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Cypen & Cypen
April 24, 2014

Stephen H. Cypen, Esq., Editor

1. PUBLIC PLAN INVESTMENTS ARE DOING JUST FINE, THANK YOU VERY MUCH: National Association of State Retirement Administrators has issued an updated brief on public pension plan investment return assumptions. As of December 31, 2013, state and local government retirement systems held assets of $3.88 trillion. These assets are held in trust and invested to prefund the cost of pension benefits. The investment return on these assets matters, as investment earnings account for a majority of public pension financing. A shortfall in long term expected investment earnings must be made up by higher contributions or reduced benefits. Funding a pension benefit requires use of projections, known as actuarial assumptions, about future events. Actuarial assumptions fall into one of two broad categories: demographic and economic. Demographic assumptions are those pertaining to a pension plan’s membership, such as changes in the number of working and retired plan participants; when participants will retire; and how long they will live after they retire. Economic assumptions pertain to such factors as the rate of wage growth and the investment return on the fund’s assets. As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long term. The brief discusses how investment return assumptions are established and evaluated, and compares those assumptions with public funds’ actual investment experience. Public pension fund investment return assumptions have been the focus of growing attention in recent years. Some critics of public pension investment return assumptions say that current low interest rates and volatile investment markets require public pension funds to take on too much investment risk to achieve their assumption. Because investment earnings account for a majority of revenue for a typical public pension fund, accuracy of the assumption has a major effect on the plan’s finances and actuarial funding level. An investment return assumption that is set too low will overstate liabilities and costs, causing current taxpayers to be overcharged and future taxpayers to be undercharged. A rate set too high will understate liabilities, undercharging current taxpayers, at the expense of future taxpayers. An assumption that is significantly wrong in either direction will cause a misallocation of resources, and unfairly distribute costs among generations of taxpayers. Although public pension funds, like other investors, experienced subpar returns in the wake of the 2008-09 decline in global equity values, median public pension fund returns over longer periods met or exceeded the assumed rates used by most plans. At 9.0%, the median annualized investment return for the 25-year period ending December 31, 2013, exceeds the average assumption of 7.72%, while the 10-year, 7.0% return, is slightly below. (At 8.1%, the 20-year period is well ahead.) Nevertheless, more than one-half of plans measured in the public fund survey have reduced their investment return assumption since fiscal year 2008.  Here is the NASRA’s conclusion:
Over the last 25 years, a period that has included three economic recessions and four years when median public pension fund investment returns were negative, public pension funds have exceeded their assumed rates of investment return. Changes in economic and financial conditions are causing many public plans to reconsider their investment return assumption. Such a consideration must include a range of financial and economic factors while remaining consistent with the long timeframe under which plans operate.
2. ANALYSIS OF ECONOMIC PRESSURES FACING FUTURE RETIREES: National Institute of Retirement Security has published “Financial Security Scorecard: A State-by-State Analysis of Economic Pressures Facing Future Retirees.” As Americans increasingly worry about their retirement prospects, states play an important and growing role in retirement security policy. States already manage long-term care programs for the elderly through Medicaid. Concerned about the impact of future elder poverty on state and local budgets and their local economies, some states are exploring creation of low-cost and low-risk retirement savings plans for private sector workers who lack access to pensions or 401(k)s on the job. Other states have developed programs to help older workers find work. The report presents a financial security scorecard, designed to inform state level stakeholders and policymakers regarding the financial security outlook for future retirees, and to help identify potential areas of focus for state-based policy interventions to improve retirement prospects. Specifically, the scorecard ranks each of the 50 states in three sources of potential economic pressures for future retirees, as measured through eight specific variables:

  • potential retirement income (measured by private sector workplace retirement plan participation, estimated average 401(k) account balances and effective tax rates on pension income),
  • major retiree costs, focused on housing and health care costs for older households (measured by Medicare out-of pocket costs, Medicaid generosity, and older households’ housing cost burden) and
  • labor market conditions for older workers (measured by unemployment and median earnings among older workers).

All states have room for improvement regardless of how they rank. Here are some scorecard findings:

  • There is room for improvement in all states in one or more measure of financial security for future retirees.
  • All three potential sources of economic insecurity for future retirees deserve policy attention.
  • Improving the future financial security of an aging workforce requires ensuring good employment options for older workers.
  • States must remain vigilant over time.

We found one particular statistic to be quite scary: for the years 2000, 2007 and 2012, the average defined contribution retirement account balances were, respectively, $38,611, $24,768 and $23,859.  Florida’s ranking went from number 1, to number 40, to its present 43.  Not a pretty picture.

3. THE DEFINED CONTRIBUTION CHALLENGE: The retirement landscape has changed, according to “Investing for Retirement: The Defined Contribution Challenge,” from Defined benefit plans, the historical workhorse of the retirement system, had the advantage of access to corporate profitability. In the event that financial asset returns fell short of design expectations, this access mitigated the impact on workers’ retirement. But, as DB plans have given way to defined contribution programs, the burden being placed on financial returns in satisfying retirement needs has increased. Target date funds are rapidly becoming the workhorse for DCs. These funds have grown substantially in recent years, partly as a result of automatic enrollment made possible by the Pension Protection Act of 2006. By and large, current target date funds resemble the old investment advisor adage that stock weight should be about 110, minus a person’s age. While this satisfies the common sense intuition that, all things being equal, weight in stocks should go down as a person ages, there are a number of problems with this approach. The paper focuses on two in particular. First, the standard solution is inflexible: all things are rarely equal. To address this shortcoming, the paper introduces a framework based on a common sense definition of risk: not having enough wealth in retirement. The goal is not to put investors into yachts, but rather to increase the odds that they have the appropriate level of resources in retirement. Viewing risk this way leads to highly customizable solutions that under certain equilibrium assumptions are consistent with current solutions but offer far more flexibility and insight. Second, the standard solutions do not recognize that expected returns vary over time. The paper shows that dynamic asset allocation -- moving your assets -- is an essential part of achieving retirement goals.

4. SSA ELIMINATES LETTER FORWARDING SERVICE: The Social Security Administration announces elimination of its letter forwarding service. Letter forwarding is a service SSA has provided to the public since 1945. It is not a program related activity under the Social Security Act.  Therefore, SSA can stop the letter forwarding service. (The cessation date for letter forwarding services is 30 days after publication in the Federal Register, which occurred on April 17, 2014). In recent years, the internet has offered a rapid expansion of locator resources via free social media websites and for-pay locator services. The public now has widespread access to the internet, and the ability to locate individuals without relying on SSA’s letter forwarding services. Based on availability of the alternative locator resources and the effects it would be as a cost savings measure, the letter forwarding service is being discontinued. The decision is in line with the Internal Revenue Service, which successfully eliminated part of its letter forwarding workload as August 31, 2012. [Docket No. 2013-0049]
5. DB PENSION PLAN SPONSORSHIP MAY BE RIGHT FOR YOUR ORGANIZATION: When the chief executive asks why his company sponsors a defined benefit plan, the answer for some companies may be “it cost-effectively provides additional rewards to some of our most valuable employees, and it enables those employees to retire in an orderly manner. The additional administrative costs and financial risks of sponsorship are more than offset by the resulting value to the organization of these workforce management advantages.” A new Perspectives paper from Towers Watson outlines how various employees would fare based on participation in a DB plus defined contribution versus a DC only plan. It also provides information to address whether the workforce planning advantages of DB plans justify the cost and risk of plan sponsorship. Some key insights are

  • The most common short term issue that organizations face is too many employees.
  • A typical employer’s staffing needs decline during recessionary times and increase during boom times.
  • Thus, the potential delay in retirement for DC only employees occurs at the worst time for the employer -- when fewer employees are needed -- and the acceleration in retirement that may occur in boom times occurs when finding replacement employees is the most difficult.

Hmmmm...never thought of it quite that way.

6. WHY ARE MANY MEMBERS OF CONGRESS AMONG THE FEW AMERICANS WHO CAN RETIRE?: Sen. Tom Harkin (D-Iowa) deserves praise for attempting to tackle our retirement crisis -- one of the few politicians to do so. However, according to, rather than mandate that all employers offer a retirement plan and contribute the equivalent of at least 3% of pay, starting in 2018, Harkin's legislation would simply allow employees who are not covered by a plan to contribute 6% of their own paycheck to a retirement account. (Actually, individuals can already accomplish such program if they invest in a mutual fund on their own!) The lack of mandates for an adequate retirement plan is ironic, given that most long serving members of Congress look forward to more generous pensions than the vast majority of their constituents. A member of Congress retiring with 20 years of service under Federal Employees' Retirement System and a high three year average salary of $174,000 will receive an initial annual FERS pension of more than $59,000 -- on top of Social Security. Compare that pension paycheck to the typical American worker. According to the Federal Reserve Board, the median amount saved in 401(k)s and other savings for those age 55 to 64 was $100,000 in 2010. (In fact, other sources indicate the number is far less.) Observing the 4% withdrawal rule, a nest egg of $100,000 turns into a measly annual income of $4,000, or about $77 a week. Even those Americans covered by a regular pension are likely to face pension poverty, as a result of the stock market crash and benefit cutbacks. The United States has one of the least generous pension systems in the advanced world: only six member countries of the OECD have lower pension wealth. The only thing more scary than a retirement crisis is enabling an industry to sell products that cannot make an empty nest egg full. (Watch a television commercial some time.)

7. CORPORATE PENSION VOLATILITY OFFSETS CEO COMPENSATION: With a booming 2013 stock market, all indications point to an increase in corporate growth. But, according to Employee Benefit News, the unpredictable nature of corporate pension assets in 2013 proved to drag down total CEO compensation pool for the nation’s largest corporations. Last year, total pay for CEO’s of S&P 1500 companies rose less than 1%, down from the 5.7% median increase CEOs received in 2012. A compensation officer explains how companies are structuring executive pay programs at a time when many are still struggling to deal with declining pension values. The rising interest rates caused a lot of companies to move downward relative to the values they were reporting in earlier years. So, when looking at year-over-year change, there are significant drops impacting the total value of pay. Stock based awards, annual bonuses and long term incentives were listed as the most common CEO compensation structures. During 2013, Mercer reported that corporate pensions overall finished the year at a 95% funded ratio, up 21% for the year. S&P 1500 defined benefit plans reported an aggregate of $1.8 trillion in total assets. 
8. TOP CEOS MAKE 331 TIMES THE AVERAGE WORKER. BUT DOES ANYONE CARE?: Lest and our readers feel sorry for chief executive officers after reading Item 7 above,BloombergBusinessweek reports that chief executives of companies in the Standard & Poor’s 500 stock index made an average $11.7 million last year. The average production and nonsupervisory worker made a whopping $35,239. The numbers mean that CEOs are paid 331 times the average worker. (Now, mind you, it is 331 times the average worker and not merely 331%.) The difference may be shocking, especially in the face of a shrinking American middle class. The U.S. Securities and Exchange Commission recently said it wants companies to disclose the CEO-worker pay ratio, but does such information make a difference? Some observers doubt the SEC proposal, if implemented, will lead shareholders to rise up in anger. Shareholders are not generally in it for the workers, and the transparency might actually encourage them to offer executives a raise if they are coming in lower than competitors. In fact, this year’s rate is down from 354 times last year, due mostly to lower interest rates moderating executives’ pension plans, rather than to any CEO salary reductions, Nevertheless, the rate is still dramatically up from 30 years ago, when executives earned 46 times more than the average worker. Next time you hear a talk show host horribilize about a $10-or-so minimum wage, just think about what he is making.   
9. STATE CAN PROHIBIT USE OF RACE-BASED PREFERENCES ON ADMISSION TO STATE UNIVERSITIES: After the United States Supreme Court decided that the University of Michigan’s undergraduate admissions plan’s use of race-based preferences violated the Equal Protection Clause, but that its law school admission plan’s limited use did not, Michigan voters adopted a new section of the state constitution, prohibiting use of race-based preferences in the admissions process for state universities. The district court upheld the proposal, but the Sixth Circuit reversed, concluding that it violated Supreme Court precedent. On certiorari, the Supreme Court reversed. Justice Kennedy, with Chief Justice Roberts and Justice Alito, reasoned that the principle that consideration in of race in admissions is permissible when certain conditions are met was not challenged. Rather, the issue was whether, and how, state voters may choose to prohibit consideration of such racial preferences. The decision by Michigan voters reflects an ongoing national dialogue; there was no infliction of a specific injury of type at issue in cases cited by the Sixth Circuit. Individual liberty has constitutional protection, but the Constitution also embraces the right of citizens to act through a lawful electoral process, as Michigan voters did. Justices Scalia and Thomas stated the question here, as in every case in which neutral state action is said to deny equal protection on account of race, is whether the challenged action reflects a racially discriminatory purpose. Stating that it did not, the Justices held that the proposition that a facially neutral law may deny equal protection solely because it has a disparate racial impact has been squarely and soundly rejected. Justice Breyer agreed that the amendment is consistent with the Equal Protection Clause, but reasoned the amendment applied only to, and forbids, race-conscious admissions programs that consider race solely in order to obtain the educational benefits of a diverse student body; the Constitution permits, but does not require, use of that kind of race-conscious program. The ballot box, not the courts, is the instrument for resolving debates about such programs. This case does not involve a diminution of the minority’s ability to participate in the political process. Schuette, Attorney General Of Michigan v. Coalition To Defend Affirmative Action, Integration And Immigration Rights And Fight For Equality By Any Means Necessary, Case No. 12-682 (U.S. April 22, 2014). This summary was provided by Justia.

10. FLORIDA DIVISION OF RETIREMENT 35TH ANNUAL POLICE OFFICERS’ AND FIREFIGHTERS’ PENSION TRUSTEES’ SCHOOL: The 35th Annual Police Officers' and Firefighters' Pension Trustees’ School will take place on May 12-14, 2014. You may access information and updates about Trustees’ School, including area maps, a copy of the program when completed and links to register at the Aloft Tallahassee Downtown. Please continue to check the website for updates regarding the program at All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of the Chapters 175 and 185 pension plans should take advantage of this unique, insightful and informative program.
11. ADULT TRUTHS: Obituaries would be a lot more interesting if they told you how the person died.

12. TODAY IN HISTORY: In 1956, AL ump Frank Umont is 1st to wear glasses in a regular season game.

13. 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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