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Cypen & Cypen
August 8, 2013

Stephen H. Cypen, Esq., Editor

      A.  Mercer L.L.C. reports that, on average, pension plans sponsored by companies in the S&P 1500 were 89% funded as of July 31, 2013, up from 88% at the end of June and from 74% at the end of 2012. Pension funding levels have not been that high since October 2008, when plans also were 89% funded.  Mercer estimated that 17% of plan sponsors had overfunded pension plans at the end of June, 2013, compared with just 4% as of the end of last year. In aggregate, the plans’ funding deficit in July fell by $10 billion, to $212 billion, down from $222 billion at the end of June, and sharply lower than the record deficit of $557 billion at the end of last year. 
  The funding status of the typical U.S. corporate pension plan in July, 2013 increased 1.6 percentage points, to 88.2%, according to BNY Mellon.  Year to date, the funded ratio is up 11.1 percentage points.  For U.S. corporate pension plans, the July improvement was driven by a 2.7 percent increase in assets, which was propelled by strong U.S. equity returns.  Liabilities for the typical plan increased 0.9 percent, as the discount rate on Aa corporate bonds fell four basis points, to 4.65 percent.  In the public sector, typical defined benefit portfolios outpaced their annualized 7.5 percent return target, as assets rose 3.3 percent over the month.  For the month, the excess return for these plans was 2.7 percent, as strong equity market returns were the main drivers for this positive performance. Year to date, plan assets are ahead of the return target by 2.6 percent.

     C.  Funded status of the 100 largest corporate defined benefit pension plans improved by $23 billion during July, as measured by the Milliman 100 Pension Funding Index. The deficit dropped to $158 billion, from $182 billion at the end of June, primarily due to a robust investment gain of more than 2% during July. The index funded ratio improved to 89.7%, up from 88.2% at the end of June.  Pension liabilities were virtually unchanged.  The market value of assets increased by $26 billion as a result of July’s investment gain of 2.04%. The index increased to $1.382 trillion, up from $1.356 trillion at the end of June.
2.  LEAKAGE IN 401(K) PLANS IS A CRISIS: Participants in 401(k) plans who take out loans may be sabotaging their retirement savings, according to New York Life Retirement Plan Services' first annualState of the Retirement Industry Report. Participants who take loans are more likely to save at a lower contribution rate than their counterparts, and are not likely to repay the loan when leaving their employer. The average contribution rate for a participant who takes out a loan from his 401(k) is 5.63%, compared with 7.23% for participants without loans. In addition, the study found that more than two-thirds of participants with an outstanding loan balance who leave their employer will take a cash distribution from their retirement plan rather than paying back the loan. Preventing this so-called leakage is very important in helping workers successfully save for retirement.  Americans are not saving enough for retirement, and compounding this problem is that loans can drain precious retirement dollars. Industry needs to reverse the ATM mentality that has developed around 401(k) savings, by encouraging sponsors to rethink loans from a plan design perspective, and enabling participants to differentiate between every day, emergency and retirement savings. Loans against 401(k) balances have often been used in an attempt to increase plan participation and allow participants access to their money during a financial hardship. And while financial hardships certainly exist, the average participation rate for plans without loans is only 9.6% lower than those plans with loans (67% versus 76%).  Although eliminating loans entirely from 401(k) plans may not be practical, the number and size of loans available to participants should be limited in scope.  According to the study, the average American worker in a New York Life 401(k) plan is 43 years old, earns $68,700 annually, contributes 6.25% of salary into the 401(k) and has an average account balance of $55,270. Lots of luck, Charlie. 
3.  DESPITE RECENT HARDSHIPS, PUBLIC WORKERS HAVE A LOT TO BE HAPPY FOR:  Many state and local government workers face a grim reality these days. During the recession, states and localities shed hundreds of thousands of jobs. In coming years, they are slated to lose to retirement even more veteran workers, which could mean more work for fewer and less experienced employees, potentially dealing a blow to morale.  Governing conducted a survey of senior state and local officials assessing the current state of the public sector workforce, examining a range of issues crucial to public employees. The responses paint a portrait of a sector hard hit by budget cuts, with many lamenting pay freezes and a lack of advancement opportunities. But the news is not all bad. Governments made great strides in advancing new and improved workforce initiatives, giving plenty of reasons for optimism.  Overall, employees seem fairly content, despite the hardships of the past few years. Of those surveyed, 78% reported being somewhat or very satisfied with jobs and working conditions. Similarly, an overwhelming majority said they thought they could make a difference through their work, and 73% said they felt at least somewhat valued by their employers.  Keeping workers engaged is one of the more important factors in uniting a workforce, but only half of survey participants reported satisfaction with their organization’s employee engagement efforts. One such way is to incorporate their feedback in decision-making. For example, some cities used peer review teams as part of the budgeting processes. Of course, it is easier for employees to stay engaged if work does not clash with personal life. Governments received high marks in this area, with 86% expressing satisfaction with work/life balance. Use of telecommuting -- one common measure promoting flexibility -- continues to spread across all levels of government, particularly in information technology and program areas where it is most practical.  As agencies have trimmed budgets, some have sought ways to innovate, turning to workers for ideas. More than three-quarters of survey respondents said they felt encouraged to innovate, but many governments could do more to motivate employees. Only 61% of respondents said their work units rewarded creativity and innovation. Incentives are helpful, but employees often see only the risks of implementing new ideas. A handful of survey participants expressed frustration around a lack of merit based pay, a barrier that is more difficult for governments to overcome in an era of cutbacks. It is also hard for many to move up the career ladder. Sixty-four percent of respondents were somewhat or very dissatisfied with their organization’s advancement opportunities.
4.  BUT STATE GOVERNMENT EMPLOYMENT HITS 8-YEAR LOW: Slow, steady cuts to state government payrolls have continued to pile up in recent months, with no signs of employment trending upward, according to Preliminary Labor Department estimates pegged total state government employment at 5,025,000 workers, the lowest since May 2005.  State government employment has declined slightly each of the past four months, with totals for July fluctuating little. Recent cuts pale in comparison, though, to what states incurred back in 2011 as budgets across the country were trimmed in response to revenue shortfalls. State governments reached a peak of about 5.2 million workers in the fall of 2008. Since then, public education jobs at the state level -- which account for about half of the sector’s employment -- have not shifted much. But while education employment is about on par with prerecession totals, all other areas of state government shed a combined 180,000 jobs from the 2008 peak.  By contrast, local government employment appears to have stabilized, with payrolls hovering around the same levels over the past 24 months. Local schools and governments have added an estimated 46,000 positions so far this year, with both education and non-education employment recording similarly small growth.  In all, the new jobs report estimated the economy added 162,000 total jobs in July, a figure below most expectations. Growth in the retail trade, food services, finance and wholesale trade industries accounted for some of the largest gains. The national unemployment rate declined to 7.4 percent, the lowest since December 2008. The employment-to-population ratio held steady at 58.7 percent, moving little over the past year.
5.  FLORIDA RETIREMENT SYSTEM POSTS STRONG INVESTMENT PERFORMANCE: The State Board of Administration of Florida has released investment performance returns for fiscal year ending June 30, 2013, showing the Florida Retirement System Pension Plan earning a 13.12% return, beating its benchmark by 111 basis points, and ending the year with a market value of $132.4 billion. The fund balance represents an increase of $9.65 billion more than last year’s fiscal year-end figure, after net distributions of $6.2 billion to participants. All asset classes earned positive returns during the fiscal year, led by the Global Equity asset class, which earned 18.56%. Strategic investments, real estate and private equity asset classes, respectively, earned 16.16%, 14.92% and 10.65%. Fixed income earned .4% and cash earned .29%.   FRS has also done well over the long-term: 25 years (8.93%) and 20 years (7.99%).  Meanwhile, the FRS Defined Contribution Plan returned 10.12%, beating a benchmark of 9.68%. Return and benchmark figures are based on the weighted aggregate of the performance of various indices representing each asset class. During the fiscal year ending June 30, 2013, 26% of newly hired employees elected to join the DC plan, and 5,722 pension plan members used their 2nd election to switch to the DC plan, resulting in a record high 150,721 member accounts. (There probably will be 150,720 disappointed people.) Additionally, the DC plan’s year-end assets of $7.9 billion were at a record setting level, representing an increase of approximately 10% over last year’s fiscal year-end figure.
6.  SOCIAL SECURITY STATEMENTS AVAILABLE ONLINE: How would you like to get a Social Security statement that provides estimates of your future benefits online?  Well, one is available online at The new online social security statement is simple, easy-to-use and provides estimates people can use to plan for their retirement.  The online statement also provides estimates for disability and survivor benefits, making the statement an important financial tool. The Social Security recommends that people get in the habit of checking their online statement each year, around their birthday, for example.  The online statement also provides workers a convenient way to determine whether their earnings are accurately posted to their social security records.  This feature is important because Social Security benefits are based on average earnings over a person’s lifetime. If the information is incorrect, the person may not receive proper benefits. The information on the statement can be saved or printed for future reference.  In order to qualify for a statement, one must be age 18 or older and must be able to provide information about himself that matches information already on file with Social Security.  Experian, an external authentication service provider, requires further verification by way of security questions.  After the user’s identity is verified, a “My Social Security” account can be created with a unique user name and password to access the online statement.  In addition, the online statement includes the latest information about other online Social Security services, such as applications for retirement, disability and Medicare.  Your tax dollars at work.
7. RESEARCH HIGHLIGHTS IMPORTANCE OF SECURING RELIABLE INCOME IN RETIREMENT: Recent research conducted by ING U.S. underscores the growing role that retirement income planning continues to play in the readiness levels of working Americans. The study, Retirement Income Redefined, pinpoints some potential discrepancies in retirement planning ideologies and practices, and reinforces how retirement is being fundamentally redefined.  The following are some key findings:  

  • One-third of retirees confirmed they are experiencing a lower standard of living in retirement than in their working years, based on the monthly income they have to live on.  
  • Meanwhile, less than one-in-ten of pre-retirees expected to have a lower standard of living when they stop working and enter retirement.  
  • Separately, eight-in-ten said they would be willing to make a financial trade-off and give up some spending money today in order to secure a level of guaranteed retirement income in the future.  
  • However, nearly four-in-ten expected to run out of money needed to support their desired lifestyle in retirement. 
  • Finally, more than one-third believed that $500,000 or less in retirement savings would be enough to provide a comfortable income in retirement -- or had no idea how much would be needed. 

8. DAUGHTER CASHED DEAD MOTHER’S CHECKS FOR NEARLY 20 YEARS:  A Georgia woman admitted in federal court that she cashed almost $220,000 worth of Social Security checks intended for her mother, who died in 1993.  Mary Bridges Clark, 64, pleaded guilty to theft of government funds. Clark’s mother received monthly Social Security benefits, which were deposited into a joint account shared with her daughter.  After her mother’s death, Clark continued to receive her mother’s monthly checks into the joint account.  Clark knew the money was intended for her mother, yet kept the money and used it for her own personal expenses, and attempted to conceal her mother’s death from the Social Security Administration. Clark pleaded guilty and could receive up to 10 years in prison and a $250,000 fine, according to the Atlanta Journal-Constitution.  The devil made her do it.
9. RETIRED HEALTH MESSAGE: If walking were good for your health, the postman would be immortal.
10.  PONDERISMS:  There are two kinds of pedestrians...The quick and the dead.
11.  TODAY IN HISTORY: In 1945, President Harry S. Truman signs U.N. Charter.
12. 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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