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Cypen & Cypen
OCTOBER 30, 2008

Stephen H. Cypen, Esq., Editor


As we have previously advised (see C&C Newsletter for May 22, 2008, Item 3), in the Determination Letter Process, governmental plans have been assigned to Cycle C, currently scheduled to end January 31, 2009. Recently, however, concerns have been raised about governmental plans’ ability to comply with the January 31, 2009 determination letter deadline. Among others, the following issues have been raised:

  • Unlike private sector plans, many governmental plans are not based upon a single document. IRS has indicated that a composite document will be acceptable.
  • Many governmental plans have not been submitted for a determination letter for a long time, if ever. Governmental entities have been concerned that they will not be able to find evidence of timely adoption of historical amendments. IRS has provided some relief with respect to this issue by providing that verification of timeliness is only necessary for amendments from the mid 1990s forward.

On October 21, 2008, an IRS official indicated that IRS is now considering a proposal to give governmental plans a one-time option to file either under Cycle C or Cycle E, which ends January 31, 2011. After 2011, all governmental plans would return to Cycle C. IRS is considering providing incentives for governmental plans to remain in Cycle C, such as expedited processing of determination letter applications and reduced correction fees. Even governmental plans that have already filed under Cycle C will have the opportunity to opt out of Cycle C and move to Cycle E. This proposal may provide a solution for those governmental plans that have been worried about the requirement to file a determination letter application in Cycle C. IRS is requesting comments on the proposed accommodation by November 3, 2008. For your information, three-fourths of the way through Cycle C only 120 applications have been filed by governmental plans. The foregoing was adapted from the Groom Law Group and BNA.


The U.S. financial crisis has shaken investor confidence in the U.S. economy, and for good reason, according to Bank of America Investment Advisors. After nearly a decade of excessive borrowing and lax financial regulation, the economy is in the grips of a painful deleveraging process. Bank failures, home foreclosures, credit card delinquencies -- these variables and others have brought the U.S. economy to a virtual standstill. These same factors have spawned a growing sense of despair and angst about America’s economic future. With the near-term health of the U.S. economy tied to a government bailout package, it is hard not to be concerned about the nation’s long-term prognosis. Right on cue, writing America’s obituary has become fashionable again in the popular media. Against this dire backdrop, it might be a good idea to step back from the drama of Washington, and unemotionally reassess prospects of the U.S. economy. Here is an inventory of what is right with the United States:

  1. The United States is the largest and most productive economy in the world. With just 4.5% of the global population, the United States accounts for 25% of global gross domestic product and produces more output in a year than the next four economies -- Japan, China, Germany and the United Kingdom -- combined. America’s economy is more than four times the size of China’s.
  2. The United States is the world’s leading manufacturer of goods. Contrary to popular media reports, the United States is still in the business of making “stuff.” Indeed, the United States is a manufacturing powerhouse, ranked number one in output. China ranks a distant second.
  3. The United States is the largest exporter of goods and services in the world. The United States has posted a trade deficit in goods every year since 1975, a notorious economic feat. However, the deficit masks the fact that the United States is a significant exporter of both goods and services. When goods and services are combined, America emerges as the world’s top exporter.
  4. The United States remains the world’s favorite destination for foreign direct investment. Lost amid all the chatter about U.S. outsourcing and jobs being shipped to China is this simple truth: the United States remains the most attractive market in the world for foreign investors. The allure of the United States comes from many factors, including its vast and wealthy market, large scale labor pool and transparent rule of law.
  5. America is home to the world’s top global brands. More than half of the world’s top 100 brands were American in 2008. Of the top ten global brands, eight were American, giving corporate America an unequaled global footprint relative to its international competitors.
  6. The United States remains the world’s technology leader. The United States remains the most innovative economy in the world. America’s risk-taking, entrepreneurial streak underpins its technological leadership -- a leadership that continues to attract the best and brightest from around the world to live and work in the United States.
  7. The top-ranked universities in the world are in the United States. Although America’s public school system leaves a lot to be desired, when it comes to higher education, the best universities in the world are in the United States. Nearly 40% of the top universities in the world are found in the United States, with American universities holding the top two positions.
  8. The U.S. dollar is still the world’s top reserve currency. The U.S. dollar remains the reserve currency of choice for many nations, accounting for roughly 65% of global central bank reserves last year. The Euro ranks a distant second.
  9. The U.S. military is second to none. Military might still matters, especially in a world where geo-strategic flashpoints continue to simmer. Keeping the global peace still falls to the United States, whose worldwide military presence is second to none.
  10. The U.S. ranks number one in global competitiveness. Based on the latest competitiveness survey, the United States ranks as the world’s most competitive economy, a position underpinned by America’s innovative capabilities and top research universities, among other variables. Whether the United States maintains its top ranking next year remains to be seen -- the financial crisis, no doubt, will take some gloss off the U.S. economy. However, on a relative basis, the U.S. economy remains among the most competitive in the world, a factor often forgotten and overlooked here at home.

There is no denying that a few things are broken in the United States right now, with the impaired U.S. financial sector among them. True, all is not perfect: America’s crumbling physical infrastructure, unwieldy healthcare system and debtor nation status require immediate attention. The U.S. economy will prove to be far more resilient and dynamic than what the doomsayers will have you believe.


That is the question posed in a new Issue in Brief from Center for Retirement Research at Boston College. The stock market, as measured by the broad-based Wilshire 5000, declined by 42% between its peak on October 9, 2007 and October 9, 2008. Over that one-year period, the value of equities in pension plans and household portfolios fell by $7.4 Trillion. Of that $7.4 Trillion decline, $2.0 Trillion occurred in 401(k)s and individual retirement accounts, $1.9 Trillion in public and private defined benefit plans and $3.6 Trillion in household non-pension assets. The Brief documents where the declines occurred. The information is interesting and important in its own right. But the declines also highlight the fragility of our emerging pension arrangements. Today the declines were divided equally between defined benefit and defined contribution plans, but in the future individuals will bear the full brunt of market turmoil as the shift to 401(k)s continues. Much of the reform discussion regarding private sector employer-sponsored pensions has focused on extending coverage. But the current financial tsunami also underlines the need to construct arrangements where the full market risk does not fall on pension plan participants. No kidding.


The National Law Journal reports that the United States Securities and Exchange Commission brought 671 enforcement actions in fiscal year 2008, the second-highest total in the agency’s history. SEC also repeated last year’s total of distributing more than $1 Billion to investors harmed by others’ actions during the fiscal year, which ended on September 30, 2008. The agency looks forward to continuing its investor protection mission in the upcoming year. The agency’s higher enforcement caseload includes a spike of more than 25% in insider trading cases and more than 45% in market manipulation cases, compared with fiscal 2007 actions. SEC also reported that it is conducting more than 50 investigations related to the subprime mortgage market. We are wondering if it is too little too late.


The Supreme Court of Washington recently considered a case that required determination of whether retirement health care and welfare benefits provided in a collective bargaining agreement vested for life with employees who reach retirement eligibility during the term of the agreement. Appellants were nine current or retired employees of the Port of Seattle, who were eligible to receive retirement welfare benefits pursuant to a collective bargaining agreement between the Port and their union. After the CBA expired, the Port ceased contributing to the welfare fund, which administered the welfare benefits provided to eligible employees and retirees. Upon ceasing contributions, the trustees terminated the welfare trust’s coverage for all employees and retirees. The Port offered appellants the opportunity to participate in its own employee benefits plan, but did not offer to pay the premiums for such coverage. The Supreme Court held that state law governs vesting principles for retirement welfare benefits conferred through a collective bargaining agreement with a state employer, and therefore declined to interpret such rights under Title I of the Employee Retirement Income Security Act of 1974. Applying the applicable vesting principles to the CBA, the Court held further that the Port is obligated to provide retirement welfare benefits for life to appellants who have satisfied the eligibility requirements to receive such benefits. In reversing, the Court held that the lower court erred in finding that appellants had no vested right to receive retirement welfare benefits because the CBA did not “unambiguously” vest welfare benefits beyond duration of the CBA itself. The lower court misconstrued Supreme Court precedent regarding creation of a vested right to retirement benefits. Conferral of compensatory retirement welfare benefits through a collective bargaining agreement creates a vested right for eligible retirees absent express language in the agreement specifically limiting the right to such benefits. Navlet v. Port of Seattle, Case No. 78866-9 (Wash., October 16, 2008) (En Banc). Note, the decision was 5-4, with a very lengthy dissent. Severity of the split is evidenced by the fact that the case was not decided until two years after oral argument!


Defined contribution plans have become an integral part of the U.S. private pension system. At year-end 2007, DC plans held $4.5 Trillion in assets and accounted for 25% of all U.S. retirement assets, not including monies originating in employer-sponsored plans and rolled over into individual retirement accounts. At year-end 2007, IRAs held $4.7 Trillion in assets, much of the total resulting from rollovers. The rising importance of DC plans is also evident in the number of workers participating in pension plans. Between 1980 and 2005 (the latest year for which data are available), the number of participants in private-sector DC plans increased from 20 million to 75 million, nearly a fourfold increase. By comparison, participants in private-sector defined benefit plans increased from 38 million to 42 million, or only about 10%. With this backdrop, Investment Company Institute conducted a survey of employees retiring between 2002 and 2007. Here is a summary of ICI’s findings:

  • Just over half of DC plan participants received all of their distributions as a lump sum. The remainder received their distribution as annuities or installment payments, deferred withdrawal or some combination of options.
  • The fraction of DC balances spent at retirement is very low.
  • Large account balances are much more likely to be distributed through annuities or as lump sums that are rolled over into other investments.
  • Seventy percent of DC plan participants recalled having multiple distribution options at retirement.
  • Retirees with a distribution choice most frequently selected the lump-sum option.
  • Eighty-six percent of retirees who received a lump-sum distribution reinvested all or some of the proceeds.
  • Retirees who reinvested lump-sum distributions generally sought and acted on investment advice from professional financial advisers.
  • The greater the value of the lump-sum distribution at retirement, the more likely recipients were to reinvest the proceeds.
  • Lump-sum distributions typically were rolled over into IRAs.
  • Lump-sum distributions that were reinvested generally remained in well-balanced portfolios.
  • Retirees’ DC distribution outcomes were generally consistent with their economic circumstances and stated personal preferences for control over asset management or income security.

The survey was conducted between October 2007 and December 2007. It included over 600 primary or co-decision makers for household saving and investing who had retired within the previous five years. Each survey respondent had assets in DC plans or similar employer-sponsored individual account plans at retirement. The majority of retirees surveyed had participated in 401(k) plans, but respondents also included those who had been in 403(b) plans, the federal government’s Thrift Savings Plan, 457 plans and employer-sponsored IRAs.


Jernigan challenged a final order of the Florida Division of Retirement granting regular disability retirement benefits, but denying his application for in-line-of-duty disability benefits. Jernigan had worked for over 25 years until 2004, when he was forced to retire due to a debilitating psychological condition he claimed was work-related. Most of Jernigan’s career was spent in law enforcement, without incident. But, two years prior to his retirement, Jernigan was accused by the media of colluding with a police informant who was a prime suspect in a murder case. Although Jernigan’s employment was terminated, no charges were ever filed, administratively or otherwise, and Jernigan was rehired five months later. Nevertheless, he was not returned to his previous position; instead, he was first assigned to court security and then to the evidence warehouse, without use of his badge or a uniform. Before the Retirement Commission, Jernigan testified that he was humiliated, and that after his termination and subsequent loss of duties his mental condition deteriorated to the point that it forced him to leave his employment. Because it was undisputed that Jernigan was totally and permanently disabled, the only issues were whether he proved by a preponderance of the evidence that (1) his injury was work-related and (2) his injury was a substantial, producing cause or an aggravating cause of his permanent and total disability. The only expert produced by the state who analyzed Jernigan’s mental condition testified that his symptoms were exacerbated after he was fired. He also agreed that if termination of a long-term position, false accusations and loss of profession were considered to be in-line-of-duty incidents, that Jernigan was disabled in line of duty. Here, as in a previous case right on point, the Retirement Commission did not properly consider that debilitating anxiety or stress over loss of duties can be considered a work-related injury, even if there are significant outside stressors. On the other hand, it found that there was no showing of a substantial relationship between the job environment and disabling illness, and that job conditions did not rise to the level of unusual stress triggering the disability. However, there is no requirement that job stress be unusual. The only requirement is that it be a substantial or aggravating cause of a total and permanent disability. While there was no question that Jernigan had major stressors outside of his job, there is no evidence indicating that these outside stressors rendered him unable to work. Inasmuch as the undisputed evidence did not support the Retirement Commission’s denial of Jernigan’s in-line-of-duty benefits, the appellate court reversed its order, and remanded with directions to award such benefits to Jernigan. Jernigan v. State of Florida, Department of Management Services, Division of Retirement, 33 Fla. L. Weekly D2441 (Fla. 1st DCA, October 21, 2008).


National Conference on Public Employee Retirement System has issued a beautifully-done publication entitled “The OPEB Challenge - Mapping a comprehensive strategy for public employers.” Many public sector employers provide retiree medical benefits as a supplement to “traditional” pension benefits. With limited accounting recognition and pay-as-you-go funding, these benefits have not always received the attention that most agree they deserve. That situation is changing, largely because of the challenges presented by compliance with new GASB Statement 45 (Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions). However, it is not just an issue of accounting: accumulation of benefits under the pay-as-you-go system, the burden of approaching baby boomer retirements and ever-growing medical costs have made retiree medical benefit finance a top priority. Indeed, there is a sense in which the GASB 45 accounting change simply reflects the urgency of those underlying concerns. According to its conclusion, the paper was to introduce readers to the core issues of OPEB program finance, including accounting considerations presented by GASB 45. In the discussion, the authors have focused on the four key elements in the OPEB decision process: valuation, funding, investment strategy and benefit design. At each step in the process, three themes that cut across each decision element have been emphasized:

  • A thorough understanding of the numbers is critical.
  • OPEB finance is different from pension finance.
  • Decisions with respect to any one element -- for example, valuation methodology, decision to fund, investment strategy or design -- will affect all the others.

The numbers will not tell you the answer, but understanding them will be the foundation of all of your decision making. For this reason, NCPERS has emphasized the following key points: the critical effect on OPEB liabilities of the interplay of discount rate and medical trend; the effect of the funding decision on liability valuation; the relationship of real assets to OPEB liability volatility; and the need to understand what is driving costs before undertaking a re-design of the benefits. NCPERS believes that good decisions are the product of a sound process, and hopes the paper has provided readers with the foundation for that process. Kudos to Hank Kim, NCPERS Executive Director & Counsel.


Mortgage backed securities are like boxes of chocolates. Criminals on Wall Street stole a few chocolates from the boxes and replaced them with turds. Their criminal buddies at Standard & Poor’s rated these boxes AAA Investment Grade chocolates. These boxes were then sold all over the world to investors. Eventually somebody bites into a turd and discovers the crime. Suddenly, nobody trusts American chocolates anymore worldwide. Hank Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 Billion until the market for turds returns to normal. Meanwhile, Hank’s buddies, the Wall Street criminals who stole all the good chocolates, are not being investigated, arrested or indicted. Mama always said: “Sniff the chocolates first, Forrest.” Yummy, yummy.


Money will buy a fine dog but only kindness will make him wag his tail.


“It’s a dog-eat-dog world, and I’m wearing Milk Bone shorts.” Norm Peterson (from Cheers)

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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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