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Cypen & Cypen
AUGUST 26, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


PLANSPONSOR, in a piece entitled “Against the Wind,” says that although the absolute percentage-use of hedge funds by public plans remains small, the number of public pension plans stepping in is growing. According to a report from Greenwich Associates, the percentage of U.S. public pension plans using hedge funds (directly or through funds of funds) has inched up from 6% in 2001 to 10% in 2003. However, although giant California Public Employees’ Retirement System is sometimes thought of as the leader in hedge fund investing, hedge funds currently represent less than 1% of its assets. When it comes to the subject of investments and fiduciary liability, we believe it is better to follow (deliberately) rather than to lead. Remember that “the purpose of a defined benefit fund is not to make the most money it can but to make sure that it earns enough to meet present and future obligations” (see C&C Newsletter for July, 1997, Page 2).


Although the Internal Revenue Service has yet to make an official announcement, Mercer Human Resources Consulting has issued estimates for qualified plans for the year 2005. Using the cost-of-living adjustment methods described in the Internal Revenue Code, the Consumer Price Index for July 2004 and projected CPI for August, Mercer projects the following key estimates. The Section 415 defined benefit plan dollar limitation will increase to $170,000.00 from $165,000.00. The Section 415 defined contribution limit will increase to $42,000.00 from $41,000.00. The Section 401 (a)(17) annual compensation limit will increase to $210,000.00 from $205,000.00. And the Section 457 deferred compensation limit will increase to $14,000.00 from $13,000.00. IRS will not announce official numbers until after the CPI for August and September have been ascertained.


In a unanimous vote on August 18, 2004, the U.S. Securities and Exchange Commission ordered mutual funds to stop paying increased commissions to brokers in exchange for promoting the companies’ funds. The practice, legal since 1980, is known as “directed brokerage.” The vote is part of the SEC’s crackdown on sales and trading abuses in the $7.5 Trillion mutual fund industry. Mutual funds pay the incentives by steering their trades to brokers who promote the companies’ funds and paying an increased commission, usually 5 cents a share instead of 2 cents. The commissions, of course, come out of the funds’ assets. The SEC started looking into fund sales practices last year, after discovering that one large brokerage house took secret payments from mutual funds in return for marketing their products. Ironically, the mutual fund industry has supported the SEC, contending that the “relatively” small amount involved in these arrangements was not worth the public relations fallout. (“Relatively” small? The chairman of just one mutual family fund estimated the extra commission costs at $40 Million a year! Just imagine how much money is really being made.)


The entity responsible for running New Jersey’s $70 Billion pension fund has approved a prohibition on the fund utilizing services of any investment manager that made political donations for state elections in the last two years, according to Investment managers proposing to do business with the fund must disclose quarterly statements showing any political donations. The rule also applies to money managers who solicit someone else to make a donation in their behalf. The new rule had been roadblocked by former Governor James McGreevey, but is particularly timely: the New Jersey fund is about to employ outside investment advisors for the first time.


Shedden appealed the decision of the Court of Appeals for Veterans Claims that affirmed the Board of Veterans’ Appeals’ denial of his claim for clear and unmistakable error in a 1994 BVA decision that denied service connection for a psychiatric disorder. The Court of Appeals for Veterans Claims determined that the following language in 38 U.S.C. §105(a) does not create a presumption of service connection:

An injury or disease incurred during active military, naval, or air service will be deemed to have been incurred in line of duty and not the result of the veteran’s own misconduct when the person on whose account benefits are claimed was, at the time the injury was suffered or disease contracted, in active military, naval, or air service, whether on active duty or on authorized leave, unless such injury or disease was a result of the person’s own willful misconduct or abuse of alcohol or drugs.

On further review by the United States Court of Appeals for the Federal Circuit, the court held that the statutory language “incurred in line of duty” and “service-connected” mean the same thing. However, denial of benefits was affirmed, because the error was harmless. The Court of Appeals for Veterans Claims had found, as an alternative ground for rejecting the claim, that there was no showing of a psychiatric condition incurred in active service that could give rise to the Section 105(a) presumption. Shedden v. Principi, Case No. 04-7001 (U.S. Fed. Cir., August 20, 2004).


The Massachusetts State Legislature enacted a law that exempts the $32 Billion Massachusetts Pension Reserve Investment Management Board from mandatory public disclosure laws. However, Governor Mitt Romney vetoed the legislation, according to Now, the Legislature has overridden the governor’s veto. Among other things, the legislation allows PRIM to retain confidential information concerning venture capital or private equity investments. Massachusetts joins Colorado, Michigan and Virginia, which all enacted similar legislation earlier this year.


The Society of Actuaries’ Pension Section announces availability of the Retirement Probability Analyzer software. The software explores in great detail the fundamental question of whether one will run out of money before dying, while maintaining a desired standard of living. “The software has been written to compute probabilities associated with a variety of requirement investment and spending strategies. It is intended to serve as a pedagogical tool to help the user develop an intuition for the impact of various asset allocation and annuity purchase decisions.” Didn’t we tell you that actuaries were exciting people?


A former Dayton police detective who served on the Ohio Police and Fire Pension Board was indicted for grand theft and an ethics violation. A county grand jury charged Thomas Bennett with accepting travel and other gratuities that improperly influenced his work as a member of the Board. Bennett is accused of receiving dinners, golf, alcoholic beverages, hotel costs, boating/fishing trips, holiday parties, transportation and gifts totaling thousands of dollars. The gratuities came from four firms hired by the Pension Board to manage its assets and investments. Bennett is trustee, who together with two other trustees, spent over $600,000.00 on out-of-state travel and other expenses between 1998 and 2003. This story was reported in the Cleveland Plain Dealer.


Although death is not the most pleasant subject, from what we can tell, it is somewhat inevitable. So, Forbes has listed the best places to die. Geography does dictate what kind of care is provided to the dying and whether death following illness occurs at home, in a hospital or in a nursing home. To create a state-by-state listing, Forbes looked at the following criteria: health care quality; legal protection; cancer deaths in hospital, nursing homes or at home; percent of Medicare patients using hospice in the last year of life; and estate taxes. Thus, in descending order, the top five places to die are Utah, Oregon, Delaware, Colorado and Hawaii. The worst places to die are New Jersey, Mississippi, Louisiana, Ohio and Illinois. And we always thought the worst place to die was on Broadway.

Copyright, 1996-2004, all rights reserved.

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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