Cypen & Cypen
MAY 3, 2007
Stephen H. Cypen, Esq., Editor
1. PENSION STATUS OF S&P 500 COMPANIES SIGNIFICANTLY IMPROVES IN 2006:
Boosted by the second half mini-bull market of 2006, S&P 500 Pension Funds produced strong market returns that reduced their underfunding from $140 Billion to an estimated $36 Billion, Standard & Poors announced in its preliminary review of its 2006 Pensions & Other Post Employment Benefits Report to be released in June. Funding ratio of the S&P 500 companies is expected to increase from the .90 reported in 2005 to an estimated .98. According to S&P’s preliminary data and estimates, S&P 500 defined benefit plans as a group were $36.4 Billion underfunded for 2006, a significant improvement from the $140.4 Billion underfunded position of 2005, but still in stark contrast to the $280 Billion of overfunding posted in 1999 at height of the bull market. Funding improved to 97.5% in 2006 from 90.4% in 2005, but remains well below the 128.2% level in 1999. Fully funded plans increased to 82 in 2006 from 47 in 2005. The improved position of pensions is a direct result of a healthier market in 2006, as market returns contributed $162 Billion into the funds in addition to the $48 Billion contributed by employers and $25 Billion contributed by employees. At this point, pensions are expected to improve in both their funding status and evaluation ratios. The analysis is based upon the expectation of slightly higher interest rates and a continued, moderate improvement in the equity markets. Based upon projections, S&P expects to see 2007 pensions fully funded on an aggregate basis by year-end.
2. U.S. PLAN SPONSORS SHORE UP DEFINED CONTRIBUTION PLANS:
U.S. pension plan sponsors are overcoming some of the serious shortcomings of the defined contribution structure by adopting new products and strategies designed to transform their DC plans into more effective retirement savings vehicles for their employees, according to a new report from Greenwich Associates. As defined benefit plan sponsors in the private and public sectors struggle with a massive funding crisis, deficiencies of DC plans are becoming more apparent and more significant. For example, incomplete DC plan participation rates have left many employees lacking a retirement savings plan of any kind. Even among participants, long-term investment returns often fall short of expectations, since participants frequently lack the financial expertise required to make sound decisions, and plan sponsors have struggled to find cost-effective means of delivering education and advice. When DC plans were used largely to supplement traditional DB plans, these deficiencies were usually overlooked, or simply accepted as intrinsic to the DC structure. But many plan sponsors -- especially those who have closed their DB plans -- recognize that effectiveness of their DC plans is now perhaps the single most important determinant of the financial status of their employees in retirement. As such, they have committed themselves to overcoming these deficiencies and improving their DC plans. Greenwich Associates’ 2007 report on U.S. defined contribution retirement plans details the steps taken by plan sponsors in this regard. DC plan sponsors are adopting automatic enrollment, they are incorporating products that improvement investment returns throughout the course of an employee’s working years, they are switching to institutional products that minimize fees and they are taking steps to maximize both their own contributions and those of participants. Approximately 22% of U.S. corporate DB plans are closed to new employees, including more than a quarter of the largest (those with more than $5 Billion in plan assets). While the data do not suggest that a wave of closings is imminent, they do indicate that DB plans will continue to close at a slow but consistent rate. Almost 5% of corporate plan sponsors say they intend to close their plans to new employees in the next two to three years. In most cases, plan sponsors are relying on DC plans to make up the slack. Plan sponsors are also demonstrating their commitment to DC plans on a more fundamental level: they are increasing their own monetary contributions. Some 95% of U.S. companies with plan assets of more than $250 Million make matching contributions to their DC plans, as do 84% of smaller plans. Among large plans, nearly one in ten say they have increased their matching contributions over the past twelve months, and another 13% say they plan to increase contributions over the next one to three years. Among smaller plans, 12% have recently increased their contributions, and 16% intend to do so.
3. SOCIAL SECURITY OFFSETS -- POLICIES PUBLIC EMPLOYEES LOVE TO HATE (AND DON’T UNDERSTAND):
Are you a member of a public pension plan for employees not covered by Social Security? If so, you may be aware of two laws that can offset, or perhaps eliminate, Social Security benefits employees may be due from a spouse or may have earned on the side. The first is the Government Pension Offset, which impacts any Social Security spousal benefits employees might be due from a wife or husband’s Social Security record. The second is the Windfall Elimination Provision, which generally reduces the public employee’s own Social Security retirement benefit (see C&C Newsletter for May 1, 2003, Item 2). Employees may be affected by one or both laws. The May 2007 International Foundation of Employee Benefit Plans’ Benefits & Compensation Digest has a piece on these offsets, which is must-reading for plan participants not covered by Social Security. See next aritcle on potential repeal of GPO and WEP.
4. GPO AND WEP REPEALER BILLS INTRODUCED INTO CONGRESS:
As has been the case each year over the last four years, on January 4, 2007 two U.S. Representatives have reintroduced the Social Security Fairness Act of 2007 (H.R. 82) to repeal the Social Security Government Pension Offset and Windfall Elimination provision. The bill has broad bipartisan support, with 180 original co-sponsors. On January 9, 2007, an identical bill (S. 206) was introduced in the Senate with ten co-sponsors. In the recent past, legislation to repeal the GPO (created in 1977) and the WEP (created in 1983) has been caught up in the debate over Social Security reform, and has eluded passage. According to an Insight from GRS, the House bill now has 237 bipartisan co-sponsors and the Senate bill has 20. However, while debate over Social Security reform is less evident this year, there is growing concern over federal deficits. According to Social Security, eliminating the GPO and the WEP would cost Social Security about $62 Billion over a ten year period and increase the program’s long-term deficit by .12% of payroll. Given recent Congressional emphasis on the principle that any cost increase or tax reduction must be paid for by an offsetting revenue increase or cost reduction, prospects for passage are unclear.
5. LIKE IT OR LUMP IT:
In a recent Wall Street Journal article entitled “Pension Tension: Figuring Out When to Lump It,” the author says more Americans are facing a critical question as they reach retirement -- whether to take pension benefits as a single one-time cash payout or as a lifetime stream of monthly payments. Private companies are increasingly giving retiring employees that choice, and pension consultants say that most retirees take the lump sum when they can. For many, however, a lump sum may not be the wisest choice. People may spend down the money or invest it poorly. And depending on their life expectancy, they may well reap a greater benefit by opting for lifetime monthly payments. Historically, pensions have been paid out as a fixed sum each month until the retiree dies, with the option to take a reduced payment that continues for a spouse’s lifetime as well. But today, some 50% of the 22 million Americans with a private-sector pension have the lump-sum option, up from about 15% in 1995, with more getting it every year. If your financial adviser encourages you to take a lump sum, be wary. He may stand to make a substantial amount of money earning commissions or fees on assets you invest. Financial advisers may also be unaware of other reasons why lump sums can be a bad deal. Here are five more things to consider before taking a lump sum:
6. DON’T PUT OFF ESTATE PLANNING:
At a recent seminar sponsored by C&C client Board of Trustees of the Miami Fire Fighters' Relief and Pension Fund, your editor spoke on why everyone should have a will, regardless of the size of his estate. The point was not to let the state’s laws of descent and distribution govern distribution of your assets and other important issues. Now, we learn from Nation’s Business the common, poor excuses for avoiding estate planning:
Just a little validation.
7. ON THIS DAY:
In 1999, the Dow Jones Industrial Average (DJIA) closed above 11,000 for the first time.
8. A LITTLE TRIVIA:
At three minutes and four seconds after 2 a.m. on the 6th of May this year, the time and date will be 02:03:04 05/06/07.
9. QUOTE OF THE WEEK:
“I don’t know the key to success, but the key to failure is trying to please everybody.” Bill Cosby
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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.