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Cypen & Cypen
JULY 14, 2005

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


Giant California Public Employees’ Retirement System has posted a complete glossary of investment terms, which identifies, defines and clarifies the meaning of investment terms used by CalPERS in its investment policies. The purpose of the glossary is to establish a uniform vocabulary of terms for users of such policies. However, the glossary can also serve as a resource for anybody interested in the meaning of a particular investment- rated term. Entries include “Alternative Investments,” “Arbitrage,” “Capitalization Weighted,” “Crossover Funds,” “Derivative,” “Eurodollar Bonds,” “Financial Firewall,” “Hedging,” “Interest Rate Swaps,” “Leverage,” “Mark-to-Market,” “Optimization,” “Performance Attribution,” “Repurchase Agreement,” “Sampling,” “Tracking Error,” “Variance,” and “Yankee Bonds.” Access the entire Glossary at We have also added the glossary as a link from our site.


July’s Benefits & Compensation Digest has a general summary of military leave benefits under the Uniformed Services Employment and Reemployment Rights Act (see C&C Newsletter for June 23, 2005, Item 1). Now, the August 2005 issue deals specifically with USERRA’s impact on pension plans. USERRA provides reemployment rights and benefits and protection from discrimination to individuals who, either by induction or voluntarily, have entered military service in any branch of the Uniformed Services of the United States. USERRA clarifies and supplements the rights and obligations provided by the Viet Nam Era Veterans Reemployment Rights Act of 1974, and codifies some of the cases interpreting that statute. Although USERRA was enacted by Congress in 1994, the post-September 11 military call-up has brought it to the attention of retirement plan trustees and plan administrators. In response, on September 20, 2004, the Department of Labor issued proposed regulations under USERRA. As we stated in our earlier piece, the DOL acknowledges that the regulations impose no new legal requirements on employee benefits plans, but offer the first explanation of obligations under USERRA. For pension plans, the primary impact of USERRA is to give a veteran who returns from military service the same rights and benefits under the plan as if the person had worked continuously in such employment during the term of military service. Thus, a protected person is entitled to all rights and benefits from employment that he or she had on the day military service commenced, plus the additional benefits that would have been provided if he had remained in employment. As a general rule, to be entitled to reemployment rights and pension benefits under USERRA, an individual must have:


a. Been absent from a position of employment by reason of service in the Uniformed Services

b. Given advance verbal or written notice of such service to the employer, unless such notice is prevented by military necessity or is otherwise impossible or unreasonable to give in the circumstances

c. Been absent from military service from the employer a total of five years or less, unless extended service is required as part of an individual’s initial period of obligation or, if service is otherwise involuntarily extended, such as during a war or operational mission

d. Applied for reemployment within requisite time period

e. Received an honorable discharge or satisfactory completed military service.

USERRA’s passage was an attempt by Congress to strengthen the protections that veterans already enjoyed under previous laws. The right to full benefit accruals and vesting is meant to insure that those individuals who enter military service are not punished for that service -- that they are in effect “made whole” as if they had not taken time to serve. This provision encourages future military service and ensures that those who serve are rewarded with protected benefits when they return to civilian life.


General Motors Corporation provides products and services under prime contracts with the United States government. One of the divisions through which GM provided services to the government was its Allison Gas Turbine Division. On December 1, 1993 GM sold its Allison division. The sale of Allison constituted a segment-closing that triggered certain obligations on the part of GM under the Cost Accounting Standard, which governs the accounting of pension costs: if a segment is closed, the contractor shall determine the difference between the actuarial liability for the segment and the market value of the assets allocated to the segment, irrespective of whether or not the pension plan is terminated. In other words, the Cost Accounting Standard not only establishes rules that govern how contractors should account for pension costs, but also provides for eventual settling-up of pension costs between contractors and the government when a segment belonging to the contractor ceases to engage in government contracting. At time of the Allison segment-closing, GM’s pension funds were underfunded, including the portion allocated to the Allison segment. GM submitted a certified claim in the amount of almost $253 Million. When negotiations between the parties broke down, GM filed suit in the United States Court of Federal Claims. In a comprehensive decision, Judge Nancy Firestone ruled that GM was not barred from recovering any segment-closing adjustment that it might be owed purusant to a segment-closing under the Cost Accounting Standard. Most importantly, the Court ruled that the Limitation of Cost clause and Limitation of Funds clause were designed to provide the government with various protections in connection with cost-overruns in connection with a specific contract. The Cost Accounting Standard adjustment, on the other hand, does not involve a cost adjustment of any individual contract. Therefore, those clauses do not apply to a Cost Accounting Standard adjustment, basically meaning that ceilings on government spending under contracts do not apply to claims for reimbursement of pension contributions! General Motors Corporation v. The United States, Case No. 00-40C (U.S. Fed. Cl., June 28, 2005).


According to a Bloomberg News Report in the Daily Business Review, U.S. workers admit to wasting more than two hours each day at work surfing the internet, chatting with co-workers, running errands or making personal calls. The 2.09 hours that workers estimate they waste each day is twice what employers expect, costing employers over $750 Billion a year in unproductive salaries. Using the internet for personal reasons was cited by almost 45% of respondents as the primary way they waste time. Socializing with co-workers was the next-biggest time waster, cited by about 23% of those surveyed. Workers in the insurance industry waste the most, at 2.5 hours a day. Public-sector workers, excluding educators, were second, admitting to wasting 2.4 hours a day. Banking and finance were last among the top ten time-wasting industries, where workers waste 1.8 hours a day. At 4 hours a day, Kentuckians waste the most (eating KFC?). Men and women waste about an equal amount of time. The survey assumed an 8-hour day and a 40-hour work week.


Most people have heard of “golden parachutes,” which are available to departing fortunate corporate executives. Well, our political leaders who leave public service will receive steady checks from taxpayers for the rest of their lives -- more akin to platinum parachutes. For example, Utah’s 71-year-old Senator Orrin Hatch will collect an estimated annual Congressional pension of $110,000, according to the Salt Lake Tribune. (The figure is calculated on a formula, because the actual amounts are considered private information. So, while the taxpayers pay the bill, they are not permitted to know what it is!) In addition, Hatch will collect on his savings plan -- like a 401(k) -- plus health benefits and Social Security. Of course, Social Security reform is still a heated topic in Washington, with President Bush and Congress proposing reforms to ensure its continued solvency. But, then, they don’t have to rely on the program for their personal well-being in retirement. How nice.


The National Council on Teacher Retirement has developed a nifty pamphlet entitled “The Value of Your Public Sector DB Plan.” The piece is intended to highlight the importance of a defined benefit plan and why it is so valuable to public employees. Most public employees in the United States receive their primary retirement benefit through a defined benefit plan rather than a defined contribution plan. There are at least four important benefits of a defined benefit plan:
! Guaranteed lifetime income that you cannot outlive -- regardless of how long you live and what happens in the stock market before, during or after your retirement, you can count on a predictable retirement benefit each month for the rest of your life from your DB plan. No other retirement plan can offer you that security.

  • Professional investment management -- just as not everyone can teach or perform a public sector job, not everyone can successfully invest in the stock and bond markets. In a DB plan, the employer has an obligation to deliver the promised retirement benefits. To fulfill this obligation, the retirement system hires professional consultants and money managers for the plan. If the plan’s investment results fall short of what is necessary to pay retirement benefits, your assets in retirement are not at risk, because the benefit is guaranteed by the employer.
  • Relatively low cost -- defined benefit plans retain and create assets for retirement via a very large portfolio. Investment earnings alone from the portfolio fund a significant portion of the ultimate benefits that will be paid out to you and your colleagues. Per dollar of benefits paid, a DB plan is often less costly than a DC plan.
  • A disciplined, ongoing investment program, requiring no effort on your part -- you probably don’t give your DB plan much thought, and that’s exactly how it should be. During the years you have been working, your employer has been contributing toward your retirement security through your DB plan. You are not required to determine appropriate asset allocation for your plan, research and select investment options, monitor performance and make changes when necessary. Your plan’s investment manager does all of that.

In addition, a DB plan offers many other important benefits (such as disability retirement, death benefits, cost-of-living adjustments) that are unavailable or that must be purchased separately in a DC plan. A DB plan also provides strength and stability for state and local governments. A DB plan helps fuel the economy, boosts economic growth, creates entrepreneurial capital and creates and stabilizes a high performance work force by attracting and retaining high caliber employees. As NCTR concludes: don’t let anyone take it away!

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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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