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Cypen & Cypen
JULY 13, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


On June 20, 2006, Governor Bush approved Committee Substitute for Committee Substitute for Senate Bill No. 80, creating Chapter 2006-232. Effective July 1, any Florida agency, including a pension board, that operates a website and uses electronic mail shall post the following statement in a conspicuous location on its website:

Under Florida law, e-mail addresses are public records. If you do not want your e-mail address released in response to a public-records request, do not send electronic mail to this entity. Instead, contact this office by phone or in writing.

So, those pension boards operating a website and using electronic mail should make sure that their websites are appropriately updated to include the foregoing language in a conspicuous location. Also, although not required by the statute, we suggest that pension boards use the same legend on all of their e-mails.


A report from Pensions & Investments indicates that unfunded pension liabilities of the top 100 U.S. corporate pension plans continued to decline in 2005 -- falling 27.2% from the previous year. In dollar terms, the top 100 plans were underfunded by a total of $50.6 Billion in 2005, down from $69.5 Billion in 2004 and $89 Billion in 2003. Overall employer contributions to the top 100 plans dipped 3.3% to $35.7 Billion in 2005, down from $36.9 Billion in 2004. The top 100 plans saw their investment earnings dip in 2005. The average percentage return on plan assets for the top 100 U.S. corporate pension plans was 9.7% in 2005, down from 11.5% in 2004 and 17.2% in 2003. While funded status improved overall, 45 of the top 100 saw their funded ratios drop last year. Discount rates fell while expected long-term rates of return on assets stayed steady in 2005. The average discount rate for the top 100 plans fell to 5.6% in 2005, down from 5.8% in 2004 and 6.1% in 2003. The average expected long-term return on plan assets decreased to 8.5% in 2005 from 8.6% the year before. In their preliminary annual reports, companies sponsoring the 100 largest U.S. pension plans said they will contribute a total of about $12 Billion to their pension plans in 2006, although a number said the amount would depend upon pending accounting rule changes and pension reform legislation.


Based on a 2006 presentation at the Trustees and Administrators Institutes, a recent article in Benefits & Compensation Digest covers a number of minitopics with pros and cons for each. The following deal with two of the subjects, defined benefit plans vs. defined contribution plans and growth investing vs. value investing:

Defined Benefit Plans vs. Defined Contribution Plans

Advantages of Defined Benefit Plans include:

A. The amount of benefit is fixed at retirement. The plan participant knows exactly how much he will receive at retirement, thus easing retirement planning process.

B. Greater benefit security. The participant knows his benefit will be paid for life. No matter how long the participant lives, the benefit never expires. A provision can also be made for a spousal beneficiary for the beneficiary’s life.

C. Simpler plan administration. The defined benefit plan does not have to keep track of individual account balances for participants.

D. Benefits can be provided at a lower cost. In a defined benefit plan, not every participant for whom the plan receives contributions will receive a pension. Those who do not earn a pension, because they do not earn sufficient credits, pay for a portion of the costs of those participants who do earn a pension.

E. A defined benefit plan can provide benefits for prior years of service. This is a tremendous advantage in the multiemployer plan world where a plan can be designed to reward workers with many prior years and provide similar benefits to those workers who still have many years to go before retirement.

Advantages of Defined Contribution Plans include:

A. There are no funding issues and there are no actuaries involved. Defined benefit plans require complex calculations and assumptions that have to be made and readjusted every year. What the participant has in his defined contribution account is what he gets at retirement.

B. The participant bears the investment risk. Many defined benefit plans are underfunded because of poor stock market years, which can result in eventual termination of the plan. Underfunding is often difficult to cure.

C. The participant can accumulate more in a defined contribution plan. In a defined benefit plan, there normally is a maximum amount of pension benefit that can be earned in a given year.

D. Individualized investment return. Administration of a defined contribution plan can allow participants to select their own investments. A participant is allowed to set his own investment objectives and risk tolerance.

E. Loans and hardship withdrawals. The primary purpose of both the defined benefit and a defined contribution plan is to provide for retirement. Only the defined contribution plan, through a loan program or hardship withdrawal program, allows a participant access to his money before retirement.

Growth Investing vs. Value Investing

The Advantages of Growth Investing are

A. Growth return beats value return in the long run. It is true that growth investing has higher risks than value investing, but with higher risk generally comes higher reward. In every long-term period measured, growth stocks have done better than value stocks.

B. Earnings growth is worth paying for. Some stocks seem always to be priced at a high multiple to their earnings. If the earnings of these same companies continue to escalate at a rate significantly higher than other companies, then the high price paid is easily justified.

C. Is a value stock truly a bargain? You can wait so long for a value stock to realize its potential that the average growth stock has significantly appreciated in the meantime. A value stock is often bought anticipating its future value. A growth stock is often bought for its escalated earnings growth.

D. A value stock is often inexpensive for a good reason. Stocks can become value stocks because of earnings decline or for numerous other pieces of bad news. There is no guarantee the bad news is going to be replaced by good news.

E. Past growth is an indicator of future growth. A growth stock that has grown quickly in the past is not guaranteed to continue a high rate of growth forever, but it is much more likely to escalate than a company that has never obtained a significant rate of growth.

The Advantages of Value Investing are

A. Value stocks decline less in bad stock market years. In the three years ended December 31, 2002, the average large growth mutual fund declined by 21.7% per year, while the average large value mutual fund declined by 6% per year. It will take many years of superior performance to make up that difference.

B. Ultimately, the growth rates of growth stocks cannot be sustained. If you always buy stocks with a high-earnings multiple, something will eventually happen that does not justify the price being paid. A growth stock cannot afford to have one bad quarter of earnings. If it does, the stock market will punish the offender with a severe price decline.

C. Most growth investors are too late. The time to buy growth stock is before the earnings multiply. By the time most managers buy so-called growth stocks, all the major growth has already taken place.

D. Value returns ultimately beat growth returns. Value stocks normally pay dividends while many growth stocks do not. When you combine the dividend yield with price appreciation, value stocks often have a superior return.

E. Pension plan trustees do not own the investments. The plan owns the investments for the exclusive benefit of plan participants. Anyone who owns securities has the right to assume whatever risk is appropriate with that ownership. When you are responsible for money that will be used to fund retiree’s benefits, you need to be prudent and you need to be cautious.

The above items cover only two of the topics debated at the Institutes. The arguments presented are certainly biased in that they ignore the strength of the opposing point of view. There are at least two sides to every issue and Americans love to take sides. There are always topics to debate in the employee benefits arena when trustees, participants and service providers strive to make the best decisions for their respective plans.


According to the Lafayette-West Lafayette (Indiana) Journal and Courier, about fifteen former members of the Merchant Marine are urging Congress to pass U.S. House Resolution 23, which is a belated “thank you” to the Merchant Mariners of World War II. The bill would also give the Mariners a pension of $1,000 a month for the rest of their lives. The House Resolution, which has 258 co-sponsors, has been before the Committee on Veterans Affairs since being introduced on January 4, 2005. However, the veterans accuse Representative Steve Buyer, Chairman of the Committee, of deliberately impeding passage of the bill. Merchant Mariners volunteered for service but were paid seamen who earned a salary similar to their Navy counterparts. During World War II, members of the Merchant Marine transported bombs, gasoline, shells, ammunition, food, guns, vehicles, planes, medicine and other supplies across dangerous waters. Some estimates are that 9,497 Mariners died during the war, which would mean they fell at a higher rate than did men in any other branch of the military. Yet, these warriors were not officially recognized as veterans until 1998, which prevented them from taking advantage of the GI Bill that would have helped pay for college. We apologize to Samuel Taylor Coleridge for the above caption.


Stagflation is what happens when you have little economic growth with a good bit of inflation. It is an awful environment for stocks, and it could come back, according to columnist Jim Jubak. There are inflation worries, of course. Financial markets are worried that inflation is running so hot that the world’s central banks will raise interest rates again to fight it. That would not be good for either stock or bond prices. There are slow-growth worries, of course. The concern here is that the central banks will overshoot and raise interest rates so high in their battle with inflation that they will either slow or stop economic growth. That certainly would not be good for stocks and if growth slowed enough, rising bad debt could take a bite out of some sectors of the bond market. And now there are stagflation worries to add to the list. Concerns that we could see a rerun of stagflation, that dreadful mix of slow-to-no growth and high inflation that made a good part of the1970s such a bad time for investors, have been on the rise this year. The Bank for International Settlements, based in Switzerland, warns in its most recent annual report that global stagflation is a real possibility. The bank, an international organization of central banks, argues that central banks from the Federal Reserve to the European Central Bank have misunderstood the effects of globalization on inflation. Globalization, the bank says, kept inflation low in the world’s developed economies. Low-priced overseas goods replaced higher priced domestically-produced goods, lowering prices. Competition with low-cost overseas producers forced domestic producers to lower prices, as well. That also acted to dampen inflation. During this period, the prices of overseas goods were not just lower than those produced by domestic competitors, they were also falling over time. Thanks to massive overcapacity in manufacturing centers, such as China and India, overseas producers were forced to compete with themselves and repeatedly to lower prices to keep the business of price-sensitive retailers (like Wal-Mart Stores) in the developed economies. Intervention in the currency markets by national governments kept prices of overseas goods from rising. Low and falling global prices masked the effects of an expanding money supply in the developed world. Interest rates that fell to 0% in Japan and 1% in the United States provided a huge boost to the global money supply, especially as investment funds borrowed money at these rates to leverage their capital assets. In other circumstances, an increase in money supply of these dimensions should have produced measurable global price inflation. But it did not. Traditional measures of domestic inflation in the developed economies did not show rising prices. With inflation prices measures showing inflation still contained, the Bank for International Settlements argues, the world’s central banks kept the money supply spigots wide open for longer than they should have. That has built up considerable inflationary pressure around the world. If the Bank for International Settlements is right, the global economy has built up significant inflationary momentum because global central banks, which did not see inflation in their usual measures, kept the money supply growing too fast for too long. That has created exactly the kind of inflationary situation described by monetarists in which too much money supply faces too little demand for money. To unwind that monetary imbalance, central banks will have to tighten by reducing money supply growth and by raising interest rates to levels that are well above current rates and quite possibly well above levels that are compatible with solid economic growth. So, we could be headed for slow growth and high inflation for awhile -- even if everything goes well in the effort to slow inflation by raising interest rates. Although stagflation is not a certainty, Jubak sees a plausible scenario that gets us to that very uncomfortable position.


According to BusinessWeek, the city with the highest percentage of millionaires is tucked away in Northern New Mexico. Almost 10% of the nearly 19,000 residents of Los Alamos are millionaires, the highest of any U.S. metropolitan statistical area. Here are the top ten:

Los Alamos, NM - 9.7%
Naples/Marco Island, FL - 8.6%
Bridgeport/Stamford/Norwalk, CT - 7.2%
Vero Beach, FL - 7.2%
San Jose/Sunnyvale, CA - 6.9%
Sarasota/Bradenton/Venice, FL - 6.7%
Easton, MD - 6.7%
Hilton Head Island/Beaufort, SC - 6.6%
San Francisco/Oakland, CA - 6.4%
Honolulu, HI - 6.4%

Once again, we suspect that nobody considered the Village of Indian Creek, FL, population 33, 100% of whom are probably millionaires.


“Money can’t buy happiness, but it will certainly get you a better class of memories.” Ronald Reagan

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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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