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Cypen & Cypen
July 13, 2017

Stephen H. Cypen, Esq., Editor

1.  MOVE TO 401(k) PLANS IS DAMAGING TO NATIONAL RETIREMENT SECURITY:  The Hill reports that Andrew Biggs’s article “Who Killed Retirement Security? If You Look Closely It Wasn’t the 401(k)” (May 28) can almost be classified as “fake news.” References in the article are vague, and in some cases misleading. For example, the article refers to a 2016 Census Bureau study, but the URL takes the reader to a National Bureau of Economic Research study that focuses on women’s retirement issues. The only thing that Biggs’s article is right about is that “unlike traditional pensions, 401(k)s can only promise what they can pay.” In other words, you are on your own in retirement. If your 401(k) service provider rips you off or goes under, tough luck. There is no recourse. There is no agency that protects bank savings accounts for 401(k) plans. Furthermore:

  • Herbert Whitehouse, former human resources executive at Johnson & Johnson and one of the first to suggest workers use 401(k)s to supplement their retirement income, acknowledged in a Jan. 2, 2017 article in The Wall Street Journal that the 401(k) experiment has been a failure.
  • A 2015 Government Accountability Office (GAO) study found that 29 percent of Americans 55 and older do not have any retirement savings or a pension. Those who do have a retirement savings plan do not have enough money. For example, the GAO study finds that 55- to 64-year-olds have an average of $104,000 and those 65 to 74 have $148,000 in savings.

According to findings by the National Institute on Retirement Security, the U.S. has a $14 trillion retirement savings deficit as measured by retirement account balances. The truth is that there is a retirement savings crisis, and it is due to a massive shift from traditionally defined benefit (DB) pensions to do-it-yourself 401(k)-type retirement savings schemes. Research indicates (a) that had there been no shift from DB retirement plans to defined-contribution (DC) plans, there would be no national retirement savings deficit, and (b) an analysis of empirical data predicts the dismantling of public-sector pensions in favor of 401(k)-type DC plans increases income inequality, drags the economy down and would inflict $3.3 trillion worth of damage to the national economy by the year 2025. And to top it off, 401(k) plans cost more than pensions to manage, and are mostly available to well-to-do employees who have other retirement resources, rather than the working poor, who need retirement security the most.
2.  FIVE WAYS A 401(k) IS NOT AS GOOD AS A PENSION – Forbesreports that over the course of a generation, pensions have gone from relatively widespread to mostly limited to certain public sector jobs. By last count, fewer than 5% of private sector employers still offer them. In its place the new paradigm of the 401(k) has emerged. The unease most Americans feel about retirement can be traced to the decline of pension plans and their replacement with 401(k)s. These 401(k) plans (often referred to as defined contribution plans, in contrast with pensions’ defined benefit structure) cut costs and risks for employers because companies were no longer on the hook if their employees lived longer than expected or markets performed less favorably than predicted. The 401(k) also improved on some of the pensions flaws. How? For one thing, the 401(k) is portable. That means the money you earn with one employer can move relatively seamlessly to your next employer. With a pension, that was not the case. The 401(k) also allows for more choice. Younger employees are able to take more risk in hopes of higher returns. But in this shift to the 401(k), your retirement plan now acts like any other investment vehicle — unpredictable in the end result, leaving you unable to answer basic questions like when to retire and what kind of standard of living you can reasonably support. Let us be honest — pensions did some things way better than today’s 401(k)s do. According to Matt Carey, here are five reasons why you might wish you still had access to a pension for your retirement income:
Reason 1: A pension provided protection from market risk. With a guaranteed income coming in the door each month, people on pensions did not have to worry whether their savings, meant to support them for the rest of their lives, would suddenly disappear in the event of a market crash.
Reason 2: A pension provided protection from outliving your savings. Lifespans have increased substantially over the last generation (despite some recent data indicating certain parts of the population may be seeing slight declines), and while that means more time with grandkids, it means saving more money. It is hard to predict in early retirement whether you should prepare for a 15 or 30 year retirement and that makes things more difficult if you do not have lifetime income. (See item 15 below.)
Reason 3: A pension lets you budget your retirement expenses.With a pension, you know exactly what is coming in the door each month. Even better, when you have more retirement income, you can take more risk with your investments in the market, without fear that riskier investment decisions will leave you unable to cover even the bare basics.
Reason 4: It is hard to translate the assets in a 401(k) into a steady monthly benefit. It is on you to budget and withdraw what you think you will need each month, putting greater responsibility in your hands and increasing the risk of outliving savings.
Reason 5: A pension incentivizes you to be healthy. If you have lifetime income, living longer is a good thing, not one that induces worry that you might not have enough. Knowing you do not have a timer on your savings incentivizes people to be healthy and stay healthy, enjoying life for what it can offer rather than worrying what to do if you are enjoying life for a longer period than you, or the market, could estimate. With a pension, you are guaranteed an income stream to cover your basic expenses regardless of how long you live. (See item 15 below.)
Those who created 401(k)s never meant for them to replace the pension, but that is what has happened. There is an ongoing debate about whether the shift to the 401(k) was a net positive or negative. Although private savings retirement in aggregate is higher since the 401(k) was created, the need for more retirement income has outpaced savings and the concentration of retirement assets has disproportionately benefited the most wealthy retirees. Pensions offered something very different from what today’s 401(k) provides. The 401(k) is a way to save money, but it is not a source of guaranteed lifelong retirement income, like a pension is. The 401(k) is a way to save money, but it is not a source of guaranteed lifelong retirement income, like a pension. There is good reason to believe that for individuals, pensions provided something far more valuable than the current do-it yourself 401(k) system provides. It certainly had flaws and it is unlikely to see a comeback, but there is good reason to believe that aspects of our old pension system should be part of our future retirement paradigm.
3.  INSURANCE COMPANY PROHIBITED FROM TAKING OFFSET FROM PERSONAL INJURY PROCEEDS AGAINST LONG-TERM DISABILITY PLAN:  Appellant Salvatore Arnone, a New York resident, appealed from a judgment of the United States District Court for the Eastern District of New York, denying his motion for summary judgment and granting the summary judgment motion filed by Appellee, Aetna Life Insurance Company, an insurer registered to do business in New York. After an accident, Arnone became disabled, entitling him to long‐term disability benefits under a benefit plan created by his employer, administered and insured by Aetna, and governed by the Employee Retirement Income Security Act of 1974. Arnone began collecting disability benefits after the accident; he also sued in New York state court against those allegedly responsible for his injuries, and settled that suit. Following the settlement, Aetna reduced Arnone’s Plan benefits, on the theory that the settlement payment duplicated sums otherwise due Arnone under the benefit Plan. The Appellate Court concluded that that Aetna’s determination contravened New York General Obligations Law §5‐335, which provides that when a person settles a claim  for personal injuries it shall be conclusively presumed that the settlement does not include any compensation for costs obligated to be paid or reimbursed by an insurer. The court also concluded that neither ERISA nor the Plan’s choice of law provision (which identifies Connecticut law as controlling the Plan’s construction) blocks application of that section. Thus, as to the issue of Arnone’s entitlement to the past and ongoing benefits that Aetna has not paid on the ground that they are duplicative of Arnone’s personal injury settlement, the District Court erred in granting Aetna’s motion for summary judgment and denying Arnone’s motion for summary judgment. Arnone is entitled to the unpaid benefits. Arnone v. Aetna Life Insurance Company, No. 15-2322, U.S.(2d Cir. June 22, 2017).
4.  ALL SKEWED UP? THE ACTIVE VERSUS PASSIVE DEBATE:  According to, there has been a lot of discussion about a recent academic paper, "Why Indexing Works," which makes a statistical case for passive investing in equities. The same logic applied to bonds, though, may make the opposite case: Passive fixed income management does not work, but active bond management does. The core of the argument for passive equity investing is the skewness of returns and hence further skewness in outcomes that arise when one looks at the resultant stock prices. While a normal distribution of returns is a reasonable approximation of outcomes and generates prices that are log-normally distributed and positively skewed, it understates what we observe in practice. To give a motivating example, the most an investor can lose from an equity investment is all of that investment – 100%. But if we look at the S&P 500 for 2016, the top-performing stock, Nvidia, was up 227% for the year. There's much greater upside than downside – positive skewness. If individual stock returns are positively skewed, what can we say about bond returns? We could go through the laborious exercise of examining return data, but a more elegant approach would be to appeal to the seminal work of Nobel laureate Robert Merton. The value of a company is the sum of the market values of its debt and its equity. As such, the equity is a perpetual call option on the value of a firm’s assets in excess of the face value of the debt. Further, corporate debt is the sum of risk-free debt plus a sold put with a strike price equal to the face value of debt. Calls are positively skewed; puts are negatively skewed. Presented another way, what is the most an investor could get back on a bond? If the bond is held to maturity, the investor gets accrued interest, future coupons and the principal. While bonds can appreciate in market value, over the life of the bond under most circumstances it returns approximately the yield. If the issuer defaults on the bond, the return can be substantially less. A likely return with capped upside – plus a possible return of substantial loss – equals a negatively skewed distribution of returns. If positive skewness is a headwind to active management, does negative skewness provide a tailwind? I’ll leave it to the academics to do the laborious work to disprove the conjecture – if they can. In the meantime, it's another indication that bonds are different than stocks.
5.  IRS LAUNCHES 2017 SUMMERTIME TAX TIP PROGRAM:  More than 719,000 taxpayers received plain-language Tax Tips directly to their email inbox during this past tax filing season and got the information they needed to help them file their taxes. Because taxes are year-round for many taxpayers, and many taxable situations arise during the summer months, the Internal Revenue Service offers a Summertime Tax Tip program that began July 3. The IRS is encouraging taxpayers to sign up now for this email service to help them get a jump-start on their taxes and learn about the tax implications of events that often occur during the summer months. The Summertime Tax Tip series, which offers helpful consumer tips written in plain language, covers a wide range of important subjects. Some of the 2017 Summertime Tax Tip topics include:

  • Tax scams do not take vacation; what is out there now
  • Teens and summer jobs
  • Vacation home rentals – tax implications
  • Getting married? Tax implications you need to know
  • IRS notices – What you could receive in the mail from the IRS

The IRS Tax Tips email service is available in English and Spanish. It provides new IRS Tax Tips via e-mail three times a week during the months of July and August. Subscribers will also receive a Tax Tip each day of the week during the tax filing season and Special Edition Tax Tips that are issued for “hot topics” that arise throughout the year. Taxpayers can sign up to receive IRS Tax Tips automatically for free
6.  ANOTHER SCARY FACTOID:  More Than Half of Americans Making Less Than $40,000 Annually Have No Retirement Savings, according tomoneytips.
7.  NEW OFFICE ADDRESS:  Please note that Cypen & Cypen has a new office address: Cypen & Cypen, 975 Arthur Godfrey Road, Suite 500, Miami Beach, Florida 33140. All other contact information remains the same.
8.  CRAZY STATE LAWS:  Good Housekeeping reminds us that there are crazy laws in every state. In Nebraska, you cannot get married if you have a venereal disease. That's a nice way of saying STDs.
9.  CYNICAL THINKING:  A recent study has found that women who carry a little extra weight live longer than the men who mention it.
10.  PONDERISMS:  Ever wonder about those people who spend $3.00 apiece on those little bottles of Evian water? Try spelling Evian backward.
11.  OLD CEMETERIES & EPITAPHS:  A truly happy person is one who can enjoy the scenery on a detour and one who can enjoy browsing old cemeteries. For example, a lawyer’s epitaph in England reads, Sir John Strange. Here lies an honest lawyer, and that is Strange.
12.  TODAY IN HISTORY:  On this day in 1960 the US Democratic convention nominates JFK as presidential candidate, as a result he became the 35th POTUS.

13. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.

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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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