retirement planning advice and solutions, particularly via the workplace. And even when they do, they do not necessarily integrate consumers' retirement needs as part of a broader financial plan taking into account other priorities.
•         A lack of product awareness: many consumers are simply not familiar with a number of retirement product options at their disposal.
•         Mistrust in financial institutions and intermediaries: a significant number of individuals do not have a high degree of trust in financial services providers and their intermediaries to offer objective advice and deliver on what they promise to serve individuals' retirement needs. 
•         The "do-it-myself" mentality: many consumers either do not want or feel they do not need professional advice in retirement planning. For many, this decision may be short-sighted, given the complexity of retirement finances and the potential value an advisor could offer.
The report offers insights about each of these barriers, and suggests how the industry’s operating models and marketing approaches might need to evolve so that financial services providers can more effectively reach and serve consumers in tackling their retirement needs. Potentially, many of these barriers can be overcome by adopting a more holistic approach, in which retirement needs are addressed early in a customer's lifecycle, but in conjunction with other financial priorities.
5.       MICROSOFT RELEASES REPORT ON LAW ENFORCEMENT REQUESTS:  For the first time, Microsoft has disclosed the number of requests it received from government law enforcement agencies for data on its hundreds of millions of customers around the world, joining the ranks of Google, Twitter and other Web businesses that publish so-called transparency reports. The report, which Microsoft told the New York Times it would update every six months, showed that law enforcement agencies in five countries -- Great Britain, France, Germany, Turkey and the United States -- accounted for 69 percent of the 70,665 requests the company received last year.  In 80 percent of requests, Microsoft provided elements of what is called noncontent data, like an account holder’s name, sex, e-mail address, I.P. address, country of residence, and data/times of data traffic.   In 2.1 percent of requests, the company disclosed the actual content of a communication, like the subject heading of an e-mail, the contents of an e-mail or a picture stored on SkyDrive, its cloud computing service. Microsoft said it disclosed to enforcement agencies in the United States contents of communications in 1,544 cases, and in 14 cases to agents in Brazil, Canada, Ireland and New Zealand.  The law enforcement requests concerned users of Microsoft services, including Hotmail,, SkyDrive, Skype and Xbox Live, where people are typically asked to enter their personal details to obtain service.
6.      HOUSEHOLD DEBT IN THE U.S.:  Debt is an important financial tool used by U.S. households to finance their purchases. Households often use their available credit in times of economic prosperity to finance large purchases -- such as a home or a vehicle -- or to pay for a household member’s education. Additionally, they may take on debt to help them get through a period of unemployment or to help pay for medical care.  In 2011, 69 percent of U.S. households held some form of debt, representing a decrease from 2000 when 74 percent of U.S. households held debt.  At the same time, median household debt has increased over the past decade: from $50,971 in 2000 to $70,000 in 2011.  This increase can be attributed to changes in secured and unsecured debt, which both increased by 30 percent between 2000 and 2011. Median secured debt (that is, debt held against real estate or motor vehicles) increased from $69,749 in 2000 to $91,000 in 2011, and median unsecured debt, (which includes credit card debt, student debt, medical debt and other loans) increased from $5,365 to $7,000. However, there was no statistically significant change in debt between 2009 and 2010. Both secured and unsecured debt decreased between 2010 and 2011: median secured debt decreased by $7,455 (8 percent), and median unsecured debt decreased by $980 (12 percent).  These data come from the U.S. Census Bureau.         

7.       RETIREMENT INCOME STRATEGIES AND EXPECTATIONS SURVEY REVEALS VARIOUS VIEWS ON RETIREMENT:  Here are some quick findings from Franklin Templeton’s 2013 Retirement Income Strategies and Expectations Survey:
•         18% currently working with an advisor expect running out of money to be their top concern during retirement. 
•         19% aged 65-74 expect inflation to be their top concern during retirement.
•         20% plan on never retiring. 
•         31% aged 45-54 have not started saving for retirement. 
•         38% who developed written income strategy have $100,001-$500,000 saved for retirement. 
•         40% aged 18-24 expect running out of money to be their top concern during retirement. 
•         44% aged 25-34 have not started saving for retirement. 
•         46% who have not started saving for retirement expect running out of money to be their top concern during retirement. 
•         55% who developed a written income strategy are confident about how much of their income will be replaced by their retirement plan at work. 
•         56% of those with 6-10 years until retirement have $100,000 or less saved for retirement. [Yikes!] 
•         58% who developed a written income strategy are confident about how much of their income will be replace by social security. 
•         62% have $50,000 or less saved for retirement.  [Double Yikes!] 
•         67% with 11-15 years until retirement are most concerned about paying for healthcare in retirement.
8.       SEVEN WEALTH-DESTROYING MANAGEMENT STYLES:  Whether running a small business or a giant corporation, leaders -- even trained MBAs -- are making major mistakes when it comes to their management styles, says  Here are the top seven mistakes management makers make:
•         The that’s not my job boss: this boss will not get his hands dirty, or even fetch his own coffee. He is a terminal excuse factory, becoming so far removed from the day-to-day operations because the little things are not in his job description.
•         The buddy boss: friendships can lead employees to believe that power has been neutralized. They hinder a boss’ ability to delegate, correct behaviors, create a sense of urgency and make tough decisions. A buddy boss allows friendships to interfere with decision making and cause productivity meltdowns.
•         Chicken little: this boss is afraid to take risks; he reacts with fear to company problems, making a mountain out of a mole hill. Not only is he assuming a position of inferiority, he is instilling a fear-stricken business mindset into his employees.
•         The inbox slave: this boss manages by sitting in front of his computer, responding only to emails, rather than to what is really happening on the office floor. He considers an e-mail response a proper fix to tangible workplace problems. He is non-interactive and a tremendous time waster. When push comes to shove, an impersonal management style fails every time.
•         Corner cutter:  this boss will sacrifice quality to save an hour or a nickel. He sets a very bad example for employees working on crucial aspects of production.
•         The do-as-I-say, not-as-I-do boss: he is known as a “long luncher” and “early exiter.”  He thinks the rules do not apply to him. Before you know it, everyone is taking long lunches, making it very difficult for a boss to discipline his staff when he does it himself. 
•         The Act of Congress boss:  this boss is so stubborn he needs an act of congress to change his view. This attitude completely shuts down feedback. This type surround himself with yes-men, preferring team members who follow blindly over ones who point out potential missteps or foreseeable bumps in the road.
9.       REVISED 60’s HITS FOR BABY BOOMERS: The Bee Gees -- How Can You Mend a Broken Hip.  
10.     PHILOSOPHY OF AMBIGUITY: Would a fly without wings be called a walk?
11.     ON THIS DAY IN HISTORY:  In 1939, Spanish Civil War ends, Madrid falls to Francisco Franco.
12.     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. 
13.     PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at




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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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