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Cypen & Cypen
JUNE 9, 2005

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


According to a recent piece in Benefits & Compensation Digest, the higher the quality of a plan’s financial statement audit, the more reliable the information used to manage and administer the plan -- and thus the greater the comfort level among employees and management. A quality audit will help protect the assets and the financial integrity of an employee benefit plan and ensure the necessary funds will be available to pay the retirement benefits promised to employees. It also helps fulfill fiduciary responsibilities. Trustees should evaluate the following factors that affect audit quality: purpose of the audit, uniqueness of plan audits, CPA firm resources, reasonable size audit practice and understanding the limited-scope audit exception. Besides making sure the auditors understand the plan’s governance structure, including the role and decisions of the board of trustees, auditors should consider the following:

  • Whether plan assets covered by the audit have been fairly valued.
  • Whether plan obligations are properly stated and described.
  • Whether contributions to the plan were received on a timely basis.
  • Whether benefit payments were made in accordance with plan terms.
  • If applicable, whether participant accounts are fairly stated.
  • Whether issues were identified that may impact the plan’s tax status.
  • Whether any prohibited transactions were properly identified.


Benefits & Compensation Digest also has a piece on developing a fraud policy. To meet the requirements of today’s business world, pension plans will find it necessary to spell out and document certain basic procedures, such as a plan fraud policy statement. Such statement helps create an atmosphere of honesty and ethical behavior and provides a thorough understanding of expectations of those working for or doing business with the plan. Statement on Auditing Standards Number 99 (SAS No. 99) Consideration of Fraud in a Financial Statement Audit established new auditing requirements for CPAs who audit financial statements for periods on or after December 1, 2002. Attached to SAS No. 99 is an example of an organizational code of conduct, or fraud policy, which includes definitions of what is considered unacceptable, and the consequences of any breaches thereof. The author has modified that code and appended it to the article. The fraud policy should contain, after an introduction, policies on general employee conduct; conflicts of interest; outside activities; dealing with outside parties; relationships with outsiders; plan funds and records; privacy and confidentiality. Check out the entire model code at


In an April 7, 2005 decision, the Florida First District court of Appeal reversed a ruling in favor of a heavy smoker who sought to show that his chronic obstructive pulmonary disease was suffered from a compensable occupational disease, as defined in Section 440.151, Florida Statutes (see C&C Newsletter for April 21, 2005, Item 5). In its earlier decision, the court held that claimant failed to present evidence showing incidence of COPD was substantially higher in his particular occupation (maintenance foreman) than in the general public. On motion for rehearing and/or clarification, although the court adhered to its reversal, the court agreed there may be evidence that shows claimant’s exposure to chemicals and irritants on the job aggravated his previously asymptomatic COPD to produce disability or need for treatment. Thus, rather than just reverse as it did the first time, the appellate court directed the judge of compensation claims to consider that theory of recovery on remand. City of Cooper City/Florida Municipal Ins. Trust/Florida League of Cities v. Farthing, 30 Fla. L. Weekly D1364 (Fla. 1st DCA., May 27, 2005). (There is another interesting little twist to this case. Farthing’s motion for rehearing and/or clarification was untimely. Thus, although the court could not consider such motion, it did reconsider on its own motion, withdrew the previous opinion and substituted the subject one.)


When New Jersey announced it would issue almost $3 Billion in pension obligation bonds, we questioned its wisdom (see C&C Newsletter for April, 1997, Page 4). And when we subsequently learned that the “deal” was coupled with an artificial change in asset evaluation, we became more skeptical (see C&C Newsletter for July, 1997, Page 4). Well, in an article entitled “How the Garden State Dug a Hole,” BusinessWeek/online reports that borrowing aimed at boosting the assets of New Jersey’s pension plans went awry -- a lesson to governments everywhere. In a typical POB, the issuing city, county or state bets that the borrowed money can be invested to earn more than the interest rate that the bonds must pay. New Jersey’s was the first state POB, and because it was issued only a few years before the big stock market drop, it has now become a cautionary tale of how wrong that bet can go. For the first two years, New Jersey’s gamble paid off: along with the rest of the state’s pension assets, bond money was invested heavily in equities and rose in value as the stock market boomed in the late 1990s. Pension accounts climbed at a rate well above the 7.6% promised in interest on the bonds. Then came the market bust in 2000. Since 1997, New Jersey’s POBs have averaged well below the amount owed in interest. Currently facing a pension deficit of at least $25 Billion, the state will have to contribute more than $1 Billion next year, up from $100 Million this year. At the same time, interest payments on the POBs are escalating -- a structure originally built into the bonds. Now about $170 Million a year, that bill will hit $500 Million annually by end of the issue’s 30-year life. Critics say that POBs are always a bad deal, no matter how the investments perform. First, they are expensive. Second, they attempt to cure a current budget problem by pushing off payments onto future generations. Third, POBs take an off-balance-sheet somewhat flexible obligation and make it a fixed general obligation of the government. Hmmm...who’s next?


A cover story in the May, 2005 issue of Plansponsor suggests that the practice of offering an investment advice to retirement plan participants is a manageable risk. However, the following points should be considered before offering such advice:

  • How financially sophisticated are the participants? The more financially sophisticated the participants, the less likely they are to seek and use investment advice.
  • How big is the retirement plan? If the cost of third-party investment advice is spread over 500 participants, it’s a lot cheaper than with 50 participants.
  • How many investment options does the plan offer? The more investment choices the plan offers, the more difficult it is for participants to decide where to put their money and the more valuable advice will be to them.
  • How will the cost of offering investment advice be allocated? There is no sense to provide a service just for the sake of providing it, if cost is going to exceed benefits.
  • Are the trustees willing to accept a new fiduciary responsibility? Trustees who select a third party to offer investment advice retain fiduciary liability for the prudent selection and monitoring of that provider. (Trustees might want to double-check that their fiduciary and liability policy does not exclude this coverage.)

In sum, the author says that plans most likely to find it advantageous to offer investment advice will be those with a membership that is not financially sophisticated, that is large enough to absorb the cost, that has numerous investment options, that can justify the benefits relative to the costs and is willing to accept responsibility of monitoring performance of the service provider.


In the same issue of Plansponsor, nationally-known Fred Reish asks the following question: “Are you giving your participants too many choices?” Reish makes reference to a recent study entitled “Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice and Investment Experience.” The report authors’ conclusions are important to pension trustees and other fiduciaries in determining the optimum number of investment choices and investment services to be offered to participants. To make a long story short, the report illustrates that many, if not most, participants lack the knowledge needed to cope with a large number of investment choices. That, in turn, suggests that most participants need solutions (such as risk-based lifestyle funds, age-based lifecycle funds or professionally-managed accounts) instead of choices. In Reish’s view, the most effective solutions have been lifestyle and lifecycle funds, particularly where they are properly explained in the enrollment process and in investment materials. Managed accounts are a promising alternative. Even more promising is the approach of automatically placing participants in lifecycle funds or managed accounts: participants would start out automatically in an age-appropriate lifecycle fund or in a managed account. Then, if a participant wished, he could direct the investment of his account among the other options in the plan. The problem is solved when participants are invested prudently, regardless of whether they select the investments or the plan fiduciaries pick the investments for them.

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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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