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Cypen & Cypen
MAY 6, 2010

Stephen H. Cypen, Esq., Editor

1.  401(K) ACCOUNTS ARE NOT RETIREMENT PLANS:  Florida Public Pension Trustees Association has issued a significant paper entitled "401(k) Accounts Are Not Retirement Plans."  Congress created 401(k) accounts in 1978 as a way to close a loophole on executive bonuses.  Such accounts were never intended as a replacement for traditional employer-guaranteed defined benefit pension plans -- but today that is how they are often perceived.  As a result, many American workers will never have sufficient funds to retire as they would with a traditional or defined benefit retirement plan. Failure of 401(k) accounts as a primary retirement vehicle can be attributed to three fundamental and incontestable shortcomings: 

  • When saving for retirement becomes optional, the average American grossly undersaves or simply opts out altogether. 
  • Defined contribution accounts compel average Americans, who are untrained and inexperienced in managing securities, to become expert portfolio managers. 
  • The 401(k) structure in its current form encourages financial failure.

Numerous employers across the United States have switched from the defined contribution model to a defined benefit plan due to inadequacy of plan benefits or increased costs. The change was made to provide reasonable retirement benefits and attract/retain quality employees -- an approach that has succeeded.  Nationally, research shows employees cite retirement benefits as a loyalty factor.  Turnover and employee resignations are reduced. Employee retention translates into increased productivity by an experienced workforce. Good pensions facilitate recruitment and retention of specialized workers to deliver critical public services.  In Florida, the evidence is clear that defined benefit plans save taxpayers money.  Defined benefit plans are efficient, effective and provide governments with ability to recruit and train highly qualified individuals and provide them with retirement security, disability and death benefits without additional costs.  Further, the nearly 1.2 million government retirees and active employees provide vital services to residents of Florida and are an economic generator of tax revenues, goods and services.  Defined benefit plans are good for taxpayers, governments, employees and the economy.  Defined contribution (401(k) accounts) are not retirement plans, were never intended to be retirement plans and cannot provide retirement security.  Those who argue differently are misleading taxpayers with short-term fixes that will have long-term consequences to taxpayers, retirees and society in general.  Your editor and his associate, Alison Bieler, were honored to have been part of a small group who contributed to the paper.  Mega-kudos go to FPPTA head, the inimitable Ray Edmondson, and to the incomparable Fred Nesbitt, both of whom spearheaded this very worthy project.  Read it all at  See also, items 10 and 11, below. 

 2. UPON RETURN TO BARGAINING UNIT, EMPLOYEES ENTITLED TO SENIORITY AS OF TIME THEY WERE  PROMOTED OUT OF BARGAINING UNIT:  Cortes and others appealed a Public Employees Relations Commission order affirming General Counsel's summary dismissal of amended charges.  They were employees who had been promoted out of the union.  After their new positions were abolished, they were required to returned to their former positions.  The union placed them at the bottom of the seniority list (below 150 employees), ignoring the date the employees had been hired.  After being told that there would be no changes made in their seniority, the employees, pro se, filed unfair labor practice charges against the union with PERC.  PERC's General Counsel summarily dismissed the charges because PERC could not determine whether the union prevented the employees from filing a grievance regarding their placement on the seniority list.  PERC issued an Order Affirming the General Counsel's Summary Dismissal of the Amended Charges, finding that the General Counsel could not determine whether a breach of duty of fair representation occurred because, the employees failed to file grievances, and could not be determined whether the union's failure to process the grievances was arbitrary, discriminatory or in bad faith. On appeal, the employees contended they were improperly placed at the bottom of the seniority list and that the union officials had a duty to place them on the seniority list in accordance with the applicable contract.  The subject collective bargaining agreement clearly provided that an employee who is promoted, or accepts a non-bargaining position, shall retain the seniority he had at the time he was promoted.  Thus, in reversing, the appellate court held that the union had a duty to the employees as members of the union properly to calculate their seniority dates.  PERC also argued that its decision was based on the fact that it could not be determined whether a breach of duty of fair representation occurred because the employees failed to file grievances and there was no allegation that the employees were prevented from filing a grievance.  In response, the appellate court held that there was nothing in the collective bargaining agreement that required employees to file a grievance.  In fact, there is no authority that requires employees to file a grievance with the union when their grievance is with the union itself. Finally, pursuant to Section 447.504(3), Florida Statutes, the court awarded appellate attorneys' fees to be paid by the union to the employees.  Cortes v. Public Employees Relations Commission, 35 Fla. L. Weekly D961 (Fla. 3d DCA, April 28, 2010). 

 3. RETROACTIVE SORNA RULE NOT INVALID:  Dean appealed his guilty plea to the charge of having traveled in interstate commerce and knowingly failing to register as a sex offender under the Sex Offender Registration and Notification Act.  (Congress enacted SORNA, effective July 27, 2006, which mandated that all states maintain a sex offender registry and set a deadline for states to implement SORNA before July 27, 2009.)  Dean asserted that the Attorney General did not have good cause to promulgate a rule making SORNA retroactive without notice and comment as required by the Administrative Procedure Act.  The United States Court of Appeals affirmed.  The Attorney General promulgated an interim rule making SORNA retroactive to all sex offenders convicted prior to SORNA's enactment.  In promulgating the rule, the Attorney General invoked the "good cause" exceptions of the Administrative Procedure Act, and did not have a pre-promulgation notice and comment period.  The Attorney General’s statement with the rule, noting the practical dangers of additional sexual assaults and child sexual abuse or exploitation offenses if SORNA were not made immediately retroactive, constituted good cause.  The United States of America v. Dean, Case No. 09-13115 (U.S. 11th Cir., April 28, 2010). 

 4. SUPPLEMENTAL PAY IN THE FINANCE AND INSURANCE INDUSTRY:  The  United States Department of Labor, Bureau of Labor Statistics, has released an article examining use of supplemental pay in the finance and insurance industry.  Pay practices in the finance and insurance sector have garnered considerable attention recently, especially in relation to the current recession and steps taken by the U.S. Treasury to stabilize the financial sector.  The article examines use of supplemental pay -- overtime, nonproduction bonuses (not related directly to productivity of the individual employee) and shift differentials -- in the finance and insurance sector.  Supplemental pay differs from benefits such as health or life insurance in that the employee receives it as a cash payment.  To emphasize the difference, the article focuses on supplemental pay as a percent of gross earnings.  It uses a dataset that pools four quarters of National Compensation Survey private industry data, 2006 to 2009, using the first quarter of each year.  On average, supplemental pay represents a small percentage of cash earnings for the U.S. labor force overall, but supplemental pay can be an important source of income for certain occupations.  The finance and insurance sector is made up of companies that specialize in various forms of financial transactions.  These activities include creation, liquidation or transfer of financial assets, as well as facilitation of financial transactions.  The major activities in this sector include raising funds by taking deposits or issuing securities, pooling risk by underwriting insurance/annuities and providing specialized services related to financial intermediation, insurance and employee benefit programs.  The percent of compensation received as supplemental pay in the finance and insurance industry ranked highest of all industries in the service-providing sector.  The ranking is driven by the use of bonus pay; use of overtime and shift differentials was found to be negligible in this industry.  Use of bonuses in the finance and insurance industry is clearly higher than the average across all other service-providing industries (6.5% as a percentage of those earnings vs. 2.9% for the next-highest).  Bonuses were found to play a particularly important role for management, professional and related occupations within the finance and insurance industry.  Among the detailed industries that make up the finance and insurance industry, the percent of gross earnings received as bonuses was higher for securities, commodity contracts, funds and trusts.  The entire article can be accessed at  

 5. CONVERTING PIG POO TO CRUDE OIL:  What can pig poo do? Apparently, it can be turned into one of the nation’s biggest imports:  crude oil. reports that swine manure is being converted into crude oil through a thermochemical conversion process.  The process reforms organic compounds in a heated and pressurized enclosure to produce oil and gas, mimicking the process that created crude oil from decomposed animals -- a process that naturally takes thousands of years -- in a much faster and more efficient manner.  The nation could see a $1.5 Billion reduction in crude oil imports and swine producers could see a 10 percent increase in their income with adoption of this new technology.  Believe it or not, a portion of Interstate 44 near St. Louis was repaved using pig manure-based material as asphalt binder.  Kinda gives new meaning to the word “road-hog.”   

 6. BUFFETT DEFENDS GOLDMAN SACHS:  Billionaire investor Warren Buffett came to the defense of Goldman Sachs in hard-hitting comments at the Berkshire Hathaway annual shareholders meeting.  According to, Buffett, who invested $5 Billion in Goldman at the height of the financial crisis, said there has been “misreporting” on the nature of the Abacus deal at the center of an SEC investigation into the firm.  Buffett said the Abacus deal is no different from a standard bond-insurance transaction and should not reflect poorly on Goldman.  Meanwhile, Berkshire Vice Chairman Charlie Munger, who said this week that Goldman was engaged in “socially undesirable” activities, told shareholders that he would have voted against SEC prosecution.  In general, it is hard to argue with Warren and Charlie. 

 7. YOUR OLD COPY MACHINE COULD BE HAZARDOUS TO YOUR HEALTH:  A recent piece on CBS dealt with the danger of “disposing of” old photocopy machines without first making sure the hard drive is completely erased.  While most people would not think to discard an old computer or even an old cell phone without first having it “washed,” many people (including us) did not realize that a photocopier’s hard drive stores every piece of paper copied, scanned, printed and faxed.  Considering the nature of information that goes through a pension board’s photocopy machine, the situation could be catastrophic.  Apparently, there are devices that will automatically erase images from the hard drive right after they are made (a cost of about $500).  Of course, just like any other piece of equipment with a hard drive, the hard drive should be completely erased before disposing of the machine.  Watch the entire scary piece at;contentBody.

 8. READER TAKES ISSUE WITH RAND REPORT:  With reference to our piece on the RAND report (see C&C Newsletter for April 22, 2010, Item 3), a reader takes issue.  (Remember that RAND posited that the number of older Americans who delay retirement will grow, thus easing financial strains on Social Security and Medicare.)  G.L. writes that while RAND may be right about more people deferring retirement and starting Social Security at a higher age, that situation will hurt Social Security.  The increased factors are based on older mortality tables, which assume earlier deaths.  If so, deferred benefits today will not be actuarially equivalent, but enhanced.  He recommends that anyone who does not need the benefits should defer as long as possible.  “It can be a better investment than most.”  By George, we think he’s got it! 

 9. SEC PROPOSES NEW RULE ON ASSET-BACKED SECURITIES:  The Securities and Exchange Commission is proposing significant revisions in Regulation AB and other rules regarding the offering process, disclosure and reporting for asset-backed securities.  The proposals would revise filing deadlines for ABS offerings to provide investors with more time to consider transaction-specific information, including information about the pool assets.  The proposals also would repeal the current credit ratings references in shelf eligibility criteria for asset-backed issuers and establish new shelf eligibility criteria that would include, among other things, a requirement that the sponsor retain a portion of each tranche of the securities that are sold and a requirement that the issuer undertake to file Securities Exchange Act of 1934 reports on an ongoing basis as long as its public securities are outstanding.  SEC is also proposing to require that, with some exceptions, prospectuses for public offerings of asset-backed securities and ongoing Exchange Act reports contain specific asset-level information about each of the assets in the pool.  The asset-level information would be provided according to proposed standards and in a tagged data format using extensible Markup Language.  In addition, the proposals would require, along with the prospectus filing, the filing of a computer program of the contractual cash flow provisions expressed as downloadable source code in Python, a commonly used open source interpretive programming language. Also proposed are new information requirements for the safe harbors for exempt offerings and resales of asset-backed securities, as well as a number of other revisions to the rules applicable to asset-backed securities.  Got it?  The entire 188 page proposed rule is at

10. FOUR-IN-FIVE AMERICANS WILL NOT MEET FINANCIAL NEEDS IN RETIREMENT:  U.S. employees will need more than 15 times their final pay in retirement resources to maintain their current standard of living during retirement according to Hewitt Associates.  While this estimate has not worsened, meeting projected retirement needs has become a greater challenge for individuals, many of whom experienced decreases in their retirement accounts over the past two years.  As a result, four-out-of-five workers are still expected to fall short of meeting all their financial needs in retirement, unless they take action to improve their savings habits or retire at a later age.  When factoring in inflation and postretirement medical costs, Hewitt projects employees will need 15.7 times their final pay in retirement resources to meet their financial needs in retirement.  Of the 15.7 times final pay, Social Security is expected to provide 4.7 times final pay, leaving employees responsible for accumulating the remaining 11 times final pay from other sources such as company-provided plans and personal savings.  Just 18 percent of employees who contribute to a defined contribution plan and work a full career are expected to achieve this goal.  On average, these employees are on track to accumulate 13.3 times their final pay (including Social Security), leaving a shortfall of 2.4 times pay.  In other words, employees are expected to meet just 85 percent of their financial needs in retirement.  Nineteen percent are expected to have a shortfall of five times final pay or more at retirement.  The situation is much bleaker for employees who are not covered by a defined benefit plan.  On average, workers who rely solely on a defined contribution plan to fund their retirement are projected to meet just 74 percent of their needs in retirement -- compared to 91 percent for employees who are also covered by a defined benefit plan.  Employees can curb the savings shortfall by starting to save, regularly increasing their contribution rate and working longer.  On the last point, for employees who delay retirement for just two years, retirement needs drop from 15.7 times final pay to 14.4 times final pay.  At the same time, their retirement resources increase from 13.3 times final pay to 14.2 times final pay, enabling them to meet 98 percent of their retirement needs.  (Hey, why not delay retirement until you die, at which point you will have no retirement needs?) 

11. MAJORITY OF COMPANIES SLOW TO REALIZE ROLE IN HELPING EMPLOYEES ACHIEVE SECURE RETIREMENT:   Speaking of secure retirement, Wells Fargo Institutional Retirement and Trust has released a survey showing the majority of U.S. companies have not adapted to their increasingly central role in helping Americans achieve a secure retirement through company-sponsored 401(k) plans.  U.S. private-sector employees are in the midst of a momentous shift from earning a pension for life to managing their own retirement, but most employers have been slow to grasp the implications.  Employers still view retirement plans mainly as a benefit rather than as the primary means for their employees to support themselves after retirement.  Fewer than half say the primary goal of offering a retirement plan to their employees is to provide employees with the means to achieve a financially sound retirement.  Rather, the majority say the primary reason they offer a retirement plan is to provide competitive benefits to attract and retain employees.  Plan sponsors need to embrace their role in helping employees focus on maximizing their retirement plan.  Ain’t the private-sector great?  First, the employee is zapped by a change from a defined benefit plan to a defined contribution plan, and then is cut adrift to fend for himself in unfamiliar territory. 

12. ALL PUNS INTENDED:  A jumper cable walks into a bar. The bartender says, "I'll serve you, but don't start anything." 

13. OXYMORON:  If a word is misspelled in the dictionary, how would we ever know? 

14. FABULOUS RANDOM THOUGHTS: The only time I look forward to a red light is when I’m trying to finish a text. 


16. QUOTE OF THE WEEK:   “Keep your eyes wide open before marriage, and half-shut afterwards.”  Benjamin Franklin                               

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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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