Cypen & Cypen
SEPTEMBER 22, 2005
Stephen H. Cypen, Esq., Editor
The National Association of State Retirement Administrators and the National Council on Teacher Retirement have issued the results of their public fund survey for the fiscal year ending 2004. The survey currently contains data on a combined 12.6 million active members, 5.8 million annuitants and $2.1 Trillion in assets, representing more than 88% of these public retirement system characteristics. Every system in the survey has at least one plan. In cases of systems with multiple plans, separate plans typically are established for different employee groups, such as local government employees, public safety personnel, judges and elected officials. In some cases, retirement systems combine all employee groups into a single plan, but may provide different benefit levels for different groups. The survey covers 103 systems and 127 plans. Perhaps the most recognized measure of a public retirement plan’s health is its actuarial funding ratio, derived during an actuarial evaluation by dividing the value of a pension plan’s assets by its actuarial liabilities accrued to date. A pension plan whose assets equal its liabilities is funded at 100% and is considered fully funded; any shortfall of assets is an unfunded liability, and a plan with an unfunded liability is underfunded. However, underfunded typically does not mean that a plan is unable to pay benefits for which it is presently obligated -- in fact, substantially all underfunded public pension plans are able to meet their current obligations. All plans, underfunded and fully funded alike, that are open to newly hired workers, rely on future contributions and investment returns. A key difference between underfunded and fully funded plans is that underfunded plans require contributions both to fund benefits currently being accrued as well as to eliminate the shortfall between their assets and their accrued liabilities. Because fully funded plans have no such shortfall, they require contributions only to fund benefits currently being accrued. “Fully funded” can be mistakenly interpreted to mean that no future contributions to the plan will be required. In fact, fully funded means that the actuarial value of assets on hand equal the plan’s actuarial accrued liabilities; contributions and investment earnings still will be required to cover the benefit obligations as they accrue going forward. Some important statistical findings from the survey: (1) the average actuarial funding ratio was 87.8%, (2) the average investment return assumption was 8.0% (comprising 3.50% for inflation and 4.50% for real rate of return) and (3) the average asset allocation to equities and fixed income is 61/29.
Internal Revenue Service, acknowledging higher prices at gas pumps across the country, has increased the mileage reimbursement rate workers claim when using personal cars for work. The decision raised the rate to 48.5 cents a mile for the last four months of the year, after which IRS will take another look at gas prices and reevaluate the rate, which had been 40.5 cents a mile. The decision temporarily to increase the rate 8 cents mid-year marks the largest single increase on record. However, if gas prices go down, the 2006 mileage reimbursement rate could end up lower than the temporary 48.5 cents rate, according to IRS. Neither public nor private employers are required by IRS to adopt the new rate. However, employees can deduct the difference between their employer’s reimbursement and the IRS rate, if they itemize expenses on their tax returns. The rate for computing deductible medical or moving expenses has also temporarily increased for the last four months of the year, to 22 cents a mile from 15 cents. The rate at which individuals deduct travel costs related to charitable service is 14 cents a mile.
That’s the question posed in a Plansponsor piece entitled “Their Own Worst Enemy.” First, let’s start with the premise that most public plans are in okay shape. Where big problems exist, it is not because the trustees are irresponsible or because defined benefit plans do not work. It is because people manipulate the plans for political purposes. There has been lots of talk about how poor stock market returns and low interest rates led to problems for public plans. However, there has been less light shed on another major contributor to the dilemmas faced by public plans: politicians. Public plans’ current troubles often boil down to too-low contributions or too-high benefit increases -- or both. Politicians have a lot of influence on each. The article deals with four examples:
Although the aggregate funding ratio of public plans did exceed 100% in fiscal 2004, the level remains a healthy 88.2% in fiscal 2004. We have always wondered how public employers enjoy pension “holidays” -- with years of little or no employer contributions -- and then are surprised that their contributions rise.
A study from Greenwich Associates reveals that 44% of plan sponsors stay with their existing investment consultant when in need of a transition manager. The study shows that more than 40% of sponsors surveyed said they choose a transition manager without any formal search or outside advice. This informal process stands in stark contrast to the rigorous procedures typically used by plan sponsors in selection of investment managers and for other critical decisions in plan management. Trade execution cost minimization and responsiveness to the sponsor’s request rank at the top of the list in terms of importance in the selection process for a transition manager. Other considerations are depth of experience and project management capabilities. The main reason for informal selections is the sponsors’ uncertainty about how to measure a transition manager’s effectiveness! One-third of the sponsors use Volume Weighted Average Price (VWAP) to measure trading execution. Almost the same number use a performance measurement called implementation shortfall, which compares actual results with a hypothetical portfolio in which all assets are transitioned instantly and without cost. Almost half of sponsors say they engage their transition manager as a fiduciary and another 20% say they sometimes do. The Greenwich Associates study was reviewed in plansponsor.com.
Tynan, a retired airline pilot, brought suit pursuant to ERISA, challenging American Airlines, Inc.’s Pilot Retirement Benefit Program’s decision to recoup excess benefit payments that were mistakenly paid to him. He alleged the plan’s decision to recoup was both arbitrary and capricious. Defendant moved for summary judgment, asserting that its decision to recover payments (and the means by which it planned to recover them) was neither arbitrary nor capricious. A United States District Judge granted defendant’s motion for summary judgment. Tynan failed to report the payment error, which the plan did not notice for approximately six years, during which Tynan received almost $120,000 in overpayments. Once the plan became aware of the overpayments, it notified Tynan of the error. It then calculated the total amount of those overpayments and partially suspended payments in an effort to recover by offset sums paid in error. (Although it claims it was legally entitled to do so, the plan did not completely suspend payments and did not sue Tynan to recover the overpaid amounts in a lump sum.) Because the plan might well have sought recovery of funds in a lump sum, rather than over a seven-year period, it is fairly characterized as reasonable. The financial burden caused by overpayments made by the plan, knowingly retained by Tynan, should be borne by Tynan rather than the other beneficiaries of the plan. To determine otherwise, would condone unjust enrichment. Tynan v. American Airlines, Inc. Pilot Retirement Benefit Program, Case No. 04-CV-335-SM (D. N.H., September 9, 2005).
The most recent federal data offer some encouraging news on retirement plan participation, as a higher percentage of all workers were offered, participated in and were vested in a retirement plan in 2003 than was measured in the previous survey in 1998, according to a study released by Employee Benefit Research Institute. The growth applied to workers in both private and public sectors. The EBRI study, based on the U.S. Census Bureau’s most recent Survey of Income and Program Participation data for 2003, also found that: (1) 63% of workers age 16 and over worked for an employer or union that sponsored a retirement plan in 2003, up from 60% in 1998; (2) 48% of all workers age 16 and over participated in a retirement plan in 2003, up from 44% in 1998; and (3) 44% of all workers say they were entitled to some pension benefit or lump-sum distribution if they left their job, up from 41% in 1998. The data also demonstrate the well-documented shift away from traditional defined benefit pension plans and toward defined contribution plans, such as 401(k) plans from the private sector. A defined contribution plan was the primary retirement plan for 57.7% of participants in 2003, up from 51.5% in 1998 and more than double the 1988 level. Correspondingly, 40.5% reported a defined benefit pension plan was their primary retirement plan in 2003 down from 46.3% in 1998 and 56.7% in 1988. EBRI was founded in 1998. Its self-stated mission is to contribute to, encourage and enhance development of sound employee benefit programs and sound public policies through objective research and education.
Title 42 U.S.C. § 1983 provides that every person who, under color of any statute, ordinance, regulation, custom or usage, of any State or Territory subjects or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity or other proper proceeding for redress. It is settled that § 1983 authorizes actions to enforce rights of individuals under federal statutes as well as under the Constitution. Uniform Services Employment and Reemployment Rights Act is a federal statute that contains a protected federal right. It provides that a person who is a member of, applies to be a member of, performs, has performed, applies to perform or has an obligation to perform service in a uniformed service shall not be denied initial employment, reemployment, retention employment, promotion or any benefit of employment by an employer on the basis of that membership, application for membership, performance of service, application for service or obligation. Morris-Hayes was terminated as an elementary school principal, allegedly because her commission as a major in the United States Army Reserve subjected her to calls for military training and active duty. On termination by the Board of Education, Morris-Hayes sued the Board and its individual members under 42 U.S.C. § 1983 for violation of USERRA. A United States District Judge found that the Board of Education was an entity of the State of New York, and thus entitled to immunity under the Eleventh Amendment to the United States Constitution. The judge, however, rejected the defense of qualified immunity interposed by the individual defendants. On appeal, the United States Court of Appeals found that neither interlocutory order was appealable, and dismissed both the appeal (by the individual defendants) and the cross-appeal (by Morris-Hayes). Morris-Hayes v. Board of Education of the Chester Union Free School District, Case Nos. 04-2450-cv(L), 04-2452-cv(XAP) (U.S. 2d Cir., September 12, 2005).
McGowan was employed by New Jersey Natural Gas Company for over 27 years. He participated in NJNG’s retirement plan, initially designated his second wife, Rosemary, as joint and survivor contingent beneficiary. He filed a federal action seeking declaratory relief directing NJNG and the retirement plan to recognize (1) Rosemary’s purported waiver of her rights as beneficiary and (2) McGowan’s subsequent nomination of his present wife, Donna, as new beneficiary. The trial court denied McGowan’s motion for summary judgment and granted summary judgment in favor of NJNG. The court held that plan administrators are not required to look beyond plan documents to determine whether a waiver has been effectuated in a private agreement between participant and his named beneficiary. On appeal, the higher court found the issue to be one of first impression in the circuit and that there was a split among courts of appeals that have considered the issue. Nevertheless, the ruling was affirmed. The terms of the plan do not permit changes to prior contingent beneficiary elections once a participant starts receiving benefit payments. And because ERISA imposes a fiduciary duty on plan administrators to discharge their duties in accordance with the documents and instruments governing the plan, any requirement imposed on plan administrators to look beyond plan documents would go against the specific command of ERISA. McGowan v. NJR Service Corporation, Case No. 04-3620 (U.S. 3d Cir., September 13, 2005).
At time of her death, Venosh had been a member of the Pinellas Park Retirement System for almost 25 years. She did not die in the line of duty and had not retired at the time of her death. Venosh was not married at the time, had no children and both parents had predeceased her. She had filled out a designation of beneficiary form designating her mother, but failed to change the beneficiary after her mother’s death. The plan provision dealing with death benefits provides that upon nonservice death subsequent to completion of ten years of credited service but prior to actual retirement, it shall be assumed that the member retired as of the date of death. Thereupon, the monthly benefit shall be paid to the member’s beneficiary (spouse or other dependent) for his or her lifetime. On the other hand, the generic provision on designation of beneficiaries basically provides that if there is no surviving beneficiary designated by the member, the benefits, if any, are payable to the member’s estate. This particular plan apparently has some built-in mechanism for review of Board decisions by a separate administrative body called a “Civil Trial Commission.” In any event, the Civil Trial Commission rejected the Board’s position that only a refund of member contributions was in order, and ruled that Venosh’s estate was entitled to death benefits under the plan. The Board sought review by a petition for writ of certiorari in the circuit court, which denied relief. The court did find that there was an inconsistency and confusion between the two above-quoted provisions. Nonetheless, the court found that it must defer to the Civil Trial Commission’s conclusion that the estate is entitled to benefits, as such interpretation is not unreasonable or clearly erroneous. Despite the Board’s position to the contrary, Venosh’s retirement benefits vested upon her death and should not be lost simply because Venosh failed to designate a new beneficiary following death of her mother. This decision is a good example of the saying that “hard facts make bad law.” Curiously, although the court granted deference to the Civil Trial Commission’s conclusions, it found no merit to the Board’s argument that the Civil Trial Commission erred in failing to defer to the Board’s interpretation of the retirement ordinance -- for which there is ample authority. Board of Trustees of the Pinellas Park Retirement System (General Employees) v. Estate of Venosh, Case No. 04-0054AP-88A (Fla. 6th Cir., April 11, 2005).
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