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Cypen & Cypen
NEWSLETTER
for
May 2, 2013

Stephen H. Cypen, Esq., Editor

1.   FRONTLINE DOES A NUMBER ON 401(K) PLANS: As scheduled ( See C & C Newsletter for April 18, 2013, Item 3 ), on April 23, 2013 PBS’s Frontline aired “The Retirement Gamble,” which concluded that most 401(k) programs are pretty bad.  (Bad, it is, for the consumer and not the industry which is becoming known for charging excessive fees and providing no guidance.)  John Bogle, founder of Vanguard, put it best: in the fund business, the miracle of compound returns is overshadowed by the tyranny of compounding costs.  In fact, Bogle gave the example of an account “earning” 7% a year, subject to 2% a year in expenses.  At the end of the day, expenses would have consumed over 60% of the return, while the owner would have kept just over 30%.  (Is this a great country, or what?)  The sad thing is that there is nothing illegal in the system.  And for his part, Bogle suggests that index funds are a much safer investment, because you are at the mercy of the market, not the casino. 
 
2.   WHY 401(K)S HAVE FAILED:  Frontline on PBS did Americans a great service, according to  Forbes.com .  It showed the folly of the 401(k) structure, which has been a problem for decades.  Although the program focused on exorbitant costs, poor guidance and employer neglect, the larger point is that employers do not have to provide 401(k)s at all -- and probably should not. The 401(k) plan was never meant to be a mainstream pension plan, and is a poor substitute for one. It is a voluntary program that was intended to supplement retirement savings -- one of those quirky little options in the byzantine tax code that employers seized upon as a way to save money while pretending that they were doing the right thing by their employees.  401(k) was an experiment that has failed. 401(k)s cost too much because employers can pass along most of the costs to employees, which eat away returns. For the sake of simplicity, employers can offer funds that charge less than 0.10% annually. These are available in off-the-shelf mutual or exchange-traded funds. But far too many plans charge employees “retail” rates of 1% or more annually. Why such a disparity? Because employers can pass along the costs and there are no minimum standards for a 401(k) other than it be “prudently” managed. The worst are small-company plans set up by insurance companies, which charge more than 2% annually. 
 
3.   FITCH’S LOCAL GOVERNMENT PENSION ANALYSIS: Fitch Ratings has released its special report entitled “Local Government Pension Analysis.” Its ratings continues to review and refine its approach to analyzing the impact of pension liabilities on local government ratings. As one element in its analysis of a government’s overall credit profile, Fitch’s goal is to identify cases where pension-related risks are outsized. Fitch expects pensions to pose a continued and in some cases rising source of budgetary pressure on local governments, although the vast majority of governments will be able to absorb the impact of higher contributions. The situations that pose the greatest concern remain those in which the plan’s funded ratio is exceptionally low and contribution levels are already high relative to the budget.  The level of risk posed by pension liabilities varies enormously among the more than 1,000 local governments Fitch rates. Because of the wide variation among the financial situations of local governments, and the ways their pension benefits are managed, Fitch evaluates each government’s pension situation individually. GASB standards will take effect beginning in fiscal 2014 (for pension plans) and fiscal 2015 (for employers). Fitch believes the new standards are a step in the right direction toward better transparency and comparability of government pension liabilities. Fitch expects the information not only to give analysts and other users a more consistent and robust view of pension liabilities, but also provide additional information to governmental employers to make decisions about funding and benefit levels going forward. A local government’s pension situation is included as an element in Fitch’s analysis of its debt burden, financial operations, and, when plans are locally-administered, management.  Fitch demonstrates one approach it has taken to analyze pension funding issues with reference to City of Chicago and Chicago Board of Education.  Over the past two years, Fitch has twice downgraded ratings on both the city of Chicago (to AA– from AA+) and the Chicago Board of Education (to A/Negative from AA–) in part due to weakness in pension funding and lack of action to address it. Both have large unfunded liabilities, and are significantly underfunding the ARC. Although other factors contributed to the downgrades, Fitch cited pensions as a large and growing concern.  Pension obligations can result in large and growing expenses for local governments, particularly when insufficiently addressed in the past. Fitch will continue to refine and enhance its analysis of the impact of pension obligations on local government credit quality. GASB changes will aid that process by increasing comparability of disclosure and providing valuable forward-looking information.
 
4.   REVISED 60’s HITS FOR BABY BOOMERS:  Abba -- Denture Queen. 

5.   PHILOSOPHY OF AMBIGUITY: If the police arrest a mute, do they tell him he has the right to remain silent?
 
6.   ON THIS DAY IN HISTORY:  In 1908, “Take me to the Ball Game” registered for copyright.
 
7.   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. 
 
8.   PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at  http://www.cypen.com/subscribe.htm .

 

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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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