1. “NAPLES LETTER” HAS BROADER APPLICATION: We previously reported the Florida Division of Retirement’s 180° turn on premium tax interpretation (See C & C Special Supplement for August 20, 2012). At that time, we predicted that the “Naples letter,” which dealt with Chapter 185, Florida Statutes, would logically be applicable to Chapter 175, Florida Statutes. By a second letter to Naples dated May 14, 2013, Keith Brinkman, Chief of Bureau of Local Retirement Systems, Division of Retirement, Florida Department of Management Services, has erased any doubt: since the statutory language in Section 185.35(2), Florida Statutes, is nearly identical to the language in Section 175.351(2), Florida Statutes, it is reasonable to rely on the prior police letter in formulation of a pension reform strategy for collective bargaining negotiations that took place after August 14, 2012. In order for the Department to determine if proposed changes would jeopardize receipt of future premium tax revenues, the plan’s actuary must provide a calculation comparing the cost required to fund the minimum chapter benefits, to the amount of additional premium tax revenues received. The calculation must demonstrate that the additional premium tax revenues are being used in their entirety to provide the minimum chapter benefits, or at least the portion thereof that can be provided with available additional premium tax revenues, and if there are any subsequent additional premium tax revenues received above the cost to provide all minimum chapter benefits, then the actuary must demonstrate that they are being used or set aside to fund extra benefits. One other important bit of information: the Department has let it be known that the “Naples letters” should be applicable in all cases of plans participating in premium taxes provided by Chapter 175, Florida Statutes, or Chapter 185, Florida Statutes. There will be no formal pronouncement to such effect, but the Department will examine each case on an individual basis.
2. DB PLANS OUT PERFORM DC PLANS: Towers Watson has been comparing annual investment returns in defined benefit and defined contribution plans for more than 15 years. The latest analysis adds investment returns for 2009 through 2011, and, for the first time, looks at asset allocations of a subset of large plan sponsors for 2010 and 2011, comparing DB and DC plan performance to simulated investment returns. Using an asset-weighted measure of returns, DB plans outperformed DC plans by an annual average of 76 basis points from 1995 to 2011. Over the last ten and five years, the average gap in annual performance was, respectively, 86 and 39 basis points. The smaller gap mostly results from the 2009 stock market boom -- the Russell 2500 Index increased by 34% -- during which DC plans realized the highest returns since the first analysis. DC plans received a much greater boost because they held significantly higher equity allocations than did DB plans. Over the last few years, the equity share has been about 14 percentage points higher in DC plans compared with DB plans. When stock market returns were poor in 2011, DB plans outperformed DC plans by 300 basis points, likely due to strong performances in long bond markets coupled with lower equity holdings. In a comparison of actual returns with simulated returns based on asset allocations, DB plans approximated their simulated returns on a plan-rated basis and outperformed their simulations on an asset-weighted basis. DC plans consistently underperformed their simulated results in 2010 and 2011 on both plan-and-asset-weighted bases. In a piece analyzing the Towers Watson numbers, Reuters termed it this way: “why pension funds are eating your 401(k)’s for lunch.”
3. PENSIONS ARE TOP INCOME SOURCE FOR WEALTHIER U.S. RETIREES: U.S. retirees with $50,000 or more in annual income are twice as likely as retirees below that threshold to say a work-sponsored pension plan is a major source of retirement funds. Instead, these lower-income retirees overwhelmingly cite Social Security as a major source of their retirement income. Results are based on Gallup’s annual Economy and Personal Finance survey. Among all U.S. retirees, Social Security continues to be the most commonly cited source of retirement funds, with 61% calling it a major source, followed by pension plans (36%), 401(k), IRA or other retirement savings accounts (23%), and home equity (20%). Those sources differ from non-retirees' expected retirement income sources, with self-directed savings accounts such as 401(k) plans or IRAs topping the list of funding streams that pre-retirees expect to rely on most. Pension plans appear to be a major factor in determining retirees' standard of living, given that they are the most commonly cited income source among retirees whose annual household income is at or above the U.S. median of roughly $50,000. Social Security is the next-most-common "major source" of funds among wealthier retirees, followed by self-directed retirement savings accounts such as 401(k)s or IRAs. Retirees below the median household income are heavily dependent on Social Security payments, as the 73% say it is a major source is nearly triple that of the next-most-common source among this group -- pension plans, at 27%. Just how much more evidence do our state and local legislators need?
4. UPDATED CHECKLIST OF FEDERAL TAX RULES APPLICABLE TO PUBLIC RETIREMENT SYSTEMS: Attorney Carol V. Calhoun has updated her checklist of federal tax law rules applicable to public retirement systems. The chart, which identifies each Internal Revenue Code section that does and does not apply to governmental plans, now includes links to each of the code sections referenced, as well as various updates to reflect recent legislative and administrative developments. As Carol notes, the outline is a basic summary of the principal Internal Revenue Code qualification requirements that apply to governmental plans, other than those described in Code sections 403(b) or 457(b). It is very general in nature, and does not replace research on specific questions. The handy chart is available on Carol’s website, athttp://benefitsattorney.com/charts/appfa/.
5. SEC CHARGES INSTITUTIONAL SHAREHOLDER SERVICES IN BREACH OF CLIENTS' CONFIDENTIAL PROXY VOTING INFORMATION: The Securities and Exchange Commission charged proxy adviser Institutional Shareholder Services for failing to safeguard confidential proxy voting information of clients participating in a number of significant proxy contests. An SEC investigation found that an employee at ISS provided a proxy solicitor with material, nonpublic information revealing how more than 100 ISS institutional shareholder advisory clients were voting their proxy ballots. In exchange for voting information, the proxy solicitor provided the ISS employee with meals, tickets to concerts/sporting events, and an airline ticket. The breach was made possible in part because ISS lacked sufficient control over employee access to confidential client vote information, as this employee gathered the data by logging into the ISS voting website from home or work and using his personal e-mail account to communicate details to the proxy solicitor. The employee no longer works at ISS. (He now works at the SEC – just kidding.) ISS, which is registered with the SEC as an investment adviser, agreed to settle the charges by paying $300,000 and retaining an independent compliance consultant. Investment Advisers Act of 1940 Release No. 3611/May 23, 2013.
6. WHEN INSULTS HAD CLASS: "He has Van Gogh's ear for music." - Billy Wilder
7. PHILOSOPHY OF AMBIGUITY: What do you do when you see an endangered animal eating an endangered plant?
8. ON THIS DAY IN HISTORY: In 1935, Babe Ruth’s final game, goes hitless for Braves against Phillies.
9. 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.
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