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Cypen & Cypen
March 26, 2015

Stephen H. Cypen, Esq., Editor

1. THE GREAT AMERICAN 401(K) EXPERIMENT IS A FAILURE:The median amount in a 401(k) savings account is $18,433, according to Employee Benefit Research Institute. Almost 40% of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop. Older workers do tend to have more savings. At Vanguard, for example, the median for savers aged 55 to 64 in 2013 was $76,381. But even at that level, millions of workers nearing retirement are on track to leave the workforce with savings that do not even approach what they will need for health care, let alone daily living. Not surprisingly, retirement is now Americans' top financial worry. Time to stick a fork in it; the great American 401(k) experiment is cooked. In America, when we had disability and defined benefit plans, you actually had an equality of retirement period. Now the rich can retire and workers have to work until they die, said Teresa Ghilarducci, a labor economist at the New School for Social Research, who has proposed eliminating tax breaks for 401(k)s and using the money saved to create government-run retirement plans. It was not supposed to work out this way. The 401(k) account came into being quietly, as a clause in the Revenue Act of 1978. The clause said employees could choose to defer some compensation until retirement, and they would not be taxed until that time. (Companies had long offered deferred compensation arrangements, but employers and IRS had been going back and forth about their tax treatment.) The 401(k) was never designed as the nation's primary retirement system. It came to be that as a historical accident. Somebody realized the provision could be used as a retirement savings vehicle for all employees. In 1981, IRS clarified that 401(k) participants could defer regular wages, not just bonuses, and the plans began to proliferate. The rest is history. A professor at Harvard Law School, who was a senior official at the Treasury Department when 401(k) accounts came into being, is quoted as saying: “on balance, I don't think it was a big plus, the accounts were created; I don't take credit for it. I try to avoid the blame.” Too late.

2.  IS THE GOOD OLD-FASHION PENSION DYING?: Once common across many American industries, traditional pensions no longer rule the employee benefit landscape. But, according to Investor’s Business Daily, given the popularity of job hopping in many 21st century careers, the death knell of pensions may not matter as much. While pensions can vary, the typical plan provides a fixed monthly benefit for the rest of a retiree's life, based on a formula that rewards years of service at the same employer. Known as defined benefit plans, they define the amount of potential payouts based on variables that you plug into the formula. To get full benefits, employees typically have to stay on the job for many years. If they leave earlier, they give up most or all of those benefits, which contrasts with defined contribution accounts like 401(k)s, which are more portable. As workers change employers with more frequency, pensions lose their allure. Job hoppers increase their retirement savings by participating in defined contribution plans like 401(k)s that are designed for portability. The point where defined benefit plans begin to provide employees with a better deal than defined contribution plans is after 15 or 20 years with the same employer.

3. HOW PRIVATE EQUITY CAN GAME YOUR PENSION: Bloomberg recently examined several private equity fund documents, which showed the industry often labels as “trade secrets” information that has as much to do with high fees, weak oversight and conflicts of interest as it does with business strategies. Here are some excerpts from those documents:

  • Legalese: asset valuations will be determined by managers. The fund does not intend to commission periodic appraisals of the investments and will not be obligated to provide fair market value estimates.

What it means: fund managers decide how much their assets are worth.

  • Legalese: managers expect that affiliate services will be provided at competitive rates but the compensation may not be determined through arm's length negotiation.

What it means: private equity funds often buy troubled companies and try to restructure them. In the process, they hire affiliates in which the private equity partners may have financial interests to provide administrative and other services. SEC has found that such related party dealings often come at a steep cost that cuts into the returns paid to pensions and other fund investors.

  • Legalese: a law firm wholly owned by the general partner, general counsel and chief compliance officer, also has an arrangement with five of the partners funds to act as counsel when such funds purchase or sell portfolio companies. There may be a conflict between investors economic interest and that which is in the best interests of the funds.

What that means: the chief compliance officer freelances at your expense.

  • Legalese: fund managers can invest in companies in which they have a preexisting interest. They may invest in other funds which may compete with the fund for investments, management's time and in other ways. It may be difficult for investors to subject the behavior of fund managers to close scrutiny. Investors will ultimately be heavily dependent upon the good faith of the fund managers.

What it means: yes, we self-deal. But you must still trust us.

  • Legalese: in accordance with common industry practice, managers may enter into “side letters” that grant certain investors rights, benefits and privileges not made available to other investors. Such agreements will be disclosed only to investors who have negotiated rights to review such agreements.

What it means: it is industry practice for some investors to profit at the expense of others.

  • Legalese: the fund is not subject to the Investment Company Act, which, among other things, requires investment companies to have independent directors and to maintain their assets and securities in the custody of a qualified custodian.

What it means: rules? Not for us.

  • Legalese: if a public records access law requires a limited partner to disclose information, the limited partner must take all reasonable steps requested by the partner to oppose and prevent disclosure.

What it means: public officials must fight for our secrecy.

Private equity officials say to run their businesses, they have to keep virtually everything about their operations a secret, including their fees.  They often require the public pension investing in their funds to sign confidentiality agreements and join them in resisting freedom of information act requests, open record requests and legal actions by pension participants, taxpayers and anyone else seeking details about the agreements. They say you cannot copyright an idea. You decide.

: The state of Rhode Island has made a new proposal for a settlement of litigation brought by unions and retirees over changes to state employee pension benefits. According to, the terms of settlement include:

  • Two, one-time $500 stipends to current retirees, with the first payment a month after enactment, and the second one a year later;
  • A once-every-four years arrears increase in the pensions paid to current retirees on their first $30,000 in retirement benefits, as opposed to the first $25,000; and
  • A tweak in the retirement age to allow workers to retire with full benefits at age 65 after 30 years of service; age 64 (31 years): age 63 (32 years) and age 62 (33 years).

Also under discussion is a proposal to allow police officers and firefighters to retire with full benefits at age 50, after 25 years of service, and at any age, after 27 years of service. The latest round of pension reform in Rhode Island, passed in November 2011, sparked several lawsuits by both unions and retirees (See C & C Newsletter for September 22, 2011, Item 1). A settlement agreement on the lawsuits was reached last year, but police union members rejected the deal, prompting the judge to order the parties back to mediation. Meanwhile, a Rhode Island state court denied the state’s motion to dismiss the challenge, rejecting the state’s argument that no contractual relationship existed between it and the plaintiffs at the time the pension reform was enacted. At press time, union members are voting on whether to accept the settlement.

: One of the major trends in the U.S. workforce during the early 21st century is seniors’ expanding participation in the labor force. As reported by, people who qualify for AARP membership have been retiring later and are more likely to be in the labor force now than people the same age were during the 1990s tech boom. There have been significant changes for all seniors, but the increase is most striking among people 65 and older. For 75-year-olds, labor-force participation has risen to 14% from 9% since 2000. The number of people age 65 to 79 in the workforce has grown by 3.5 million. Of that, 1.6 million is due to the growing population in that age group, and 1.9 million is due to the increased propensity to work. The first baby boomers will turn 70 in 2017, and the number of retired Americans will skyrocket. Not only are the baby boomers an unusually large generation, but the Silent Generation that immediately preceded the boomers was a particularly small one, born in the lean years of the 1930s and ’40s. To grasp the magnitude of this change, consider that there were 3.5 million 65-year-olds in 2013, compared with just 2 million in 2000. The United States is going to be a very different place, demographically, for the next 30 years. Seniors putting in more years at the office will help ease that transition, cover a small part of Social Security’s deficit and allow more older Americans self-sufficiency in their retirement.

6. EMPTY NESTERS HAVE A LOT TO LEARN ABOUT RETIREMENT SAVING: says you might think Americans' ability to retire rests on the health of the economy or on government policy. Wrong: it depends on whether or not parents spend less money and save more when their kids are on their own. Kids play a big role in the way academics -- and, eventually, financial planners and other advisers -- assess how much money you need to retire. How big that role is, though, is up for debate. A new study by the Center for Retirement Research at Boston College ran the numbers using two competing ways of measuring the impact. One result points to potential old-age Armageddon. The other? Retirement Arcadia, or close to it. One method assumes that parents still spend the same amount when the kids leave, just more on the two of them. Using that projection, and others, CRR's calculations suggest that 52% of U.S. households may not be able to maintain their standard of living in retirement. The reason it is so hard is that if households want to ensure they can spend the same amount at age 90 as they did at age 60, they have to save a ton, and people find it hard to save that much. But there is another way empty-nesters' spending might change. This alternative approach assumes, among other things, that prudent parents save a lot more when kids move out and household expenses go down, and that they will spend less in old age. If parents save a lot with the kids gone and spend less as they approach their 80s, it improves the retirement forecast considerably, because if they are spending less, they need less in savings. Look at it this way, and the 52% of households at risk shrinks to about 17%. For all the research on retirement finances, academics do not really know which of these models is accurate or whether there is a third or a fourth option that is better yet. Actually, people know but they know different things. The people on each side of the discussion are very sure their position is correct. Together with a research economist at the Social Security Administration, experts are working on a paper that will analyze 401(k) amounts included on W-2 tax forms. This exercise may show what happens to a parent's 401(k) contribution rate when the kids leave.

7. IRS WEBINAR ON RETIREMENT PLAN LOANS TO PARTICIPANTS: Internal Revenue Service puts on free phone forums and webinars featuring IRS employees discussing retirement plan topics. On March 26, 2015, at 2:00 p.m. Eastern Time, IRS will present “Retirement Plan Loans to Participants.” Learn about

  • What type of plans can make loans to participants
  • What are the conditions a plan must follow to make loans
  • What are the required terms of a plan loan
  • How plan loans may be taxable under IRC Section 72(p)
  • When plan loans violate the prohibited transaction rules of IRC Section 4975
  • How to fix plan errors involving loans

Estimated duration is sixty minutes. Register and you will receive a confirmation email:

8. DILLERISMS: Old age is when the liver spots show through your gloves. Phyllis Diller

9. STUFF YOU DID NOT KNOW: Which day of the year, are more collect calls made than any other day of the year? Father’s Day. 

10. TODAY IN HISTORY: In 1953, Dr. Jonas Salk announces vaccine to prevent polio.

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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