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Cypen & Cypen
MAY 31, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


TIAA-CREF manages over $400 Billion of retirement issues on behalf of 3.2 million participants in more than 15,000 non-profit institutions nationwide. The mission of the TIAA-CREF Institute, part of TIAA-CREF, is to foster and conduct objective research, to build knowledge, to support thought leadership and to enhance understanding of strategic issues related to higher education and lifelong financial security. The Institute has released its publication on Designing Public-Sector Pensions for the 21st Century, a risk-managed approach. Public policy makers are often bombarded with emotion-laden arguments as to the relative merits of defined benefit and defined contribution plan designs. Here are definitions of those terms:

  • Defined benefit plans define clearly how much monthly benefit a participant will receive from his employer when he retires. The benefit may even be stated as an exact dollar amount. In the private sector, a participant is generally not required to make contributions to a DB plan, but most public sector funds require employee contributions. Defined benefit plans do not require the participant to make investment decisions. Typically, the risks of meeting the promised benefits falls to the plan sponsor, who is responsible for adequately funding the program and managing money invested to support the plan.
  • Defined contribution plans, on the other hand, define clearly how much the sponsor and the participant can or must contribute to an individual account created for each participant. When the employee retires, retirement benefits are based on the total amount contributed plus investment gains, minus expenses and losses. Typically, the employee makes choices about how the money should be invested and takes the risk of poor investment performance if his or her choices do not perform well.

There are anti-defined benefit and anti-defined contribution rhetoric, which add a great deal of heat but little light to the subject:

  • Defined benefit plans are the "dinosaurs" of retirement plans on the verge of extinction.
  • Public sector DB plans are "excessive" or "extravagant."
  • If private sector employees do not have DB plans why should public employees?
  • Public sector DB plans are inherently subject to abuse by politicians and trustees.
  • DB plans are less moral than DC plans because they do not encourage personal wealth building.

* * *

  • Risky defined contribution plans will increase poverty rates during retirement.
  • DC plans will make destitute the surviving children and spouses of police and firefighters who gave their lives on the job.


  • DC plans will line the pockets of greedy investment providers.
  • State and local economies will suffer if DC plans replace DB plans.
  • DC plans will undermine the actuarial funding of existing DB plans.

The executive summary indicates that the history of public employee defined benefit pension systems in this country can and should be viewed as a tale of long-term success. Since their beginnings in the early part of last century, these plans have served plan sponsors, participants, beneficiaries and taxpayers very well as effective vehicles for delivering cost-efficient, adequate and secure retirement benefits for employees of state and local governments. Through their long history and with only a few exceptions, state and local government defined benefit pension plans have met the benefits and financial objectives for which they were originally established. The retirement income security provided for many covered employees could not have been achieved without the successful establishment and operation of the public employee defined benefit retirement systems that serve nine out of ten state and local government full-time employees. Most public employee defined benefit retirement systems remain well funded and financially sound. But an increasing number are not. Many of the state and local governments that sponsor plans, even those that are well funded, are watching their budges become strained to the breaking point, partially because of the increasing cost of supporting growing numbers of workers in retirement. Now, at a time of uncertain future economic growth, record federal deficits and burgeoning costs of entitlement programs, some public sector executives and legislators are asking if public sector defined benefit plans can be sustained going forward. Although many private sector companies are making hard decisions to cut back on pension and retiree health promises just to survive, the concerns and purposes of governments are not the same as the private sector. It would be a mistake for public policy makers to assume that the trend in the private sector to move swiftly to offload defined benefit pension risk to workers is the right decision for the public sector. It would also be a mistake for public sector policy makers not to reassess just how much pension funding risk they can realistically accept going forward. Taxpayers will hold their feet to the fire, at least to consider plan designs that share the risk for the future. The scholarly paper seeks to show how new risk-managed retirement designs can protect public sector workers at the same time as they help proportion risk more evenly between sponsors and participants to avoid the fiscal disconnects that, in some cases, threaten fiscal stability for a growing number of government bodies. The entire 63-page piece is available at


PR Newswire US reports on a new poll that found 69% of employed U.S. adults receive some type of retirement or other savings benefit from their employer, and that just under half of employed adults can participate in a 401(k) plan. Thirty-six percent say their employer matches their 401(k) contributions, and 29% have a pension plan. Thirteen percent have the opportunity to buy company stock, while 9% can participate in their company’s stock-option plan. Those with more education are in jobs that offer a greater variety of financial planning and retirement-preparation opportunities and incentives. For example, 33% of employed respondents who were college graduates say their employer provides a generous company match or 401(k) plan contributions, compared with 16% of those with high-school education or less. Further, one-quarter of college grads say that their employer invites professionals to provide financial or retirement-planning workshops. Only 8% of those with a high-school education or less have the same opportunity.


For the first year in this millenium, pension funded status during 2006 was a win-win situation, according to Milliman’s 2007 Pension Funding Study. Strong funded status improvement fueled by further strong investment returns beating expectations (12.8% vs. 8.4%) boosted pension fund assets at the same time that increases in interest rates decreased the value of pension obligations. Although new accounting rules forced most companies to reduce shareholder equity to recognize defined benefit pensions and other post-retirement benefits, that reduction was about half of the impact that had been projected last year, due to the win-win year for the funded status of the plans. Milliman’s 7th annual study of the financial reports of 100 large U.S. corporations that sponsor defined benefit plans shows that these companies had pension plan assets of almost $1.3 Trillion and annual pension costs of $26.4 Billion. The funded status of the pension plans improved significantly during 2006, almost reaching 100%, as liability increases were moderated or reversed by increases in discount rates, while strong asset returns boosted assets.


How many times have you heard that? Well, there is an office in the Internal Revenue Service where people want to hear your complaints and will stand up for you, according to Entrepreneur. Taxpayer Advocate Service is an independent office within IRS. Many cases the service takes involve IRS actions that cause undue hardships on a taxpayer. The office gets results. In the fiscal year ended September 30, 2006, it handled more than 242,000 cases, and was able to resolve 70% of those in favor of the taxpayers. If you think you’re not getting a fair shake, call one of the 75 Taxpayer Advocate branch offices. Start by calling 877.777.4778, or by filling out and faxing IRS Form 911. (911? How appropriate.)


“The race may not be to the swift nor the victory to the strong, but that’s how you bet.” Damon Runyon

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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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