Cypen & Cypen
JULY 17, 2008
Stephen H. Cypen, Esq., Editor
Miami-Dade County Commission Chairman Bruno Barriero on June 25, 2008 introduced a resolution calling for a referendum on whether to amend the Miami-Dade County Home Rule Charter to require transfer of fire protection and rescue services from all municipalities to the County. The County Commission will hold a special meeting on July 18, 2008 at 9:30 A.M. to consider the Chairman’s resolution and other items. If the resolution is adopted, the question would be placed on a special election to be held at the same time as the general election, on November 4, 2008. To our knowledge, the following municipalities maintain fire protection and rescue services separately from the County: City of Coral Gables, City of Hialeah, City of Miami, City of Miami Beach and Village of Key Biscayne.
UBS Global Asset Management announced that its U.S. Pension Fund Fitness Tracker, a quarterly estimate of overall health of a typical U.S. defined benefit pension plan, shows pension funding ratios rose 3% in the second quarter of 2008. After a painful start to the new year, pension plans recouped some of their first quarter losses during the second quarter. According to the U.S. Pension Fund Fitness Tracker, a typical U.S. pension fund started the second quarter with a funding ratio of approximately 90% and ended the quarter stronger at approximately 93%, reversing some of the 11% drop witnessed in the first quarter. Although funding ratios have recovered from their lows, they are still off by almost 20% from the highs they hit in mid-2007. Overall, plans have experienced extreme volatility from that peak until now. The quarter’s funding ratio performance was driven by two factors that affected the funding ratio in opposite ways: (1) equity markets remained volatile and ended the quarter down slightly, which decreased value of the asset pool from which plan participants’ benefits are paid and (2) higher interest rates, which decreased present value of pension liabilities that more than offset the drop in assets, causing the funding ratio to rise. For your information, funding ratios measure a pension fund’s ability to meet future payout obligations to plan participants. The main factors impacting the funding ratio of a typical U.S. DB plan are equity market returns, which grow (or shrink) the asset pool from which plan participants’ benefits are paid and liability returns, which move inversely to interest rates.
We previously reported that a federal appellate court had upheld trial court rulings against Hames’s challenges to forfeiture of his pension (see C&C Newsletter for May 22, 2008, Item 2). What we failed to report then was that the appellate court’s opinion was “unpublished,” meaning that although binding among the parties, the decision may not be relied upon as precedent. Subsequent to the opinion, two of the prevailing parties moved to have the opinion published. By Order dated July 10, 2008, the court has denied those motions, so the opinion will remain unpublished. Hames v. City of Miami, Case No. 07-11821 (U.S. 11th Cir., July 20, 2008).
Almost three out of five new middle class retirees will outlive their financial assets if they attempt to maintain their pre-retirement standard of living, according to a new study conducted by Ernst & Young LLP on behalf of Americans for Secure Retirement. According to U.S. Newswire, the study also finds that middle income Americans entering retirement now will have to reduce their standard of living by an average of 24% to minimize likelihood of outliving their financial assets. Those Americans seven years out from retirement are even less prepared, and the study estimates that they will have to reduce their standard of living by even more, an average of 37%. These reductions will be necessary even when assuming that retirees can maintain the same standard of living with income equal to 59- to 71% of their pre-retirement wages! Retirees are much better prepared to have a financially secure retirement if they have a guaranteed source of retirement income beyond Social Security, such as an annuity or defined benefit plan. One other key finding: married couples are more likely to outlive their financial assets, due to longer joint life spans, than single households. How much more evidence must there be before DC proponents get the picture?
The cover story on International Foundation of Employee Benefit Plans, Inc.’s July 2008 Benefits & Compensation Digest carries that title. Today’s retirement education lacks measures of individual success. Until success is clearly defined and adult learning-based content is aligned with that definition, retirement education will continue to be a variety of topics taught to adults who are not motivated to learn. Personal motivation is the most effective adult education tool. Therefore, retirement education that harnesses personal motivation is the most effective. If employers offer retirement education, they should require providers to prove they actually educate employees, especially if any of the participants’ money acquired through plan fees is used to provide education. After all, employees should be getting value for their money. At a minimum, retirement educators should ensure that employees (participants and nonparticipants):
Some in the retirement industry refer to 401(k)s and other undefined benefit plans as “America’s retirement plans.” However, if these plans fail to help the majority of eligible employees to retire with a reasonable level of comfort and dignity, America could face a sad and costly social and financial problem. (See Item 4 above.) The ultimate goal of any retirement education approach must be to create employees who have a passion for achieving their personal retirement dreams, and who are able to define their own success. Amen.
The July 2008 Benefits & Compensation Digest also contains an article asking that very question. While there are many factors involved in building and maintaining a first-rate web site, the three areas reviewed in the article -- web site ergonomics, basic content selection and hosting -- are the essential building blocks. A state-of-the-art web site will allow funds to keep pace with the evolving online information access needs of their participants as well as to reap financial, administrative and legal benefits. In addition, a well-designed and maintained web site can increase the level of administrative services and attention that members receive and improve their awareness and the value of the various benefits the fund provides. Moreover, it will enable the fund to meet ever growing technology and self-service expectations set by today’s business practices and high-tech world.
Brookens filed an action pursuant to the Employment Retirement Income Security Act of 1974 against General Motors and its pension plan. By her complaint, she sought interest or “disgorgement of profits” on the lump sum payment for the twelve and a half years between her ex-husband’s death and payment of that lump sum. The pension plan provided survivor coverage with respect to a spouse to whom an employee or former employee is married, but only if the couple shall have been married throughout the one-year period ending on the date of the employee’s or former employee’s death. Nevertheless, the surviving spouse benefit could be preserved if so provided by terms of a Qualified Domestic Relations Order. After rejecting several proposed Qualified Domestic Relations Orders, the pension plan approved one (which was retroactive), paid an accrued lump sum benefit in excess of $25,000 and commenced monthly pension payments. Beyond benefits due under terms of a plan, ERISA permits a beneficiary to sue for “other appropriate equitable relief.” This statutory language encompasses claims for interest on delayed payments, but only (1) to address violations of ERISA or terms of an ERISA plan or (2) to enforce any provisions of ERISA or terms of the plan. Here, the pension plan’s decision to reject prior submitted documentation was not arbitrary and capricious. In granting summary judgment against Brookens, the United States District Court concluded that she had not established benefits had wrongfully been withheld prior to payment of a lump sum, and thus was not entitled to interest on the lump sum payment. Brookens v. General Motors Corp., Case No. 07-387 (D. DE., July 1, 2008).
Watson Wyatt has been comparing rates of return between defined benefit and defined contribution plans for more than ten years. Earlier studies found that, over time, DB plans attained higher returns than did 401(k) plans. Between the bull markets of the late 1990s, 401(k) plans outperformed DB plans. But Watson Wyatt’s 2004 analysis of data through 2002 found a reversal of fortune in both the stock market and rates of return, suggesting that DB plans outperformed DC plans during bear markets. The analysis finds that DB plans outperformed 401(k) plans even in the bull markets of 2003 through 2006. Achieving consistently high investment returns in volatile financial markets is challenging. The shift from DB plans to 401(k) plans has raised concern about whether today’s workers will have sufficient resources for a secure retirement. In a DB plan, the sponsor assumes investment risk and, generally, responsibility for providing lifetime retirement income. With 401(k) plans, however, it is up to employees to invest wisely and build up enough savings to last a lifetime. Watson Wyatt’s most recent comparison of investment returns finds that between 1995 and 2006, DB plans outperformed DC plans by an average of 1% per year. In terms of asset-weighted medians, DB plans substantially outperformed 401(k) plans through the recent bear-to-bull market cycle (2000-2006). Over the 12 year span from 1995 to 2006, DB plans outperformed 401(k) plans through all the ups and downs of financial markets by an average of 109 basis points. In addition, 401(k) plans have more administrative expenses, which are bundled into fees and deducted out from returns, which could explain a portion of the performance difference. Once these bundled noninvestment-related expenses are added back into rates of returns, however, DB plans still outperform 401(k) plans by 100 basis points. In terms of plan-weighted medians, 401(k) plans actually outperformed DB plans during the 2003-2005 bull market, while DB plans outperformed 401(k) plans in 2006. Comparing investment returns using both plan- and asset-weighted methods does not change the fact that, on average, DB plans outperformed 401(k) plans over the 12-year analysis. Trustees for DB plans have a fiduciary responsibility for investment performance. They or the professionals they hire also usually have considerable financial education, experience, discipline and access to sophisticated investment tools -- advantages not typically shared by individual participants in 401(k) plans. These advantages help DB plan investors maximize their returns and maintain well-diversified portfolios so they can generally ride out market fluctuations more smoothly than 401(k) plan participants. Time will tell whether 401(k) participants will learn to manage their new investment responsibilities more effectively to ensure adequate retirement income in the future. Plan sponsors and regulators have implemented devices and strategies to help offset the knowledge gap between institutional and individual investors, such as the recent regulation that defines default investments for participant-directed plans. In the absence of investment direction from a 401(k) plan participant, the regulation allows the fiduciary to invest the participant’s assets in a qualified default investment alternative (QDIA), which must be a life-cycle/target date fund, a balanced fund or a professionally-managed account. These default investments may help mitigate the risk many 401(k) employees incur by failing to rebalance their assets over time. While these results do not reflect effects of the new “autopilot” investment returns, future analyses will investigate whether these widespread design changes will help close the gap in returns. Don’t count on it.
According to pionline.com, a funny thing happened on the way to the fundraising: many pension funds -- long the main source of capital for most large investment pools -- found themselves largely ignored. Executives at fixed-income specialists that raised credit funds recently perceived a very narrow window of market opportunity and set deadlines for commitments so tight that most pension funds could not make a decision in time to participate. And for perhaps the first time in modern investment memory, money managers did not delay their fund closings to accommodate the meeting cycles of slow-moving pension boards of trustees. Instead, they turned to sovereign wealth funds and a very small cadre of U.S. institutional investors able to make fast decisions and with sufficient liquidity to meet the large minimum commitment size, typically, at least $100 Million a pop. In fact, sources said fixed-income managers were wildly successful in their latest marketing splits, raising at least $300 Billion for hedge funds, structured investment vehicles and other strategies. Among the few pension funds able to participate were $245 Billion California Public Employees’ Retirement System and $169 Billion California State Teachers’ Retirement System, both of which have for some time given staff discretion for certain investment classes to ensure investment opportunities are not missed. (For CalPERS, at least, we hope these investments do not turn out to be another boondoggle. See C&C Newsletter for June 19, 2008, Item 7.)
Watson Wyatt has released its annual survey to rank the largest investment managers in areas of real estate, fund-hedge-of-funds, private equity fund-of-funds, infrastructure and commodities. According to the research, alternative assets (only fund-of-funds) managed on behalf of pension funds by the world’s largest 99 investment managers grew by 40% in 2007 to $822 Billion from $586 Billion the year before. Included are 190 investment manager entries composed of: 57 in fund-of-hedge-funds, 52 in real estate, 50 in private equity fund-of-funds, 14 in commodities and 17 in infrastructure. In the private equity and hedge fund area, this ranking is focused purely on fund-of-funds, which have traditionally been of most interest to pension funds. For real estate, commodities and infrastructure, direct managers are included. Real estate managers led the ranking, occupying the top 9 positions and accounting for 62% of assets. Infrastructure managers were included in the research for the first time this year, and all 10 new entrants were ranked in the top 99, accounting for 5% of assets.
Congress created individual retirement accounts with two goals: (1) to provide a retirement savings vehicle for workers without employer-sponsored retirement plans and (2) to preserve individual’s savings in employer-sponsored retirement plans when they change jobs or retire. Questions remain about IRAs’ effectiveness as a vehicle to facilitate new, or additional, retirement savings. The United States Government Accountability Office was asked to report on (1) the role of IRAs in retirement savings, (2) the prevalence of employer-sponsored and payroll-deduction IRAs and barriers discouraging employers from offering these IRAs and (3) changes that are needed to improve IRA information and oversight. GAO reviewed published reports from government and financial industry sources and interviewed retirement and savings experts, small business representatives, IRA providers and federal agency officials. Several factors may discourage employers from offering employer-sponsored IRAs to employees, including administrative costs and concerns about employer fiduciary responsibilities. Information is lacking on how many employers offer employer-sponsored and payroll-deduction IRAs with the actual costs to employers for administering payroll-deduction IRAs. The Department of Labor does not have jurisdiction over payroll-deduction IRAs. GAO suggests that Congress may wish to consider whether the payroll-deduction IRAs should have some direct oversight. A clear oversight structure could be critical if payroll-deduction IRAs become a more important means to provide a retirement savings vehicle for workers who lack an employer-sponsored retirement plan. GAO-08-590 (June 4, 2008) and GAO-08-890T (June 26, 2008).
The United States Department of the Treasury has issued the fifth-in-a-series of Briefs on Social Security reform. The fundamental reason Social Security must be reformed is that scheduled payments under current law exceed the future revenues that the system is projected to receive. (Specifically, scheduled benefits have a present value that is $13.6 Trillion greater than the present value of projected revenues.) The brief discusses the possible role that progressive reductions in scheduled benefits would play in Social Security reform. A progressive reduction in scheduled benefits would have high earners bear a relatively larger share of the burden of adjustments needed to make Social Security permanently solvent, while workers with low earnings would be relatively shielded from impact of benefit reductions. Under such change, reduction in scheduled benefits expressed as a share of wages while working would be higher for high-wage workers than it is for low-wage workers. While there is considerable disagreement about the precise nature and timing of reforms that will ultimately make Social Security solvent, there is broad agreement that progressive benefit adjustments will be a key component of those reforms. Indeed, most proposed reforms to move Social Security toward permanent solvency call for benefit changes of this type.
MetLife’s Mature Market Institute has released its second Retirement Income IQ Study. In 2003 and again in 2008, MetLife used a nationally representative survey to measure financial knowledge of pre-retirees. The new 2008 survey reveals:
The 2008 survey results demonstrate some very concerning retirement income misconceptions, with the overall average score just 43 on a 100 point scale. Some particularly important findings centered on incorrect assumptions that could put many respondents at risk for outliving their assets in retirement. For example, almost seven in ten (69%) respondents overestimated how much they can draw down from their retirement savings -- with 43% saying they believe they can withdraw 10% or more each year while preserving their principal -- even though most retirement experts suggest a withdrawal rate of no more than 4% annually. Almost half (49%) underestimate the amount of pre-retirement income they will need in retirement, believing that they will need only 50% or less of their pre-retirement income, when experts are recommending figures of 80%-90%. Over half (56%) of pre-retirees are now aware that longevity risk, the risk of outliving their retirement savings, represents the most important financial risk facing them in retirement. Despite significant improvements over 2003, the results suggest there remains a lack of understanding in applying that knowledge. For example, six in ten (60%) respondents underestimate their chances of living beyond a given average life expectancy. The rate at which pre-retirees have identified they would withdraw from their retirement savings suggests that today’s longer life expectancy is not being fully considered in their retirement calculations. Good news and bad news.
The Wharton School’s Pension Research Council has issued two new Working Papers. The following come from abstracts of said Working Papers.
A. Managing Public Investment Funds: Best Practices and New Challenges. Publicly-held pools of assets have grown dramatically over the last several years, and they are playing an increasing prominent role in cross-national investments. The paper examines how better to secure prudent and economically sound public fund management policies, focusing on ways to formulate and build a strong governance structure for managing the assets, how one might protect the assets from political interference and what sensible investment policy might entail. The authors compare three distinct forms of public funds, namely, foreign exchange reserve funds, sovereign wealth funds and public pension funds, to highlight similarities and differences among them. The authors also explore how their management structure relates to governance practices and country-specific characteristics, drawing from the pension and corporate finance literature. Finally, the authors discuss alternative means of managing public reserve funds in aging economies such as Japan, to help meet future social security liabilities in face of rapid demographic aging. PRC WP2008-07 (May 2008)
B. The Future of Public Employee Retirement Systems. At a recent Wharton Impact conference hosted by the Pension Research Council, an energetic cast of academics, financial experts, regulators and plan sponsors examined the challenges facing public retirement systems in the United States and around the world. The event included speakers who traced the evolution of public sector pensions and retiree health programs, compared public with private sector pay and benefits and took up public policy concerns regarding accounting and management in public employee plans in the United States, focusing on ways properly to measure liabilities and how to make the plans more cost effective. Discussion also included analysis of defined contribution versus defined benefit plans for the public sector, and funding of federal retirement systems, both civilian and military. International lessons were brought to bear with discussion of reforms in the German, the Japanese and the Canadian public employee plans. PRC WP2008-08 (June 2008)
Four years ago the Law Enforcement Officers Safety Act became law. It amended the Federal Criminal Code to authorize a qualified law enforcement officer carrying photographic governmental agency identification to carry a concealed firearm, notwithstanding any state or local law. It declared that this provision shall not be construed to supersede or limit laws of any state that (1) permit private persons or entities to prohibit or restrict possession of concealed firearms on their property or (2) prohibit or restrict possession of firearms on any state or local government property, installation, building, base or park. “Qualified law enforcement” is defined as (1) a current governmental agency law enforcement officer who is authorized to carry a firearm, who is not the subject of disciplinary action, who meets agency standards that require the employee regularly to qualify in the use of a firearm, and who is not under the influence of alcohol or another intoxicating or hallucinatory drug or substance and (2) a retired law enforcement officer who retired in good standing from public agency service, who was regularly employed as a law enforcement officer for at least 15 years, who has a nonforfeitable right to agency retirement benefits, who has met the state’s standards for training and qualification for active law enforcement officers to carry firearms during the most recent 12-month period and who is not under the influence of alcohol or another intoxicating or hallucinatory drug or substance. Machine guns, firearm silencers and destructive devices are excluded from the definition of “firearm.” However, despite its purported effective date of 2004, the law had no meaning in Florida until July 2007. Huh? Yes, that’s right. Until July 1, 2006 the State of Florida had no statewide shooting standards. Thus, the federal law had no application to Florida retirees until July 2007, 12 months later. Better late than never, we guess.
Two separate independent peer reviews, one conducted by a team of international auditors and the other by one of the nation’s leading accounting firms, have given the U.S. Government Accountability Office a “clean opinion” on quality assurance systems the agency uses to produce its reports and testimony to Congress. An international peer review team, led by the office of the Auditor General of Canada, examined GAO’s performance audit work. The accounting firm KPMG LLP focused on GAO’s financial audit work and attestation engagements. Reports from both teams concluded that policymakers and the public can be confident of the facts and analyses presented in GAO’s studies. In addition, the international peer review team cited several exemplary practices at GAO that national audit offices in other countries may wish to emulate. The international peer review and KPMG LLP reviews, which, respectively, took seven and four months to complete, examined all aspects of GAO’s quality assurance framework -- from initial acceptance of new work to issuance of the final product. Teams made frequent visits to GAO to interview staff and study a sample of GAO audit products. GAO is required to undergo an independent external assessment of its quality assurance systems every three years. The 2004 assessments of GAO’s quality assurance system also provided a “clean opinion.” Now if we could just find somebody to give KPMG a clean opinion... .
A thief who stole a calendar got twelve months.
“True terror is to wake up
one morning and discover that your high school class is
running the country.” Kurt Vonnegut
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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.