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Cypen & Cypen
August 24, 2017

Stephen H. Cypen, Esq., Editor

1.  TAXPAYERS NOT BURDENED BY PUBLIC PENSIONS: reports that taxpayers only contribute about 20 cents on the dollar toward public pension plan contributions, according to a recent paper by the National Conference on Public Employee Retirement Systems (NCPERS). The organization also cites research by the National Institute on Retirement Security (NIRS) indicating that every dollar paid in pension benefits creates $2.21 in economic output. This results in about $3.7 trillion of pension fund assets invested in the U.S. economy by public pension funds, NCPERS suggests. Research by the NIRS points out that economic activity generated by the spending of retiree pension checks in 2014 resulted in $189.7 billion in tax revenues. At the same time, $120.5 billion was contributed toward pension systems in taxpayer contributions to state and local pension funds that year. NCPERS says, opponents of public pension often argue that taxpayers cannot bear the heavy burden of funding public pensions. The fact is quite the opposite. When public programs are funded on a pay-as-you-go basis, taxpayers put up every dollar for the services they receive. But public pensions are funded in advance, over the course of many years, with investment earnings and employee contributions powering asset growth. According to the organization’s study of California Public Employees Retirement System (CalPERS) and California Teachers Retirement System (CalSTRS), their investments support 1.45 million jobs. It notes that if the 2016 average salary in California is about $90,000 and 2016 average tax rate is about 17%, CalPERS' and CalSTRS' investments in California will generate $22.2 billion in state and local revenues. However, NCPERS notes the often bleak state of pension funding. It maintains that if governments continue to dismantle public pensions, they will inflict $3 trillion in damage on our economy by 2025. In short, while public pensions are cost effective and beneficial, dismantling pensions is costly and short-sighted for taxpayers.
2.  MILLIMAN: CORPORATE PENSION FUNDED STATUS RISES $4 BILLION IN JULY:  The funded status of the 100 largest corporate defined benefit pension plans grew by $4 billion during July, according to consulting and actuarial firm Milliman’s most recent Pension Funding Index (PFI). The funded-status deficit declined to $282 billion from $286 billion at the end of June due to strong July investment gains, the report said. The funded status improvement came as the benchmark corporate bond interest rates used to value pension liabilities continued a decline that began in April. As of July 31, the funded ratio nudged 0.2% higher to 83.7%, from 83.5% at the end of June, and the funded ratio has been vacillating between 83% and 84% over the first seven months of 2017. Given the relatively strong market returns contrasted with persistently low interest rates, it is no surprise that there has been little movement this year in the funded ratio for the Milliman 100 plans, said Zorast Wadia, co-author of the Milliman 100 PFI. With the lack of funded ratio improvement, we are seeing a number of sponsors make additional contributions with an eye towards shoring up funded status in the future. The 0.93% investment gain for July raised the Milliman 100 PFI asset value to $1.450 trillion from $1.442 trillion at the end of June. So far, the cumulative investment gain for the year is 6.50%. By contrast, the 2017 Milliman Pension Funding Study reported that the monthly median expected investment gain during 2016 was 0.57%. The projected benefit obligation (PBO) increased by $4 billion during July, raising the Milliman 100 PFI value to $1.732 trillion from $1.728 trillion at the end of June. The change resulted from a three-basis-point decrease in the monthly discount rate to 3.71% for July, from 3.74% in June, according to Milliman. Between August 2016 and July 2017, the cumulative asset return for the pensions has been 6.8%, and during that time the Milliman 100 PFI funded status deficit has improved by $141 billion. Discount rates increased over the last 12 months, moving from 3.33% as of July 31, 2016, to 3.71% one year later. If the Milliman 100 PFI companies were to achieve the expected 7.0% median asset return (as per the 2017 pension funding study), and if the current discount rate of 3.71% was maintained during years 2017 and 2018, we forecast the funded status of the surveyed plans would increase. Milliman said this would result in a projected pension deficit of $265 billion (funded ratio of 84.7%) by the end of 2017, and a projected pension deficit of $220 billion (funded ratio of 87.3%) by the end of 2018. For purposes of the forecast, Milliman has assumed 2017 aggregate contributions of $36 billion, and 2018 aggregate contributions of $39 billion. It said that under an optimistic forecast with rising interest rates, reaching 3.96% by the end of 2017 and 4.56% by the end of 2018, and asset gains of 11.0% annual returns, the funded ratio would climb to 89% by the end of 2017, and 102% by the end of 2018. However, using a pessimistic forecast with similar interest rate and asset movements, Milliman said the funded ratio would decline to 81% by the end of 2017, and 74% by the end of 2018. As Congress has adjourned for August, we continue to wait for any details that could emerge for ‘tax reform’ and how that could affect the funded ratio of these large DB plans.
3. OLDER WORKERS MORE LIKELY TO DECREASE RETIREMENT SAVINGS: again reports that nearly one-quarter, 23%, of working Americans increased their retirement savings contributions this year, the highest reading in six years of polling, according to However, 16% are saving less, and 5% are not saving at all. In 2011, only 15% increased their retirement savings contributions, and 29% cut them. Working Americans are increasing their retirement savings more and more as the economic recovery continues, whether saving the same percentage of higher earnings or a higher percentage of the same earnings, says Chief Financial Analyst Greg McBride. Among households earning $50,000 or more a year, 27% increased their retirement savings. Among households earning less than $50,000 a year, only 18% increased their retirement savings. Among households earning less than $30,000 a year, 20% boosted contributions, but 22% scaled them back. A larger percentage of every age group younger than 63 increased their savings than decreased them, with Millennials, i.e. those between the ages of 18 and 26, leading the way. Nearly one-third, 30%, of Millennials increased their retirement savings in the past year. Older workers, however, were more likely to have cut back on their contributions than increased them. Sixteen percent of older Boomers, i.e. those 63 to 71, cut back on their savings, while 15% increased them. Forty-five percent of those in the Silent Generation, i.e. those 72 and older, cut back on their retirement savings, while 13% increased them. Part-time workers were more likely to decrease contributions than full-time workers (33% versus 17%).
4. HOW ADVISERS CAN RESCUE AN UNDERFUNDED DB PLAN:  In the epic poem The Rime of the Ancient Mariner, the Mariner is blown off course by a storm, and spends the rest of the poem battling to return to the safety of port, reports Many sponsors of underfunded defined benefit (DB) plans can probably relate to his plight. Burdened by an albatross of unfunded liability about their necks, and mired in the doldrums of low corporate bond rates funding ratios are often “as idle as a painted ship upon a painted ocean.” There are only three ways that a sponsor can attempt to return to full funding. Most benefit advisers should be well versed in all three: Investing in high-return seeking assets, investing in a mix short and long duration bonds, and infusing the plan with cash. Investing in high-return seeking assets like equities can quickly improve funding ratios. This comes with significant risk, however, as equity winds have been known to suddenly change direction. Investing in a mix short and long duration bonds can help stabilize the plan. When interest rates rise, short duration bonds outperform liabilities and the funding ratio improves. Conversely, longer durations that match liabilities reduce funding ratio drift. In this case, the funding ratio does not benefit as much from rising rates, but it is protected should the tide go out again and rates drop. Adding cash to the plan, which is expensive, but it is the only sure way to bridge the funding gap. The amount of cash that most organizations can afford to invest in their plan, will be limited, so some combination of all three elements will be required. The problem is that the first two also introduce risk that the funding ratio could decline further. The greater the gap, the more likely it is that the sponsor will bet heavily on option number one, figuring that the potential upside outweighs downside. Likewise, the fixed income mix will be heavily tilted towards shorter durations, hoping to take full advantage of rising rates. This tends to look like a more “traditional” investment allocation with 60 percent in equities and 40 percent in short duration bonds. A sustainable funding policy may also be employed to help sail towards full funding. Assuming a year of fair market conditions, equities would generate positive returns and interest rates might rise about 1 percent. This would push the liabilities of a typical DB plan down to10 - 15 percent, while core bonds would only lose about 4 percent, for a net return of 6 - 11 percent vs. liabilities. In short, the funding gap would narrow. All too often, however, the sponsor “doubles down,” hoping for another positive year. Portfolio risk is not reduced, and the plan becomes acutely vulnerable to any shift in market direction. Advisers should help their clients understand that what is missing from this sort of thinking is the wisdom of calibrating the portfolio’s degree of risk with the need to take it. Since the funding ratio is already closer to full, the pressure to maintain such a high exposure to equities is reduced. And with higher interest rates in place, extending the duration of fixed income holdings to match that of liabilities enables the plan better to withstand a subsequent interest rate reversal. Cutting equity exposure to 30 percent and extending fixed income duration would decrease funding ratio volatility significantly, while still maintaining some upside potential. The closer the plan gets to full funding, the more it will benefit from this type of duration-matched bond strategy. As the funding goal nears, the sponsor has the opportunity to set the plan’s allocation to 100 percent fixed income with durations matching that of the liabilities. This would provide a safe harbor for the portfolio, which is now protected from the vicissitudes of the equity markets and corporate bond rates. Such a strategy has a formal designation. Many advisers may already know that it is known as a “2-Dimensional Dynamic Asset Allocation”– the two dimensions being fixed income weighting and duration.
5.  FOCUS ON RETIREMENT PLANNING — IT IS YOUR FUTURE:  Social Security says that when most people begin their career, retirement is the farthest thing from their mind. Instead, they focus on trying to purchase a home, start a family, or perhaps save money for travel. Retirement seems so far away for many younger people that they delay putting aside money. However, it is very important to save for the future — if you want to enjoy it. An employer-sponsored retirement plan or 401(k) can be a useful way to set aside funds for retirement, especially if your employer offers matching funds on what you invest. If you do not work for an employer that offers this type of plan, there are many other plans designed to help you save for retirement. From solo 401(k)s to traditional and Roth IRAs, there are programs designed to fit a multitude of budgets. The earlier you start to save, the more funds you will have ready for retirement. In addition to traditional programs, the U.S. Department of the Treasury now offers a retirement savings option called myRA. There is no minimum to open the account, you can contribute what you can afford, and you can withdraw funds with ease. To learn more about myRA, visit And, as always, there is Social Security, which is funded by taxes you pay while you work. To get estimates of future benefits and check your earnings record for accuracy, you can create a mySocialSecurity account at Prepare for your future and start saving — and planning — today!
6.  SIRI, MEET EMMA, THE VOICE-ACTIVATED BENEFITS EXPERT:  “Emma, what is my annual contribution limit?” Some employees now can get benefits information with simply a voice command. Emma, the new voice-activated assistant from consumer-directed healthcare provider Alegeus, is designed to help workers quickly get information about their offerings and make the most of their healthcare money. Think Apple’s Siri — but for benefits. The service, which is available to users of the firm’s mobile app, will help answer questions previously tasked to a call center. There is such a glaring obvious need for people to get easy and accurate information when they need it in a convenient way. Consumers have questions but people do not often seek the answers because they are not easily available. Americans have poor financial literacy, with half of flexible spending account enrollees passing a basic proficiency quiz, according to Alegeus research. The hope is that a voice-activated intelligent assistant will bridge the gap in understanding benefits. Emma can answer 100 questions regarding tax-advantaged benefit accounts, such as flexible spending accounts, health savings accounts, health reimbursement accounts, limited purpose FSAs, dependent care FSAs and commuter accounts. This could be a self-service educational tool. I think it is set up to that and I think we are going to get quite a bit of use on that. The company also built a sense of humor for the intelligent assistant, who can tell a HIPAA knock-knock joke and share personal details about her virtual healthcare needs. Although Emma might be open to sharing her healthcare information, Alegeus has multi-layered authentication and authorization framework to protect user data. Privacy is an enormous issue for all industries, specifically when it comes to people’s finances and health records. We are on that wall related to that with our privacy measures. The company says Emma does not track questions that users ask, and she will only speak after the user has been successfully authenticated within the mobile application and only for as long as the application is running. Alegeus clients using the mobile application have access to Emma as of its second quarter.
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 North Carolina drunk BINGO is not okaySadly we could not find the original story behind this law either, but know if you play drunk BINGO in North Carolina, you may win a prize, but are sure to receive a class 2 misdemeanor as well. Party foul!
9.  CYNICAL THINKING:  If you ever feel you are worthless, remember that you are full of expensive organs.
10.  PONDERISMS:  All of us could take a lesson from the weather. It pays no attention to criticism.
11.  FUNNY TOMBSTONE SAYINGS:  Some tombstones are clever and could make you die from laughter. For example, one tombstone reads: “The GPS is not always right, Honey”
12.  TODAY IN HISTORY:  On this day in 1992 Hurricane Andrew hits South Florida; 35 die.

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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