Cypen & Cypen
JUNE 1, 2006
Stephen H. Cypen, Esq., Editor
According to a FRONTLINE documentary that
recently aired on Public Broadcasting Service, the baby
boomer generation is headed for a shock as it hits retirement:
many of them will be long on life expectancy but short on
savings. The two main strategies for funding retirement
-- lifetime pensions and 401(k)-style savings plans -- are
in serious trouble. Half of America’s private sector
workforce has no employer-sponsored retirement plan; among
the half that does, twice as many workers have contribution
plans like 401(k)s than have lifetime pensions, a complete
reversal from 25 years ago. The move from lifetime pensions
to 401(k) plans has meant that employees now bear much more
of the cost -- and risk -- of saving for retirement. According
to the U.S. Department of Labor, in 1978 workers put in
only 11% of total contributions to retirement plans, while
corporations put in 89%. By 2000, the employee share had
leapt to 51% and the company share had plummeted to 49%.
A major driver behind this shift is a corporate bankruptcy
strategy that enables companies to terminate lifetime pension
plans through Chapter 11. The program looks inside the Chapter
11 bankruptcy of United Airlines. United dumped its pension
plans, which were underfunded by nearly $10 Billion, on
the Pension Benefit Guaranty Corporation, the federal agency
insuring pensions (and which itself is running a $23 Billion
deficit). Because the PBGC only insures pensions up to a
fixed amount, many United employees and retirees saw their
pensions dramatically slashed. With their lifetime pensions
gone, current workers of United have joined the millions
of Americans trying to save for retirement in 401(k) plans.
To maintain their standard of living, experts say Americans
will need to save ten times their annual pay in their 401(k)s
by the time they retire: in other words, 15%-18% of salaries,
year in and year out, over an entire career! By this standard,
most Americans are simply not saving enough. The typical
baby boomer is approaching retirement with only three times
annual salary, enough to last seven or eight years. But
with life expectancies after 65 approaching 18 years, many
retirees may be living on nothing but Social Security for
a decade or more. The program can be viewed online at http://www.pbs.org/wgbh/pages/frontline/retirement/view/.
A transcript can also be downloaded and printed at
In the spirit of even-handed reporting, we present Profit Sharing/401(k) Council of America’s response to PBS/FRONTLINE’s “Can You Afford to Retire?” program. PSCA believes the program seriously distorted the value of employer-provided plans that could have a negative effect on an employee’s willingness to save for retirement. The program’s conclusion that there will be no retirement is not only incorrect, it is dangerous. If people believe that they will have to work until they die, they will stop saving for retirement. The program also once again supports the adage that, for employers working hard to provide benefits to workers, no good deed goes unpunished. In the United States, employers have set aside over $14 Trillion for retirement in addition to the $1.4 Trillion that has accumulated in the Social Security Trust Fund. Defined contribution plans and traditional pension plans are like apples and oranges -- they are both fine fruits, but they are not the same. They do share one important characteristic: neither is free. The costs an employer incurs in maintaining a defined benefit plan or in making contributions to a defined contribution plan, such as matching contributions or profit sharing contributions to all employees, are part of the “cost of compensation” that an employer pays an employee. Retirement plan costs offset cash salaries; it is all employee compensation. A defined contribution plan amasses wealth that a worker may use for retirement or to pass on to an heir. A defined benefit plan targets a predetermined retirement income flow, but no residual wealth. Both plans have pros and cons and any effort to distinguish one as superior to the other is pointless and counterproductive. PSCA is a national non-profit association of 1,200 companies and their 6 million employees, which advocates increased retirement security through profit sharing, 401(k) and related defined contribution programs.
Several supervisors at Southwest Airlines convinced two Albuquerque police officers to stage an arrest of Marcie Fuerschbach, a Southwest Airlines employee, as part of an elaborate prank that included actual handcuffing and apparent arrest. This was a “joke gone bad,” and turned out to be anything but funny, as Fuerschbach allegedly suffered serious psychological injuries as a result of the prank. She sued the officers and the City of Albuquerque under 42 U.S.C. §1983, alleging violations of her Fourth and Fourteenth Amendment rights. The district court found that the officers were shielded from the constitutional claims by qualified immunity, and granted summary judgment to all defendants. On appeal, the appellate court concluded that Fuerschbach’s allegations were sufficient to survive assertion of qualified immunity. Whether the characterization of the incident as a prank permits the officers to escape liability is a jury question. “The fact that the defendant who intentionally inflicts bodily harm upon another does so as a practical joke, does not render him immune from liabilities so long as the other has not consented. This is true although the actor erroneously believes the other will regard it as a joke, or that the other has, in fact, consented to it. One who plays dangerous practical jokes on others takes the risk that his victims may not appreciate the humor of his conduct and may not take it in good part.” (Anyone who has ever flown Southwest, is probably familiar with its propensity for “funky antics.”) Fuerschbach v. Southwest Airlines Co., Case No. 04-2117 (U.S. 10th Cir., February 28, 2006).
Defined benefit plans do not financially destroy companies and are good for both employers and employees, a Center for American Progress report has found. The report, reviewed in Global Pensions, defends DB plans and points out distinct advantages such plans offer over more favored DC plans. Among the key findings, the report claims DB plans raise pension coverage more than DC plans in the private sector, while pension wealth grew faster and more equitably under DB plans compared to DC plans. It also says risk exposure was dramatically reduced under DB plans, while recent growth of 401(k) plans had not improved pension coverage rates. However, growth in DB coverage boosts overall pension coverage rates. A Center spokesman said that at a time when Congress is considering legislation that would drive workers out of traditional defined benefit retirement plans, the report contradicts many opinions currently held of pension plans and provides numerous ways that companies and individuals can benefit from such retirement plans.
Although it took over one year, HR 1499, Heroes Earned Retirement Opportunities Act, has become law. The law amends the Internal Revenue Code to allow members of the Armed Forces to include their combat zone compensation (otherwise excludable from gross income) in their earned income for purposes of determining their allowable deduction for contributions to retirement savings plans. The law makes such provisions applicable to (1) taxable years beginning after December 31, 2003 and to (2) retirement savings contributions made for any taxable year beginning after such date and ending before enactment. Further, the law waives any limitation period otherwise applicable to refund claims relating to contributions made in years prior to enactment, if such claims are made before one year after such contribution is made. It also allows a 3-year period after contribution is made for assessment of any tax deficiency relating to such contribution. A record of votes in the House and Senate was not kept, so the bill basically passed unanimously.
According to Investment Company Institute, combined assets of the nation’s mutual funds increased by $123.9 Billion, or 1.3%, to $9.486 Trillion in April. Long-term funds (stock, bond and hybrid) had a net inflow of $27.88 Billion in April, compared to $40.24 Billion in March. Stock funds posted an inflow of $26.38 Billion in April, versus $34.36 Billion in March. Among stock funds, world equity funds (U.S. funds that invest primarily overseas) posted an inflow of $18.35 Billion in April, as opposed to $18.71 Billion in March. Funds that invest primarily in the U.S. had an inflow of $8.03 Billion in April against $15.66 Billion in March. For the first four months of the year, world equity funds had inflows of $79.70 Billion and domestic funds had inflows of $39.89 Billion. Meanwhile, money market funds saw an outflow of $27.13 Billion in April, compared with an outflow of $8.29 Billion in March.
If that scary headline does not militate in favor of defined benefit plans, then nothing will. When employees switch jobs, many withdraw money from 401(k) plans to pay down credit card debt or buy automobiles, rather than roll the funds into another retirement account, according to a recent study from Hewitt Associates LLC. Many financial advisers agree with the study’s findings, which show that 45% of workers cash out their 401(k) plans when they leave a job. The study, reported in InvestmentNews, prompted NASD to send out an advisory cautioning people to think twice before cashing out of their 401(k) plans. NASD warned consumers that if they cash out of their 401(k) plans, it could have a devastating effect on their finances. NASD pointed out that early cashouts would cause consumers to get hit with steep state and federal income taxes, plus a 10% early withdrawal penalty that could consume as much as half of the money. A number of financial advisers say they have had to convince clients to roll over their 401(k) money, but some clients just do not listen.
“There’s nothing wrong with
the younger generation that being taxpayers won’t
cure.” Dan Bennett
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