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Cypen & Cypen
OCTOBER 6, 2005

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


As interest rates have declined over the past five years, sponsoring defined benefit pension plans has become increasingly expensive -- as plan sponsors are well aware. Plan participants, on the other hand, often do not fully understand or appreciate how much their defined benefit plans are worth, according to Watson Wyatt Worldwide. For most workers who participate in a typical pension plan, the value of their pension plan benefits has grown at a significantly faster clip than their 401(k) account balances over the last five years. What is the cash value of a monthly benefit provided by a defined benefit pension plan? The answer depends upon the monthly benefit, the time value of money and the participant’s life expectancy. Using annuity rates developed by the Pension Benefit Guaranty Corporation, one finds that the immediate lifetime annuity paying $1,000/month to a 65-year-old male cost approximately $110,000 five years ago. Today, that same income stream costs about $145,000 -- almost one-third more. (Values for female participants are comparable, but even higher due to their longer life spans.) From 2000 to 2005, workers who participated in defined benefit plans generally did better than workers who participated in defined contribution plans. Granted, investment returns during this period were relatively weak and interest rates fell steadily. In other five-year periods, the results might have favored 401(k) plans. When the financial markets are booming, defined contribution-type vehicles can help employees accumulate wealth. But defined benefit plans provide participants with a more stable source of retirement income in all market conditions. One of our favorite sayings bears repeating here: “You can never outlive your defined pension benefit.”


The U.S. Census Bureau reports data on state and local government plans for 2004. The report shows that 77% of public pension fund income is from plan investments. In other words, for every dollar in investments paid, 77 cents came from earnings on plan investments. In 2004, total income to pension public funds was $404 Billion. Of that total, $31 Billion (7.7%) came from employee contributions, $61 Billion (15.1%) from employers and $312 Billion (77.2%) from earnings on investments. Remember that over the last ten years many employers made little or no contributions to pension funds. That they are now making catchup contributions explains why contribution rates are higher in 2004. Employees have always made contributions and never enjoyed a contribution holiday, according to National Conference on Public Employee Retirement Systems. Readers can access the entire U.S. Census Bureau report at


Our readers are aware of the Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission, “Staff Report Concerning Examination of Select Pension Consultants” dated May 16, 2005 (see C&C Newsletter for May 19, 2005, Item 1). The SEC Staff Report was followed by U.S. Department of Labor and SEC Guidance entitled “Selecting and Monitoring Pension Consultants - Tips for Plan Fiduciaries” dated June 1, 2005 (see C&C Newsletter for June 2, 2005, Item 1). Now, a piece from Morningstar strongly suggests that both documents must be read to help one understand the shell game played by many pension consultants. Here’s how that shell game is played. Many pension consultants market their services (for example, identify plan investment objectives, allocate plan assets, select money managers to manage plan assets, select mutual funds as plan investment options, monitor performance of plan money managers, etc.) to sponsors with the hope of becoming the designated “gatekeeper” to a plan. The gatekeeper designation is important to a pension consultant that has won it at the expense of its competition, because it allows the consultant to exact a “toll” from a money manager that seeks to provide, for example, funds for a plan’s investment options. That toll is composed of money and other forms of compensation paid by the money manager to the pension consultant -- compensation in addition to the explicitly stated retainer paid by the pension plan to the consultant. In fact, the disclosed annual consulting fee paid to a pension consultant often pales in comparison to the undisclosed toll paid to the consultant by money managers. (Sometimes when the tolls are particularly high, the consulting fee is totally waived, which makes it appear that the consultant is providing its services for “free” -- ha!) The article emphasizes the extreme importance of reading and understanding the two items referenced above.

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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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