Cypen & Cypen
JUNE 28, 2007
Stephen H. Cypen, Esq., Editor
A blue-ribbon commission studying Kentucky’s pension situation will review the benefits contract with current employees and retirees, despite repeated assurances by elected officials that only benefits of future employees were under scrutiny. According to the Louisville Courier-Journal, the commission’s chairman confirmed that an attorney would examine the contract, but said the purpose is not to find a way to break the state’s contractual promise to current employees and retirees. The commission simply wants to ask an attorney questions such as whether the state could offer current employees a $10,000 pay increase in exchange for reduced retirement benefits. (Sure.) Courts across the country, including the Kentucky Supreme Court, have given states little room to change what commonly are referred to as “inviolable contracts” with public employees. The concept of “inviolable contracts” means that retirement benefits in place when the state hires workers -- including health care benefits -- cannot be diminished for those workers. Only benefit levels for new employees can be reduced. No wonder some members of the blue-ribbon commission questioned why the review is being undertaken at all.
According to Business Insurance, the U.S. Department of Energy will not put in place a plan to stop reimbursing contractors for defined benefit pension plan costs. In April 2006, the Department of Energy -- supposedly due to cost concerns -- said it would reimburse contractors only for costs associated with defined contribution plans, as long as costs of those plans did not exceed certain benchmarks. The policy would have affected only new employees. However, following that change, the U.S. House of Representatives approved an amendment to an appropriations bill that barred the agency from implementing its new reimbursement policy. As a result, the Department suspended the policy, pending a review of the issue. After extensive consultation with various stakeholders, the Department said it would not implement the pension reimbursement policy. Nice try.
Plansponsor.com correctly recognizes that soft dollars are the investment industry’s answer to frequent-flyer miles. With frequent-flyer programs, one can rack up miles and cash them in upon request. An investment manager can pay its brokers with commissions above the rates for straight executions and spend the extra soft-dollar credits on investment research and the like. The question is obvious: shouldn’t the one “paying” for these benefits enjoy them? One of Wall Street’s many subindustries is “commission recapture,” which is the flip side of soft dollars, where a recapture broker consolidates trading and gathers up a portion of excess commissions. The money recaptured is often applied as an offset to custody or other plan expenses. However, with falling commission rates, large brokers are finding it increasingly difficult to make a profit on recapture trades. So, many are dropping out of recapture networks, resulting in clients’ lower expectations of recapture. In the year ended February 2006, U.S. institutional investors spent $10.8 Billion on equity trading commissions of which $4.5 Billion was soft. Almost three-quarters of money managers use soft dollars. More than thirty years after “May Day,” prior to which the Securities and Exchange Commission set rates at 30¢ a share, commissions generally amount to 2¢ a share for pure execution services and 4.6¢ for soft-dollar commissions. From 2003 to 2005, overall commission rates fell 17% while soft-dollar commission rates fell 10%.
The U.S. should be encouraging both defined benefit and defined contribution plans, according to the head of a group that represents major employers. As reported by InvestmentNews, the president of the Washington-based American Benefits Council, which represents major companies that sponsor retirement and health benefit plans, believes we have wasted a lot of time in this country debating over which type of plan is better. The idea situation would be for employees to have both DB plans (which provide guaranteed levels of employer-funded benefits), and DC plans (which give employees opportunity to save on a tax-favored basis for their retirement). Despite the decline in DB plans to 29,000 plans in 2005 from 115,000 in 1985, millions of people are still covered by DB plans and will be for decades to come. Innovations such as IBM’s move to allow employees to convert some or all of their 401(k) holdings to annuities at group rates, which are less expensive than individual annuities, should be encouraged. Further, automatic enrollment plans are clearly making headway since enactment of the Pension Protection Act of 2006, which made it easier for companies to adopt them.
The Sacramento Bee reports that a California group filed an initiative that would slash state and local government pension costs by offering a less generous retirement allowance to new retirees, and raising the age at which they qualify for full benefits. The initiative, if it qualifies for the ballot, would face stiff opposition from public employee unions, which in 2005 fought off another attempt to scrap the current pension formula. Unions believe it’s part of a national agenda attacking defined benefit plans and the interests of working people. Unlike the same group’s previous proposal, this one preserves the traditional plan, which guarantees a certain payout in retirement years, but cuts the formula that determines pensions and extends the years an employee would have to work to get them. Rank-and-file workers in the state’s current system now get 2% of their highest pay multiplied by the number of years of service at age 55. Under the initiative, workers who also qualify for Social Security would get only 1% for each year worked, and they would qualify for full benefits at the same age they become eligible for Social Security, 65 to 67. Those who do not qualify for Social Security would get 1.5% for each year worked. Public safety officers would get 2.2% for each year worked at age 55. (Currently, the state and many local governments pay public safety officers 3% and allow them to retire as early as age 50.) Another change would base the pension payout on the highest consecutive five years of pay, instead of the one year or three years now in use. That move would tend to reduce retirement allowances, because a five-year average is normally lower than the highest year of pay or a three-year average (Duh).
Miami Herald columnist Fred Grimm, in an opinion piece, has taken a shot at firefighters’ pensions in general and Davie firefighters’ pensions in particular. The column is mean-spirited, sarcastic and unworthy of the Herald. He says that “police and fire unions have negotiated ever more generous pay since 2001, with ever sweeter pensions. It’s a simple formula. An increased concern for public safety since 9/11 translates into enhanced political power for police and fire unions.” How skeptical can one get? Incidentally, by jokingly comparing his Herald pension with that of a Davie firefighter, Grimm only proves that his pension is woefully inadequate. Here’s what we say, Mr. Grimm: tell it to the families of the 343 firefighters who died on September 11, 2001 and to the families of the 9 firefighters who died earlier this month in South Carolina.
The Chicago Sun-Times says determining how much money you need for retirement is a highly personal and complex decision. It depends on a number of factors, including the retirement lifestyle you desire, your target retirement age and your life expectancy. While the general rule is that you need 70% of your pre-retirement income to retire comfortably, many accountants suggest 80% or higher as a more reliable figure, especially considering rising health care costs and increased longevity. Take time to think through your responses to the following questions to help prepare yourself for the realities of retirement:
There are plenty of resources for learning how much you need to retire, but working with experts can also help you meet your particular needs.
U.S. Newswire reports that three out of four investors say that if they learned a company they were invested in had a high return on investment that was a result of unethical but legal behavior by the CEO and board, they would likely move their investment elsewhere. Thirty-eight percent said they would only “probably” move it and an equal amount said they would “definitely” move it. One in five say they would not move their investment at all. Two-thirds of investors say they know either a great deal or are somewhat knowledgeable about the ethical standards and practices of companies in which they invest. Only one-third say they know little or nothing about ethical standards and practices of companies in which they invest. Investors are split on how well corporate boards are doing at ensuring their companies are managed ethically. Slightly more than half say they are doing very well or fairly well, while 42% say they are doing either fair or poorly. Only 9% say they are performing very well.
Braehler worked for Ford and was eligible for retirement benefits under the Ford Motor Company UAW Retirement Plan. He applied for regular early retirement and retired effective June 1, 2003. He died on November 6, 2004. Braehler was married successively to two women during his employment at Ford. His first wife, Paula, obtained a final decree of dissolution of marriage on May 3, 1994. The decree incorporated a property settlement agreement between the parties, under which Paula became the alternate payee in a qualified domestic relations order. Braehler’s second wife, Lera, sued the plan and the company seeking to recover benefits she claimed were due to her under terms of the plan and the Employee Retirement Income Security Act. A federal trial court granted defendants’ motion to dismiss. The plain terms of the QDRO indicate that Paula was to be treated as surviving spouse under the plan, and that upon Braehler’s death, payment would be made to her as provided in the plan for a surviving spouse. The QDRO does not affirmatively state that Paula would only receive a portion of the surviving spouse benefits; rather, it states that she will be treated as a surviving spouse. Although the QDRO references Paula’s treatment under the plan as that of “a” surviving spouse rather than “the” surviving spouse, the court does not find that Paula was to receive anything less than the full surviving spouse’s benefit. Compliance with the QDRO is mandatory. ERISA does not permit a pension fund to look beneath the surface of a QDRO. Braehler v. Ford Motor Company UAW Retirement Plan, Case No. 3:06CV-306-R (W.D. Ky., June 21, 2007)
Assets in American retirement accounts increased by $1.7 Trillion during 2006, a 12% increase over the prior year, according to an Investment Company Institute 2007 Investment Company Fact Book. According to cch.com, approximately half of retirement assets, $8.3 Trillion, were held in individual retirement accounts and employer-sponsored defined contribution plans. Remainder of the $16.4 Trillion in retirement assets was held in defined benefit plans, government employees’ plans and annuities. The year-over-year-increase in retirement assets was largely propelled by increases in IRAs. Last year, those assets rose 17% to $4.2 Trillion, while assets in DC plans totaled $4.1 Trillion. Between IRA assets and DC plan assets, $2 Trillion and $2.1 Trillion, respectively, were held in mutual funds.
A large Norwegian study suggests that social position in the family and not biological birth order as such is significantly linked to IQ. Thus, a child who is first born (or is treated as first born, if, say, his older sibling dies) is more likely to develop a higher IQ than his younger siblings. The study, from the University of Oslo, is published in the journal Science. Other studies have found links between low birth order and higher intelligence as measured by IQ, but the reason has not been very clear: is it biological or is it social? For instance, some theories have suggested it is social, that stimulation and attention received by the first born before siblings come along give the earlier born child’s intellectual development a boost, especially when added to the child’s social position in the family, such as mentor and teacher of younger siblings. Other theories have suggested that higher prevalence of maternal antibody attack in later pregnancies, which affects fetal brain development and other biologically unfavorable conditions, mean the brains of firstborn children have a better chance of cognitive development and learning. However, until now it was just speculation. Researchers had access to data on birth order, status of earlier born siblings (whether they had died early in infancy, for instance) and IQ scores for nearly 250,000 male 18 and 19 year olds. They found, using linear regression analysis, and taking into account a number of factors that might affect IQ in families with adverse reproductive histories, that men who were first in social or birth order had an IQ about 2.3 points higher than those who were second in social or birth order. The pattern continued in the sense that second born men had higher IQs than third born, and so on. But when researchers removed the effect of social order, they found that birth order was statistically non-significant. The conclusion is that it was social order and not birth order that gave the eldest children higher IQ points. Ahem.
“The reason that crime doesn’t
pay is that when it does, it is called by a more respectable
name.” Laurence Peter
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