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Cypen & Cypen
September 24, 2015

Stephen H. Cypen, Esq., Editor

1.  MYTHS AND TRUTHS ABOUT PENSIONS: In the conversation around public pensions, there are a lot of myths that get repeated over and over again. National Public Pension Coalition is going to dispel three of the most common myths here.

  • Myth #1: Pensions are Underfunded and Unsustainable:

Truth: most public pensions are back on sound financial footing after the Great Recession, and on a path to full funding. Recently, Center for Retirement Research at Boston College predicted public pensions would achieve sustainable funding levels by 2018. One of the most important indicators of a healthy pension fund is a state’s actuarially required contribution. The ARC represents the amount of money a state needs to contribute each year in order to maintain a balance between money coming in and money going out. National Association of State Retirement Administrators says the majority of states have been contributing most of their ARC.

  • Myth #2: States are Abandoning Defined Benefit Pensions:

Truth: far from abandoning traditional defined benefit pension plans, states in recent years have rejected bills that would convert their pension systems to riskier 401(k)-style accounts. Not only that, but certain states are considering moving back to defined benefit plans. In Alaska, a state that moved to a defined contribution system with disastrous consequences, State Senator Bill Wielechowski has introduced legislation to return to a defined benefit system. In a recent editorial in the Greeley Tribune, he warns other states not to follow Alaska’s path:

                “‚Ķlegislators should heed the warnings of states such as of Alaska, where we’ve learned 401(k)-style plans not only diminish recruitment, retention and retirement security, but actually cost the state more. When states act responsibly, defined benefit pension plans are the most cost-effective way to provide workers with retirement security‚Ķ Recognizing the negative effects of retreating from a defined benefit pension plan, we have also introduced legislation to reinstate this option.”

  • Myth #3: 401(k)-style Plans Offer a Secure Retirement to Workers:

Truth: 401(k)-style defined contribution plans have failed to live up to their billing. Instead of assuring a safe and secure retirement for workers, defined contribution plans can offer only a fraction of the value of a defined benefit plan, often at much higher cost. Under a defined contribution scheme, retirement resources are not pooled, not professionally managed and workers must determine how much to contribute to their retirement. Study after study has shown that workers fail to plan adequately for retirement.  Defined contribution plans also leave their participants exposed to a great amount of market risk.  During the Great Recession, for example, the value of many investments in 401(k) accounts was wiped out by the stock market crash.  This left many retirees with no savings for retirement, even if they had been saving for decades.

Reality: defined benefit pension plans afford the safest and most secure retirement for teachers, firefighters, nurses and other public workers who spend decades working for the public good and have earned their retirement.

2.  RETIREES WARNED: DO NOT FALL INTO THE SOCIAL SECURITY TRAP: Every year, Americans give up thousands of dollars of income by filing for Social Security benefits too early, according to International Foundation of Employee Benefits. If you are anywhere near retirement or want to help guide your parents, here is how to think about when to file-a once-in-a-lifetime decision with huge financial consequences. You can start getting a monthly check at 62, but that locks in a reduced benefit for the rest of your life. Retirees currently get the full Social Security benefit at 66. Waiting even longer will fatten those checks further. File for Social Security as a single person at 70 and your monthly check can be 76% higher than if you had filed at 62. That is a source of income that automatically adjusts for inflation and will last as long as you do. Of course, you could die before you get those higher benefits or get to enjoy them for long. But research suggests that for those with average life spans, it usually makes sense to wait. Even for groups statistically more likely to die in their 60s, including African-Americans and people without high school diplomas, one study found that some delay in Social Security benefits makes sense. This is particularly true for couples in which one spouse, usually the man, in older male-female couples, is the main breadwinner. “If you are a primary earner, not only do you get higher benefits for the rest of your life, you pass on higher benefits to your widow if you die first,” said Sita Slavov, a professor of public policy at George Mason University. Most Americans do not even hold out until they reach the full retirement age. Some need the checks to live on. But according to new research by Slavov and colleagues at Stanford University and the U.S. Treasury Department, many retirees could dip into savings but decide not to. The study, issued this month, looked at tax data for Americans born in 1940. It found that about a third of people who file early for Social Security benefits had enough assets in individual retirement accounts to make up for two years of Social Security checks. About a quarter had enough to cover four years of benefits. Retirees probably also had other savings, investments, and pensions that researchers were not able to measure. Yet retirees are tapping their Social Security benefits before they tap their IRAs, when ideally most people should be doing the opposite. The returns from delaying Social Security are a guaranteed payoff, immune to inflation, of about 8% a year, while investments in IRAs can be volatile. Why are Americans doing this? Some might want to leave their IRAs to their heirs. You cannot leave your Social Security benefits to your children or to charity after you are gone.  Others might be justifiably worried about their health, Slavov’s study shows. Early filers were 80% likelier to die between 66 and 71 than those who filed for Social Security after the full retirement age. Early filers also are likelier to feel unhealthy and doubt whether they will make it to 75, according to the authors’ analysis of survey data. This question of health and longevity -- “how much longer do I have?” -- is the key to getting the Social Security filing question right. If you really think you might die in your 60s, it might make sense to settle for a smaller but earlier Social Security check. Even if you feel great, you might not want to blow your whole IRA now to get the highest possible Social Security payout over your lifetime, a point Slavov is careful to concede. “We hesitate to say people are making a mistake by delaying,” she said. Sometimes individual circumstances, such as a serious illness or a troubling family medical history, argue for filing early. Still, most of the time, retirees would get a better deal from Social Security if they waited at least a little longer. Many early filers are underestimating their longevity or leaving their surviving spouses with inadequate income. The key is to be strategic and not unthinkingly file the moment you stop working.

3. SOCIAL SECURITY AND MEDICARE LIFETIME BENEFITS AND TAXES: How big is your retirement package? Benefits from government retirement programs -- Social Security and Medicare -- vary over time, but the trend has been toward higher lifetime benefits for each successive cohort according to a new white paper from Urban Institute “Social Security and Medicare Lifetime Benefits and Taxes 2015 Update.” Expansion derives mainly from increases in real annual benefits, more years of benefits through longer lifespans, and better and more expensive health care. In 1960, a couple where each spouse earned constant “average” wages over a career beginning at age 22 and retired on his or her 65th birthday would receive about $300,000 in health and retirement benefits; today, that figure is over $1 million in health and retirement benefits. The expected benefits for couples turning 65 in 2050 -- age 30 today -- are scheduled to rise under current law to almost $2 million. The following table shows the expected present value at age 65 of benefits received in retirement and taxes paid over a career for households with different wage and marriage histories. The underlying data comes from the 2015 Social Security and Medicare trustees’ reports and supplemental data published by the Social Security Administration and Centers for Medicare and Medicaid Services. For Medicare lifetime benefits, the author uses an alternative cost scenario from CMS that assumes that certain measures that result in declining reimbursement rates relative to private insurance are not fully realized over time, resulting in higher Medicare expenditures in the out years. In calculating expected present values, the author uses sex-adjusted probabilities to account for chance of death after age 65 and a discount rate of 2% plus inflation. Medicare premiums paid by individuals are subtracted from Medicare benefits. Higher income-adjusted Medicare premiums for high-income retirees are not included here since they generally do not apply to individuals with incomes at the levels shown, except some with substantial assets accumulated by time of retirement or with continued earnings above the maximum taxable earnings. Over time, more households will be subject to the income-based premium adjustments because the income thresholds are not indexed to inflation until 2020 and because real wages will rise over time, pushing more households above the thresholds. The numbers presented are averages for hypothetical workers with specific work histories and longevity characteristics. Lifetime benefits and taxes experienced by specific households in the economy will vary based on a number of factors, including income, health, and choices about marriage, divorce, children, and retirement. For example, the greater expected lifetime benefits of women compared with men with the same earnings profile stem from longer life expectancies for women. These estimates assume individuals receive all benefits scheduled under current policy, regardless of the status of the Social Security or Medicare trust funds. Since both funds face shortfalls in the intermediate future, policies for both programs will inevitably change, and those changes will greatly influence the benefits and taxes of current and future cohorts. From that perspective, future benefits are likely overstated, or taxes are understated or both) for many typical households represented.

4. JUST HOW MUCH ARE OUR RETIREMENT FUNDS COSTING US?: Prospectuses and mutual fund statements of my wife’s retirement account came in the mail over the past two weeks. I did the same thing with them that I have done in the 15 years my wife and I have been married. I tossed the prospectuses in the recycle bin and filed the statements in a binder. Then I did something I had never done before. I unclipped the latest individual retirement account statements for the month closing August 31, and took a closer look at the funds in which my wife’s retirement advisor had invested her $75,000 in retirement assets. Why now? Why suddenly take an interest in mutual fund statements that I had not given any thought to previously? With the Department of Labor considering some of the most important changes to how advisors treat retirement assets since the passage of the Employee Retirement Income Security Act of 1974, mutual fund statements suddenly struck a chord. A favorite number bandied about by consumer interest groups during public hearings over the past month has been $17 billion. Small retirement investors such as my wife and I are losing as much as $17 billion a year, we are told. That is money that goes toward intermediaries and industry giants in the form of fees and commissions. So that’s why I decided to remove my wife’s latest mutual funds statements and retrieve one or two prospectuses out of the recycle bin. I cannot say I much understood the prospectuses, although the pie charts and percentages breaking down the holdings are clear enough. Much of the fine print in those prospectus documents are generated by lawyers and financial analysts, of course, to be read by other lawyers (mostly) and other financial analysts and compliance officers (mostly). They are not designed for the retail investor audience. This is why folks like me -- with a job, with deadlines, with an 11-year-old daughter in school, with paint peeling on one side of the house, with a mother-in-law who needs special medical attention, with annual car registration renewals, with holidays to celebrate and functions to attend, who has never been to law school, and who has never had any formal financial education -- never read them. And I cannot say I saw much about fees in these prospectus documents. However, I am sure there was a sentence or two buried in there about fees and commissions, always expressed as a percentage, never as a hard-dollar figure or as subtraction from total return. But the mutual fund statement was a different story. Two years, ago, when my wife’s (very) small business decided to terminate its 401(k) plan because it was too expensive, we transferred the balance to her IRA. Her two advisors were part of a three-man team, reduced to two when her father died suddenly of a stroke four years ago. So it made sense to keep it “all in the family,” which is exactly how many retail investors operate. Besides the loyalty factor, it made sense since both advisors are managing her mother’s and sister’s assets. (My own retirement assets are held at Vanguard, where I know absolutely no one.) With her consent, our advisor invested my wife’s IRA money into a diversified group of “open-end” funds. She’s now the owner of Class C shares of the Dreyfus Opportunistic Midcap Value fund, the Cohen & Steers Real Estate Securities fund, the Columbia Acorn Emerging Markets funds, the Fidelity Advisor New Insights fund, the Gabelli Small Cap Growth fund, the Gabelli Equity Income funds, the Investment Managers Center Coast MLP Focus fund and the MFS Research International fund. The statement lists the fund symbol, quantities, price, value, unit costs, the original investment and the cumulative returns, unrealized gains and losses, annualized income and estimated yield. This was all well and good, although the statements give me no idea whether my wife paid any fees or commissions for her advisor investing in those funds. The only part of the statement that relates to costs is the average unit cost/cost basis column, but that has to do with the dividends and capital gains distributions. It has nothing to do with any fees and commissions, if any, paid to her advisor. If any fees were paid to her advisor, they were not spelled out in the monthly statement. Retail investing amateurs, such as my wife and I, have no reason to assume she paid any fees to an advisor, at least so far as we can tell by the statement. So this week, out of curiosity, I decided I would run fund comparisons through the Financial Industry Regulatory Authority’s Fund Analyzer tool, an accessible and clear explanation of what funds cost. I compared three funds: Vanguard’s Total Stock Market Index Fund Admiral Shares, where I have my IRA; as well as the two funds where my wife has a portion of her IRA, Dreyfus Opportunistic Midcap Value Fund Class C and the Gabelli Small Cap Growth Fund Class C shares. A $10,000 investment with a 5% return over a 10-year period would grow to $16,207.71 in the Vanguard fund, $13,443.48 in the Dreyfus fund and $13,164.12 in the Gabelli fund, according to FINRA’s expense analyzer. Total fees and sales charges were $64.28 for Vanguard, $2,234.35 for Dreyfus and $2,451.63 at Gabelli, the FINRA algorithm revealed. (To be fair, the Vanguard data was current as of Sept. 9, while the Dreyfus data was current as of Sept. 4 and the Gabelli data as of Sept. 5.)  Since the inception of each of the respective funds, Vanguard’s annual return is 5.33%, Dreyfus 8.78% and Gabelli 8.86%. However, the annual operating expenses at Vanguard were 0.05%; at Dreyfus, 1.92%, and at Gabelli, 2.13%. Certainly, my wife’s advisor gave her suitable investment advice -- the Dreyfus fund blew out industry indexes last year. But were his choices in her best interest? I do not know. FINRA’s analyzer tells me there are no contingent deferred sales charges, whatever those are (remember, I am just an amateur), no contingent deferred sales charges if held for more than 12 months at Dreyfus, and no contingent deferred sales charges if held for more than 12 months at Gabelli. Who benefits from those charges, why and in what amounts, I do not have a clue. Furthermore, there’s nothing in the documents to help me make sense of this -- again, from the perspective of a retail client. Proponents of the industry at the DOL hearings last month talked about the importance of disclosure. But my wife’s Stifel statements and the FINRA fund analyzer do not tell me anything about how much was paid to her advisor or to the mutual funds themselves -- and this is an age where mutual funds have to disclose that information. Yes, there are plenty of percentages outlined the Dreyfus Opportunistic Midcap Value C prospectus on Morningstar’s website. Under the “Fees and Expenses” heading, there’s information about shareholder fees for Class A, C, I and Y shares, along with management fees, 12b-1 fees and “load” charges. “This table describes the fees and expenses that you may pay if you buy and hold shares of the fund,” the Dreyfus prospectus says. “You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in certain funds in the Dreyfus Family of Funds.” Sorry, folks. This does not do me as a retail investor any good as it is not in a format that tells me what I really want to know. What I want to know is how much in dollar terms of the $75,000 of my wife’s IRA went to pay for her advisor and how much the funds -- Columbia Acorn, Dreyfus, Gabelli and company -- paid him to select the funds that were chosen for her two years ago. This steering of investors into particular funds is the central issue raised by the debate around the DOL’s conflict of interest rule. “People do not have a clue what they are paying for in their mutual fund,” Barbara Roper, director of investor protection with the Consumer Federation of America, told the DOL regulators during hearings on the conflict of interest rules last month. Under FINRA’s simple three-by-nine table spelling out fees was the chart of redeemed fund values over time after expenses. This is a blue bar representing the Vanguard fund rising steadily over the smaller -- but still rising -- bars representing the Dreyfus and Gabelli funds. That is when, in the middle of a UEFA soccer game on television, I finally turned to my wife as she was preparing for another day on the road for her small business (because that is how retail investors approach their retirement futures -- by grabbing bits and pieces of attention in the evening?). I showed her what I had done on the laptop and asked her to take a look at the difference in the bars. She let out a hearty laugh. “Good job, Sunbeam,” she said, recognizing my modest efforts at helping ourselves in the often opaque world of investing. The nickname was a reference to my first and only direct purchase of stock, $2,000 of Sunbeam, which I bought in the late 1990s when I was taking a finance course. The transaction helped me visualize what it meant to be an investor and what to look for in statements issued by a Wall Street brokerage house. The company, headed by a former Marine nicknamed Chainsaw Al, filed for bankruptcy in 2001. Still, I felt privileged in that I had learned enough about stock markets without suffering too much, and that I also had learned the stock market wasn’t for me. Then my wife hit upon an essential truth, which I suspect is close to how millions of other U.S. retail investors feel about the market: She has no interest in investing and deciding where her money should go. She just wants her retirement account to grow and to have the funds there for her one day without having to worry about it. Like much of entrepreneurial America, she is interested in running her small business, not in making retirement account investment decisions. But perhaps if her mutual fund statement told her how much -- in dollar terms -- she would have to pay for one fund over another, and how much of that was going to her advisor, I have no doubt she would be making different choices. On a positive note, my wife encouraged me to ask her financial advisor what kind of fees he collected in her fund selection, which I intend to do. Then I might suggest she insist on her advisor selecting cheaper funds, which she might take me up on. As of me, I am all-in with index funds. If the Wall Street-D.C. financial-regulatory complex is not going to tell me what I really want to know about how much I am paying them, why pay them a cent more than you have to?  This piece is from

5. FPPTA FALL TRUSTEES SCHOOL: The Florida Public Pension Trustees Association’s Fall Trustee School will take place on October 4 through October 7, 2015 at the Naples Grande Beach Resort, Naples. A link on FPPTA’s web site,, will take you to the Naples Grande Beach Resort site to make your room reservations. You may access information and updates about the Conference at FPPTA’s website. All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of Chapters 175 and 185 pension plans should take advantage of this conference.

6. ON SECOND THOUGHT...MAYBE THEY WERE WRONG?: It will be gone by June -- Variety Magazine on Rock n’ Roll -- 1955.

7. TODAY IN HISTORY: In 1948, the Honda Motor Company was founded.

8. 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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