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Cypen & Cypen
SEPTEMBER 27, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


For the second time in less than a month (see C&C Newsletter for September 20, 2007, Item 9), the Securities and Exchange Commission has rebuked a pension consulting firm. This time the SEC issued a cease-and-desist order against a large pension consulting firm for failing to tell its clients it had an outside business relationship that could affect the investment advice it gave. The San Francisco-based firm advises about 300 pension funds and other institutional investors with combined assets of about $1 Trillion. It neither admitted nor denied the agency’s allegations. Here, the consultant had sold a brokerage firm to a bank, which became obligated to pay the consultant more each year if the consultant sent enough of its clients’ brokerage business to the bank to meet certain benchmarks. Government officials had occasion to ask the consultant whether it was being rewarded for sending business to the bank, but the consultant answered in the negative. The SEC called these responses “inaccurate and misleading.”


An article earlier this year in International Foundation of Employee Benefit Plans’ Benefits & Compensation Digest deals with supplemental insurance plans from the public sector prospective. There are a number of terms used to describe supplemental benefits. Some use the word “worksite,” while others use “voluntary.” Worksite benefits are generally individual policies and are usually targeted at smaller employers where little or no employer-paid benefits are available. Voluntary or supplemental benefits, on the other hand, are group-type insurance benefits where employees pay the entire cost, which supplement the basic or core benefits already in place. For purposes of the article, the author considers supplemental benefits to be group insurance (excluding worksite benefits);100% employee-paid; can be the sole source of coverage (for example, long-term care insurance); or can buy “buy-up” coverage (for example, additional life and long-term disability insurance above core coverages). Supplemental plans can be a valuable addition to public plan sponsors’ benefit programs. They provide added benefit choices for employees and access to coverages (sometimes on a tax-favored basis) that employees cannot otherwise obtain. As medical, prescription and dental plan costs continue to increase faster than wages, there will be increasing pressure on public employers to offer more and different types of supplemental plans that are paid entirely by employees. Before expanding their supplemental plan offerings, public plan employers should think strategically about how these plans fit with their overall benefits objectives. Adding plans may actually do more harm than good, especially if the new plans compete with core benefit programs. Also, there can be a point where too many options confuse employees and cause them to make choices not in their best interests. Once a decision is made to offer or expand supplemental coverages, the plan sponsor should have a clear policy on marketing access to its employees and the type of personnel allowed to do the marketing. There is some evidence indicating that the extra administrative burdens from supplemental plans are more than offset by the added value of the programs to employees. Nonetheless, public plan sponsors need carefully to assess the potential impact of adding these plans to their own unique staffing and payroll functions before deciding whether to proceed. There are numerous administrative functions that must be considered, such as procurement, renewals and employee grievances, which can impact staffing requirements. Lastly, the public plan sponsor will need to determine what roll, if any, its professional benefits advisor will play in procuring and maintaining its supplemental plans. Regardless of the form of advisor compensation, whether fees, commissions or accommodation, full disclosure of all revenue paid to the advisor is a sound practice that can avoid future problems.


Greenwich Associates has presented its Summary of Public Pension Fund Market Trends (Summer 2007). The report tracks shifts in asset allocation of public pension funds over the last several years, and focuses on research related to how public pension funds are managing their investments in each major asset class. Some key findings are

  • Asset allocation shifts: Public pension funds have decreased their exposure to domestic equity, as well as fixed income over the past two years, while increasing their exposure to diversifying asset classes, such as international equities and -- to a lesser extent -- alternative investments.
  • U.S. equity investments are predominately indexed among public pension funds.
  • International equity investments for public funds are moving from “core” EAFE (Europe, Australia & Far East) products to value and growth-biased international equity products. Some funds are seeking further diversification in emerging markets through ACWI (All Country World Index)-benchmarked mandates.
  • Fixed income investments among large public pension funds are more heavily weighted towards core and international when compared with other investors.
  • Use of hedge funds and alternative investments continues to rise among institutional investors. Public funds that use hedge funds allocate, on average, 3.6% of their assets towards them. Meanwhile, public funds invested in private equity allocate, on average, 5.6% of their assets to this asset class.
  • Average fees paid by public pension funds to investment managers increased slightly from 2005 to 2006. Public funds now pay an average 38.5 basis points to outside investment managers. Public funds paid an average $291,000 for investment consulting services in 2006.
  • Compensation of public pension fund officials rose from 2005 to 2006. Total cash compensation for public fund executives in the top quartile was over $133,000.

Greenwich’s analyses are based on personal interviews conducted in September and October of 2006 in the United States with 1,052 of the 1,989 largest corporate, public, endowment and foundation funds, each with total investable assets over $250 Million. These funds’ total assets exceed $7.2 Trillion. Key findings from the study specifically for public pension funds are presented in this report, and are based on interviews with 219 of the largest public funds with about $3.4 Trillion in assets.


According to a recent Wall Street Journal Online/Harris Interactive Poll reported by, nearly half of retired adults said their living expenses in retirement matched their expectations, while 31% said expenses were much or slightly higher than expected. More than 20% said expenses were lower than expected. Twenty-seven percent of retired respondents said they would need $49,000 or less to live on in retirement; 8% said $25,000 or less; 27% said $25,000 to $49,000; 30% said $50,000 to $74,999; and 17% said $75,000 to $99,999. About one-quarter of retired individuals said they would mostly depend on employer-sponsored pensions, while 11% of non-retired respondents said the same.


Following the Protecting Florida’s Investments Act (see C&C Newsletter for June 14, 2007, Item 1), the State Board of Administration, which is responsible for investments of the Florida Retirement System, has listed 57 “scrutinized companies,” of which SBA must now divest itself. Of the 57 companies listed, FRS currently has about $1.3 Billion invested in 21 of them. None of the 57 companies are based in the United States. Incidentally, we have never even heard of any of the companies, except Royal Dutch Shell PLC, headquartered in the United Kingdom, in which FRS holds an investment of over $300 Million.


According to LifeHelper, a provocative study suggests middle-aged men and women are more likely to retire early from their jobs if they are depressed. Middle-aged men who suffer with symptoms of depression are more likely to retire early, while retirement-age women often take the leap even if their depressive symptoms are mild. Almost one in 10 adults suffers from major depression in any given 12-month period. The study followed nearly 3,000 adults between the ages of 53 and 58 every two years between 1994 and 2002 for mental health labor-force status changes. Researchers did not examine whether retirement was voluntary or involuntary.

A Congressional Research Service Report for Congress, updated September 24, 2007, deals with Income and Poverty Among Older Americans in 2006. According to the summary, older Americans are an economically diverse group. In 2006, the median income of individuals age 65 and older was $16,890, but incomes varied widely around this average. Twenty-three percent of Americans 65 or older had incomes of less than $10,000 in 2006, while 12% had incomes of $50,000 or more. As Congress considers reforms to Social Security and the laws governing pensions and retirement savings plans, it may be helpful to examine how changes to one income source would affect each of the others, and thus the total income of older Americans. Retirement benefits from Social Security and pensions are the most common sources of income among the aged. In 2006, Social Security paid benefits to 86% of Americans age 65 and older. Social Security is also the largest single source of income among the aged. Sixty-eight percent of Social Security beneficiaries age 65 or older receive more than half of their income from Social Security. For 39% of elderly recipients, Social Security contributes more than 90% of their income, and for one-quarter of recipients, it is their only source of income. In 2006, 35% of people age 65 and older received income from a private or public pension. Among people age 65 and older who reported income from a government pension, the median annual amount was $14,400. Among recipients of private pensions, the median amount received in 2006 was just $7,200. Many Americans prepare for retirement by saving and investing some of their income while they are working. Of the 36 million Americans age 65 or older who were living in households in 2006, 19.4 million received income from assets, such as interest, dividends, rent and royalties. Most received small amounts of income from the assets they owned. Of all individuals age 65 or older who received income from assets in 2006, half received less than $1,685. Earnings from work continue to be an important source of income for older Americans, especially those under age 70. Although there was a trend toward early retirement from about 1960 to 1985, over the past 20 years more Americans have continued to work at older ages. In 2006, median earnings of individuals aged 55-61 work worked were $37,000, while median earnings of workers aged 62-64 were $30,000. Among workers 65 and older, median earnings were $19,000. Poverty among those age 65 and older has fallen from one-in-three older persons in 1960 to less than one-in-ten today. While the overall rate of poverty is relatively low, it remains high for women, minorities, the less-educated and people over age 80. CRS intends to update its report annually.


The U.S. Equal Employment Opportunity Commission has filed an action against Baltimore County and several unions under the Age Discrimination in Employment Act to correct unlawful employment practices on the basis of age and to provide appropriate relief to two individuals and a class of similarly situated aggrieved individuals at least 40 years of age. EEOC alleges that, since at least January 1, 1996, Baltimore County has engaged in unlawful employment practices by requiring the two individuals and a class of similarly situated aggrieved individuals within the protected age group to pay higher contributions than those paid by younger individuals to the County’s pension plan, in violation of Section 4(a)(1) of ADEA, as amended. Although the complaint makes only the foregoing general allegation, according to the Baltimore Sun, the percentage of pension contribution is specifically based on a participant’s age at start of work, ranging between 4.4% and 11%. EEOC is asking for a permanent injunction to prevent the County from requiring its older workers to contribute more than its younger workers to its pension plan and from engaging in any other employment practice that discriminates on the basis of age against individuals 40 years of age and older. EEOC also seeks appropriate back pay as liquidated damages and an order that the County make whole the individuals and the class. One important point: The County’s pension plan has existed in virtually the same form for about 30 years prior to enactment of ADEA.


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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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