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Cypen & Cypen
MAY 21, 2009

Stephen H. Cypen, Esq., Editor


The United States Supreme Court has held that an employer does not necessarily violate the Pregnancy Discrimination Act when it pays pension benefits calculated in part under an accrual rule, applied only pre-PDA, which gave less retirement credit for pregnancy than for medical leave generally.  Because AT&T’s pension payments accord with a bona fide seniority system’s terms, they are insulated from challenge under Title VII, §703(h).  That section provides it shall not be an unlawful employment practice for an employer to apply different standards of compensation pursuant to a bona fide seniority system, provided that such differences are not the result of an intention to discriminate because of sex.  From the 1960s to the mid 1970s, AT&T employees on “disability” leave got full service credit for the entire periods of absence, but those who took “personal” leaves of absence received maximum service credit of thirty days.  Leave for pregnancy was treated as personal, not disability.  In a 1976 case, the U.S. Supreme Court concluded that a disability benefit plan excluding disabilities related to pregnancy was not sex-based discrimination within the meaning of Title VII of the Civil Rights Act of 1964.  In 1978, Congress amended Title VII by passing the Pregnancy Discrimination Act, which superseded the Court’s 1976 ruling and made clear that it is discriminatory to treat pregnancy-related conditions less favorably than other medical conditions.  On the PDA’s effective date, AT&T replaced its old plan to one that provided the same service credit for pregnancy leave as for other disabilities respectively, but did not make any retroactive adjustments for pre-PDA personnel policies.  AT&T Corp. v. Hulteen, Case No. 07-543 (U.S., May 18, 2009). 


The Social Security Board of Trustees has released its annual report on financial health of the Social Security Trust Funds.  The Trustees project that program costs will exceed tax revenues in 2016, one year sooner than projected in last year’s report.  The combined assets of the Old-Age and Survivors, and Disability Insurance (OASDI) Trust Funds will be exhausted in 2037, four years earlier than projected last year.  The worsening of the long-range outlook for the Social Security program is due primarily to the recent economic downturn and faster reductions in mortality than previously assumed.  In the 2009 Annual Report to Congress, the Trustees announced: 

  • The projected point at which tax revenues will fall below program costs comes in 2016 -- one year sooner than the  estimate in last year's report. 
  • The projected point at which the Trust Funds will be exhausted comes in 2037 -- four years sooner than the estimate in last year's report. 
  • The projected actuarial deficit over the 75-year long-range period is 2.00 percent of taxable payroll -- up from 1.70 percent in last year’s report. 
  • Over the 75-year period, the Trust Funds would require additional revenue equivalent to $5.3 Trillion in today's dollars to pay all scheduled benefits. 

Other highlights of the Trustees Report include: 

  • Income including interest to the combined Old-Age and Survivors, and Disability Insurance (OASDI) Trust Funds amounted to $805 Billion ($672 Billion in net contributions, $17 Billion from taxation of benefits and $116 Billion in interest) in 2008. 
  • Total expenditures from the combined OASDI Trust Funds amounted to $625 Billion in 2008. 
  • Assets of the combined OASDI Trust Funds increased by about $180 Billion in 2008 to a total of $2.4 Trillion. 
  • During 2008, an estimated 162 million people had earnings covered by Social Security and paid payroll taxes. 
  • Social Security paid benefits of $615 Billion in calendar year 2008.  There were almost 51 million beneficiaries at the end of the calendar year. 
  • The cost of $5.7 Billion to administer the program in 2008 was a very low 0.9 percent of total expenditures. 
  • The combined Trust Fund assets earned interest at an effective annual rate of 5.1 percent in 2008. 

For your information, the Board of Trustees comprises six members.  Four serve by virtue of their positions with the federal government:  Timothy F. Geithner, Secretary of the Treasury and Managing Trustee; Michael J. Astrue, Commissioner of Social Security; Kathleen Sebelius, Secretary of Health and Human Services; and Hilda L. Solis, Secretary of Labor.  The two public trustee positions are currently vacant.  Readers can access the entire 240-page Report at     


The Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, whose members are also trustees of the Social Security Trust Funds, have released their 2009 Annual Report.  The Medicare program is the second-largest social insurance program in the U.S., with 45.2 million beneficiaries and total expenditures of $468 Billion in 2008.  The complete 245 page report is available at


Despite U.S. employees sustaining record losses in their 401(k) accounts in 2008, their 401(k) saving and investing habits showed very little change, according to an annual study by Hewitt Associates.  Still, not all workers ignored the market’s downward slide -- employee investments in equity fund allocations were at record lows last year.  Hewitt’s annual Universe Benchmarks study, which examines saving and investment behaviors of more than 2.7 million employees eligible for 401(k) plans, shows that the median rate of return during 2008 was negative 28.3%.  The average 401(k) balance dropped from $79,600 in 2007 to $57,200 at the end of 2008.  Forty-four percent lost 30% or more of their savings.  Only 11% of employees were able to break even or see a gain in their 401(k) portfolios.  Despite these monumental losses, workers continued to save.  Hewitt’s research shows that three-quarters of employees participated in their 401(k) plan in 2008, which is consistent with previous years’ findings.  The average 401(k) contribution rate dropped only marginally, from 7.7% in 2007 to 7.4% in 2008.  In fact, more employees increased their savings rate last year (15.4%) than decreased it (14.9%).  Less than 5% stopped contributing to their 401(k) plan altogether in 2008.  Eighteen percent of employees took a hardship withdrawal from their 401(k) plan in 2008.  The number of employees taking out 401(k) loans (23.1%) in 2008 remained similar to levels in prior years. 


The Center for State and Local Government Excellence recently conducted a survey among government managers.  The findings are published as “A Tidal Wave Postponed:  The Economy and Public Sector Retirements.”  The slumping economy is holding back retirement among state and local government employees.  Almost half of respondents to the survey said 20% or more of their workers are eligible to retire in the next five years.  An overwhelming majority (80%) said the economy is affecting timing of retirements.  Of them, 85% said employees are delaying retirement; 9% said employees are accelerating retirements to avoid changes that will reduce benefits; and 7% said employees are taking incentives for early retirement.  A majority of respondents said their governments do not have a formal plan to develop their workforce, while 39% said they did.  Of those with a plan, just 31% had made changes in their plans, while 54% said they had not made changes.  While delayed retirements may be good news in the short term as governments can benefit from experienced workers, when the economy rebounds and retirement-eligible employees do retire, combined with layoffs governments are currently implementing, there could be a tremendous strain on their ability to deliver services.  


The issue of retirement security remains a great concern for all Americans.  A new Issue Brief from National Institute on Retirement Security found that 83% of Americans are concerned about their ability to retire.  Yet women in particular seem to display great anxiety concerning their retirement prospects:  a full 88% of women are concerned that current economic conditions will affect their ability to achieve retirement security, as compared with just 79% of men.  Furthermore, men seem more confident that they will be able to achieve retirement security, with 78% of respondents believing this, as opposed to just 73% of female respondents.  Finally, 72% of women and 69% of men believe that it is more difficult to prepare for retirement today compared to previous generations.  Such concerns are neither surprising nor unwarranted; numerous risks facing women in retirement have been widely reported.  The Issue Brief looked at specific challenges facing women in retirement, and assesses the policies that may help to achieve retirement security for women.  Here are some key findings: 

  • Women may need to accumulate more assets for retirement than men because they tend to live longer and need additional money to avoid outliving their savings.  At the same time, women have lower wages and less access to retirement plans than men during their working years, making accumulating assets more challenging. 
  • Defined benefit pension plans can be especially beneficial to women, as they include key spousal protections and offer a lifetime income that cannot be outlived. 
  • Supplemental defined contribution savings plans offer portability of assets and can be an important supplemental savings tool for women who may move in and out of the workforce more often than men. 
  • Therefore, attaining the three-legged retirement stool of Social Security, a traditional DB pension and supplemental DC savings offers the greatest opportunity for women to achieve security in retirement. 

And we would say the same things hold true for men. 


As the financial crisis continues, it appears U.S. employers view the situation as significantly more serious than they did just six months ago.  A follow-up survey conducted by International Foundation of Employee Benefit Plans in May 2009 found that the crisis has forced both defined benefit  plan sponsors and defined contribution plan sponsors to make changes to their retirement coverage and plan design.  The survey found that the financial crisis has prompted 42% of DB plan sponsors to make changes in their strategic asset allocation -- more than double the 20% who reported having changed allocations six months earlier.  Of the DB plan sponsors that changed asset allocations as a result of the crisis, the most common changes were increasing fixed income assets (37%), reducing U.S. equity allocations (17%) and increasing alternative fund investments (13%).  In addition to changing their asset allocations, some DB plan sponsors are reexamining offerings to some or all employees.  As of May, 13% of DC plan sponsors have changed their investment product offerings as a result of the crisis -- almost double the 7% that reported executing changes six months earlier.  Of the 13% that have implemented changes, 21% added more low-risk investment choices, 18% increased diversification, 16% added life cycle/target-date funds or money market funds and 15% added government-backed options. 

Financial Times reports that the hedge fund industry, infamous for imposing high fees, is finally beginning to cut these charges amid heavy outflows and investor complaints after a year of losses.  At least three hedge funds admitted to cutting their fees for new investors, usually by lowering management fees half a percentage point to between 1% and 1.5%, and performance fees from 20% to 10%.  Here is a real surprise:  A few privileged investors have always been able to gain such favorable terms.  (No!)  However, what makes the current trend so striking is the number of special deals proliferating fast.  Fee cuts started when some funds halted redemptions during the financial crisis, offering investors fee reductions in exchange for staying in the fund.  One fund manager said his fund used to give its standard rate (2% and 20% performance fee) most of the time, but now new investors paying that much would be in the minority.  What took so long? 


Chief executives of the country’s nine largest banks had no choice but to accept capital infusions from the Treasury Department in October, according to The Associated Press.  Recently released documents contain “talking points” used by former Treasury Secretary Henry Paulson during an October 13, 2008 meeting among federal officials and executives that stressed the investments would be required “in any circumstance,” whether the banks found them appealing or not.  Paulson also told the bankers it would not be prudent to opt out of the program because doing so “would leave you vulnerable and exposed.”  It is no secret that some of the banks had to be pressured to participate in the program, with several bank CEOs saying they had been strongly encouraged to take the funds.  However, the documents are the first proof of the government’s insistence.  The outcome of that fateful meeting -- which resulted in the government’s taking direct stakes in the banks through $125 Billion in preferred stock purchases -- marked a shift in the government’s strategy of fixing the financial system.  Treasury had already decided to use a chunk of the more-than-$700 Billion financial bailout package to pay for partial ownership stakes in banks, rather than using money to buy rotten debts from financial institutions.  The idea was that investments would instill confidence in the system and get banks to lend again following the freeze of credit markets.  Banks that were initially required to accept the funds were Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., State Street Corp., Bank of New York Mellon and Bank of America Corp. (including the soon-to-be-acquired Merrill Lynch).  Paulson wanted healthy institutions that did not necessarily need capital from the government to participate in the program first in order to remove any stigma that might be associated with a bailout.  Treasury has since invested a total of almost $200 Billion in more than 550 of the nation’s banks.  Of that amount, $1.16 Billion has been returned by 12 institutions.  Several other recipients of funds, including JPMorgan and American Express Co., have stressed their desire to return the money as soon as possible.  The funds have become burdensome for banks due to increased government scrutiny and limits on compensation attached to the investment. 

As part of a wider outreach effort to educate taxpayers about benefits they will receive under the American Recovery and Reinvestment Act,  Internal Revenue Service has released new withholding adjustment procedures for pension plans.  In February, IRS issued revised withholding tables incorporating the Making Work Pay Tax Credit, one of the key provisions of the ARRA.  That change resulted in more take home pay for over 120 million American households, and provided an immediate economic stimulus.  The new procedure for pensions will make withholding more accurate for pension recipients.  While the newly-announced procedures apply only to pension payments, IRS is gearing up for a wider outreach campaign to educate pensioners and other taxpayers about withholding tables and Recovery payments.  IRS will work with partner groups to provide taxpayers information to make sure they have appropriate withholding for their situation.  IRS will also work on developing a variety of information products, including brochures, video and audio material to help educate taxpayers.  The current announcement will help some pensioners avoid a smaller refund next spring or even a balance due in limited situations.  A wide variety of factors, such as outside jobs and other earned income, can affect how much, if any, withholding is needed by people receiving a pension to satisfy their annual tax liability.  The optional adjustment procedure that may be used by those paying pensions is available in Notice 1036-P,, Additional Withholding for Pensions for 2009. Pension payors are not required to use the new procedure and may continue to use the February 2009 withholding tables.  For plans that adopt the new procedure, withholding on pension payments will be automatically adjusted with no action needed by pensioners.  IRS also encourages pension payors who choose to implement the new withholding adjustment procedures to contact retirees who previously submitted a Form W-4P, Withholding Certificate for Pension or Annuity Payments, requesting additional withholding after the February withholding tables were issued.  IR-2009-050 (May 14, 2009). 


In a letter dated May 12, 2009 to Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission, New York City’s Comptroller, who is also Chief Investment Adviser to the City’s $80 Billion pension funds, has expressed concern by the recent and ongoing developments affecting investment activities of public pension funds nationwide.  Following his State counterpart  (see C&C Newsletter for April 30, 2009, Item 8), the City Comptroller has taken appropriate steps to cause city pension funds to suspend use of placement agents in their transactions.  Nevertheless, it has become clear that improper conduct is a pervasive and systemic problem:  many placement agents are not properly registered under federal securities laws; in addition, there are indications of a critical lack of transparency in that numerous placement agents reportedly have “fee-splitting” arrangements with undisclosed parties.  Such actions, says the City Comptroller, underscore the need for broad a comprehensive reform with respect to activities of placement agents.  He also supports implementation of SEC’s 1999 proposal to prohibit investment advisors from providing compensated services to public pension funds if the advisor or certain related parties make any contributions to affected elected officials or candidates.  The Comptroller suggests that a uniform prohibition based on the one now in place for brokers and dealers engaging in the municipal securities industry needs to be promulgated as expeditiously as possible in order to increase transparency and public confidence in investment activities of all public pension funds.  Based upon an apparent new attitude in Washington, we would expect a friendly reception on this one (although, perhaps, not with as much alacrity as the City Comptroller wishes). 


Well, it did not take long for Saturday Night Live to weigh in on the Treasury Department’s stress test applied to the 19 largest U.S. banks.  To view the spoof, go to Geithner -- report on Stress Test. Will Forte as Treasury Secretary Timothy Geithner, is great, as usual.  We thank loyal reader G.F., in Jefferson City, MO, for sending us the link. 


MetLife has released its Study of Risk Management Attitudes and Aptitude Among Defined Benefit Pension Plan Sponsors.  Defined Benefit Plans in the U.S. account for $2.3 Trillion in assets, and cover nearly 42 million plan participants, of whom over 20 million are active employees.  Though shrinking in number, these traditional employee benefit plans remain an important part of the investment and retirement security landscape.  In light of this situation, it is perhaps surprising that relatively little is known about how effectively these plans are managing their risks.  At a time of great market volatility, a close examination of the full range of plan risks and tools available to manage those risks is of critical importance.  While the legacy of the extraordinary financial market events of 2008 is yet to be determined, it is certain that it will include an enduring awareness that risk management practices are only as effective as the depth of understanding of the risks themselves.  The research underlying the study was performed before the market downturn.  The downturn presents enormous challenges, and it is not suggested by any means that the study provides easy or full answers to those challenges.  The hope is that the study can provide new perspectives on risk management methodologies that can, along with other factors, help in recovery and preparing for the future.  The primary objective of the MetLife U.S. Pension Risk Behavior Index research, a quantitative study of large plan sponsors supplemented by a series of in-depth individual interviews, is to develop a baseline for the current state of risk management within DB plans, and to identify early warning signs of risk management gaps.  The study comprises two parts:  an index (which measures the extent to which plan sponsors are managing risks they believe are most important) and an analysis (which examines patterns and inter-relationships between risk attitudes and behaviors).  MetLife designed and fielded the study to encourage public dialogue around pension risk-related issues for plan fiduciaries, help plan sponsors develop a new framework for understanding risks, and explore solutions for mitigating risk exposure.  Results of the large-scale research study should be a call to action for pension plans not yet comprehensively and systematically managing risk.  Readers are encouraged to consider tactical actions and decisions in context of their impact on the enterprise -- or at least the entire DB pension plan.  An environment without commonly-accepted pension governance and risk management standards can leave plan fiduciaries in a challenging position at a time when scrutiny is arguably at its highest point in the last two decades.  Nevertheless, current market volatility and fast-changing regulations make one thing clear:  pension decision makers will continue to face new challenges.  The costs associated with an incomplete process are only likely to become greater with time, and may take on greater visibility as the “one size fits most” approach to pension plan management gives way to more firm-specific strategies driven by balance sheet, income statement or cash flow concerns rather than the more predictable and stable asset allocation and performance benchmark measures of prior years.  


Joining  other city funds see item 11 above and state funds (see C&C Newsletter for April 30, 2009, Item 8), New York City’s Fire Department Pension Fund, with about $5 Billion in assets, has suspended use of middlemen for investments.  Combined, New York City’s pension funds have assets in excess of about $80 Billion. 


The Carlyle Group, one of the largest and most politically-connected private equity funds, will pay $20 Million and make broad changes to its practices to end an inquiry by New York’s State Attorney General into its pension business.  Under the deal, Carlyle will no longer use intermediaries, known as placement agents, to gain investment business from public pension funds nationwide, and it will curtail its campaign contributions to elected officials who oversee pension funds. 


In a private letter ruling, Internal Revenue Service has concluded that an employee will not be in constructive receipt of income due solely to availability of a one-time irrevocable election to waive retiree health benefits in return for an increase in rate of pay for future services provided to the taxpayer that requested the ruling.  The taxpayer represented that the increase in an employee’s rate of pay resulting from the irrevocable waiver of retirement health insurance will apply only on a prospective basis.  Employees who irrevocably elect to forego future health benefits will not receive additional salary or taxable compensation for payroll periods for which the employee has already been paid.  PLR 200914018 (4/3/2009)


A small boy swallowed some coins and was taken to a hospital. When his grandmother telephoned to ask how he was, a nurse said,’'No change yet.” 


“You do not really understand something unless you can explain it to your grandmother.”  Albert Einstein (The quote also sounds like something Warren Buffett would say.)


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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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