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Cypen & Cypen
OCTOBER 15, 2009

Stephen H. Cypen, Esq., Editor

1.            TIME REPORTS WHY IT’S TIME TO RETIRE THE 401(K)!:  When your editor was looking through the stack of news magazines in his reception room, his eyes were immediately drawn to a very provocative cover:  “Why It’s Time to Retire the 401(k).”  However, the real surprise wasn’t the cover story, but that it appeared on the cover of Time magazine.  Space does not permit the treatment that should be accorded to an article of this importance; readers should review the entire piece at,8599,1929119-1,00.html.  Here are just a few tidbits: 

  • The 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation's retirement system.  But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that is exactly what happened.  
  • The ugly truth is that the 401(k) is a lousy idea, a financial flop, a rotten depository for our retirement reserves. 
  • The average 401(k) has a balance of $45,519.  Even worse, 46% of all 401(k) accounts have less than $10,000.  The average 55-to-64-year-old should have a 401(k) balance of $320,000.  Today, just 21% of all U.S. workers are covered by traditional pensions, and the number shrinks every year. 
  • 44% of all Americans are in danger of going broke in their postwork years.

Unfortunately, the author does not advocate a return to defined benefit pension plans -- as we do.  He does suggest three alternatives to the traditional 401(k) plan:  

  • Automatic 401(k) - system of  defaults requires you to save money and invest more wisely.  No protection for market meltdowns. 
  • Guaranteed retirement account - government plan to ensure that workers receive 26% of pay in retirement on top of Social Security.  Workers pay 5% a year. 
  • Retirement insurance - Policies offered by private insurers pay for nearly 30% of retirement. 

We do not know enough about the second two alternatives to comment, but we do not believe the automatic 401(k) will work any better than the traditional 401(k).  Nevertheless, an article of this nature in a magazine like Time hopefully will serve as a catalyst for those who have the power to make changes that count. 

 2. FRS CLASSIFICATION AS “SPECIAL RISK” NOT NECESSARY TO INVOKE HEART/LUNG PRESUMPTION ... MAYBE:  On October 8, 2009 the Florida First District Court of Appeal issued an opinion holding that Florida Retirement System classification as “special risk” is not necessary to invoke the heart/lung presumption in Section 112.18(1), Florida Statutes.  However, almost immediately thereafter the court ordered the opinion withdrawn.  Thus, we will not publish the case name or a detailed analysis of it.  Presumably, the opinion will be reissued, in one form or another, and we will then report it here. 

 3. DB FUNDING STATUS SLIPS SLIGHTLY:   Despite the stock market’s continued surge, the typical U.S. defined benefit pension plan saw its funded status decline by one percentage point in the third quarter, according to a UBS Global Asset Management survey reported by  The typical plan’s assets jumped 9% for the quarter ended September 30, 2009, one of the best gains on record.  However, the yield on the 10-year Treasury dropped 21 basis points, and the spread between Treasuries and the yield on high-quality corporate bonds used to calculate present value of future corporate pension obligations narrowed 60 points, which was reflected in a 10% jump in liabilities. 

 4. PLAYING RETIREMENT BY EAR:  A shaky economic recovery means employees and employers are treading lightly on making big decisions about retirement and retirement benefits, according to the Aon Consulting 2009 Benefits & Talent Survey reported in Employee Benefit News.  The survey found that nearly 87% of employers report workers are delaying retirement due to a slow economy.  In addition, a third of employers admit that they have less than 70% of their workers enrolled in their defined contribution plans, with 67% citing that workers are not enrolled because they cannot afford it.  (Having a DC plan instead of a DB plan is scary enough; not enrolling in that DC plan is almost unforgivable.)  Employees, however, continue to turn to the workplace for advice about retirement savings.  About 65% of employers said they had noticed an increase in investment-related questions in 2008, compared to 2007.  Still, in 2008, only about a third of those employers increased their communications on the importance of saving for retirement, while 62% report their communication remained unchanged from the previous year.  The survey also shows that 56% of employers offer matching contributions to DC plans.  Of those, half provide a higher than 3% match.  And 41% of employers have an automatic enrollment plan, with 53% implementing a default at 3%. 

 5. NEVADA RETIREES CHALLENGE RETIREMENT REDUCTIONS:  Five retired Las Vegas firefighters have sued the city and its retirement system, alleging that a reduction in their retirement pay amounted to breach of contract.  According to, the lawsuit filed in state district court alleged that the Public Employees Retirement System changed the rules governing what counts as a retirement contribution after their retirements, and subsequently reduced the firefighters' retirement pay.  We do not know what the Nevada Constitution provides, but we assume Nevada is governed by the United States Constitution.  So, if the news item is anywhere near accurate, look for a retiree victory on this one. 

 6. SEN. NELSON INTRODUCES PUBLIC SAFETY TAX-FIX:  Senator Bill Nelson (D-FL) has introduced a bill to fix certain tax issues related to passage of the Pension Protection Act of 2006. S. 1657 would amend Internal Revenue Code to fix unintended changes to Section 828 of PPA, which amended IRC Section 72(t) to allow retired public safety employees beginning at age 50 to take distributions from their defined benefit plans without paying the 10 percent early distribution tax.  Section 828 recognized that -- due to the nature of the profession and in many cases mandatory retirement ages -- public safety employees typically retire earlier than the general population, and therefore should have access to their retirement benefits without penalty.  Unfortunately, since implementation of PPA, two issues have arisen that need to be fixed.  First, public safety employees between ages of 50 and 55 who chose to rollover their distributions into a 457 plan and then take distributions from the 457 plan are subjected to the 10 percent early distribution tax until age 59 1/2.  Second, public safety employees who retired before age 55 and prior to enactment of Section 828 and opted to annuitize their benefit to avoid the 10 percent early distribution tax -- and who after enactment of Section 828 decide to take a modified distribution from their plans -- are subjected to a 10 percent recapture tax on the previous annuitized distributions.  At issue here is wording of PPA Section 828, which was written so that the exemption on the 10 percent tax penalty was available only if the distribution was made from a defined benefit plan.  Senator Nelson’s bill removes the requirement that distribution be made from a defined benefit plan, and further exempts from the 10 percent recapture tax qualified retired public safety employees who opted for annuitized benefits prior to enactment, but now want to modify their distribution.  National Conference on Public Employee Retirement Systems, from which this report comes, our client City of Miami Police Officers’ and Firefighters’ Retirement Trust Fund and others have been working hard to bring this issue to the attention of members of Congress and urge them to provide relief from the unintended consequences of Section 828.  The bill, a companion bill to one introduced last year by Representative Kendrick Meek (D-FL) (see C&C Newsletter for June 12, 2008, Item 1), was referred to the Senate Committee on Finance.

 7. SEC PROPOSES RULES FOR CREDIT RATINGS DISCLOSURE:   The United States Securities and Exchange Commission has proposed amendments to its rules to require disclosure of information regarding credit ratings used by registrants, including closed-end management investment companies, in connection with a registered offering of securities, so that investors will better understand the credit rating and its limitations.  The amendments also would require additional disclosure that would inform investors about potential conflicts of interest that could affect the credit rating (see C&C Newsletter for September 24, 2009, Item 5).  In addition, the proposed amendments require disclosure of preliminary credit ratings in certain circumstances, in order that investors have enhanced information about the credit ratings process that may bear on quality or reliability of the rating.  Comments will be received on or before 60 days after publication in the Federal Register, which should occur in the near future.  Release Nos. 33-9070; 34-60797; IC-28942; File No. S7-20-09 (October 7, 2009).

 8. ERISA REQUIREMENTS TRUMP QDRO:   Ludwig, former spouse of a vested participant in various benefits plans, sued them, claiming that the plans had denied her health coverage and her assigned share of her former husband’s benefits.  After learning of her divorce several months after it became final, the plans notified her that she was not entitled to continued medical coverage under the Consolidated Omnibus Budget Reconciliation Act because the plans were not given timely notice of the divorce.  They further informed her that payments from her husband’s pension and savings funds awarded to her in the divorce decree would be honored, but not at this time, because her husband had not yet qualified for a disbursement.  Ludwig claimed violations of various federal civil rights statutes and the Employee Retirement Income Security Act. A United
States District Judge granted summary judgment in favor of the benefits plans.  COBRA amended ERISA to require employee benefit plans to offer a plan beneficiary the option of continued coverage under the plan if she is no longer eligible for coverage because of a qualifying event.  In a divorce situation, ERISA obligates the employee or former spouse to notify the plan administrator of the occurrence of the divorce within sixty days after the qualifying event.  Ludwig would have been eligible for continued coverage under COBRA because her divorce constituted a “qualifying event.”  However, the plan first became aware of the divorce five months after it was entered.  The fact that Ludwig assumed her health coverage would continue because her former husband told her it would is insufficient to obligate the plan to continue coverage.  Further, Ludwig’s argument that the plan knew of her divorce well within the sixty day time frame because the fund was aware earlier of her ongoing divorce proceedings is unpersuasive; a “pending divorce” is not a qualifying event within ambit of the plan or COBRA.  Ludwig v. Carpenters Health & Welfare Fund of Philadelphia & Vicinity, Case No. 08-809 (ED Penn., September 18, 2009).

 9. INCOME AND POVERTY AMONG OLDER AMERICANS:   Congressional Research Service has prepared a report for members and committees of Congress, entitled “Income and Poverty Among Older Americans in 2008.”  Older Americans are an economically diverse group.  In 2008, median income of individuals aged 65 and older was $18,208, but incomes varied widely around this average.  One-fourth of Americans 65 and older had incomes of less than $11,139 in 2008, while another one-fourth had incomes of $33,677 or more.  Older Americans receive income from a variety of sources, including earnings, pensions, personal savings and public programs such as Social Security/Supplemental Security Income.  Social Security and pensions are the two most common sources of income among the aged.  In 2008, Social Security paid benefits to 86% of individuals aged 65 and older and to 89% of households in which the householder or the householder’s spouse was 65 or older.  Social Security is the largest single source of income among the aged.  Sixty-nine percent of Social Security beneficiaries aged 65 or older received more than half of their income from Social Security in 2008.  For 41% of elderly recipients and 28% of elderly households, Social Security accounted for more than 90% of total income in 2008!   Thirty-four percent of persons aged 65 and older received income from private sector and public sector pensions in 2008.  Among individuals aged 65 and older who reported receiving income from government pensions, the median amount received in 2008 was $18,000.  Among recipients of private pensions, median pension income was $7,584.  Forty-four percent of households in which either the household head or spouse was aged 65 or older received income from a private or public pension in 2008.  Median household income from public-sector pensions in 2008 was $19,162.  Median household income from private sector pensions in 2008 was $8,412.  Many Americans prepare for retirement by saving and investing some of their income while they are working.  Of the 37.8 million Americans aged 65 and older who were living in households in 2008, 20.4 million (54%) received income from assets such as interest, dividends, rent and royalties.  Earnings are a significant source of income for older Americans, especially for those under age 70.  Although there was a trend toward earlier retirement from about 1960 to 1985, in recent years more Americans have continued to work at older ages.  In 2008, 68% of Americans aged 55 to 64 worked at some time during the year.  Poverty among Americans aged 65 and older has fallen from one in three older persons in 1960 to less than one in ten today.  In 2008, the poverty rate among individuals aged 65 and older (9.7%) was lower than the poverty rates among children under age 18 (19%) and adults aged 18 to 64 (11.7%).  Although the overall rate of poverty among older Americans is relatively low, it remains high for women, minorities, the less-educated and people over age 80. 

10. A BIG FAT GUESS ON YOUR 401(K):  How much will you need in your 401(k) to buy the future lifestyle you want?  No one can tell you exactly.  It depends on the lifestyle you want, how long you live after your full-time working career ends and unknown future events and factors.  However, it is probably going to be the most expensive purchase you will ever make -- yes, more than your house.  And one way to reduce the price is by working longer.  Dennis Ackley presents a “Big Fat Guess,” which is much better than what most people have:  no idea.  Ackley says, citing Employee Benefit Research Institute, that people who have made an estimate have, on average, five times more money in their accounts than people who have not.  In any event, the one page estimator is available at  

11. LOSS OF DB WILL AFFECT BOOMERS:  Social Security Administration has released a bulletin entitled “The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers.”  The percentage of workers covered by a traditional annuity, often based on years of service and final salary, has been steadily declining over the past 25 years.  From 1980 through 2008, the proportion of private wage and salary workers participating in defined benefit pension plans fell from 38 percent to 20 percent.  In contrast, the percentage of workers covered by a defined contribution pension plan -- that is, an investment account established and often subsidized by employers, but owned and controlled by employees -- has been increasing over time.  From 1980 through 2008, the proportion of private wage and salary workers participating in only DC pension plans increased from 8 percent to 31 percent.  More recently, many employers have frozen their DB plans.  Some experts expect that most private sector plans will be frozen in the next few years and eventually terminated.  Under the typical DB plan freeze, current participants will receive retirement benefits based on their accruals up to date of the freeze, but will not accumulate any additional benefits; new employees will not be covered.  Instead, employers will either establish new DC plans or increase contributions to existing DC plans.  These trends threaten to shake up the American retirement system as we know it because of vast differences between DB and DC pension plans, including differences in coverage rates within a firm, timing of accruals, investment/labor market risks, forms of payout and effects on work incentives/labor mobility.  DB pensions are tied to employers who, consequently, bear responsibility for ensuring that employees receive pension benefits.  In contrast, DC retirement assets are owned by employees who, therefore, bear responsibility for their own financial security.  The article estimates how the shift from DB to DC pensions might affect distribution of retirement income among boomers under two different pension scenarios:  one that maintains current DB pensions and one that freezes all remaining DB plans in addition to a third of all state and local plans over the next five years.  The article examines both changes in retirement income and numbers of winners and losers, and it compares these outcomes among individuals grouped by sex, educational attainment, marital status, race/ethnicity, years of paid employment and quintiles of lifetime earnings and retirement income.  Of principal concern is whether income from increased DC plan coverage will compensate for loss of DB plan benefits.  The following are some high-level conclusions:

  • On balance, there would be more losers than winners and average family incomes would decline.  The decline in family income is expected to be much larger for last-wave boomers (born from 1961 to 1965) than for first-wave boomers (born from 1946 to 1950), because last-wave boomers are more likely to have their DB pensions frozen with relatively little job tenure. 
  • Demographic groups most likely to have pensions under the baseline scenario are projected to be those most affected by accelerated freezing of DB plans, namely, non-Hispanic whites, college graduates, those with many years of work experience and those in the highest lifetime earnings and retirement income quintiles. 
  • Policymakers need to know impact of significant shifts in pension provisions on retirement well-being, so they can assess alternative policy options of shoring-up DB plans before those plans disappear or letting them slowly fade away, while focusing on ways to encourage higher participation rates and sounder investment choices within DC plans. 
  • Finally, as policymakers consider proposals to improve solvency of the Social Security system, they must recognize that the shift from DB to DC pensions means that Social Security will increasingly become the only source of guaranteed lifetime benefits of which most retirees can rely. 
  • Finally, as policymakers consider proposals to improve solvency of the Social Security system, they must recognize that the shift from DB to DC pensions means that Social Security will increasingly become the only source of guaranteed lifetime benefits of which most retirees can rely. 


It’s not a typo:  we repeated the last conclusion because it is so important, and is one we have  been preaching for decades.  Social Security Bulletin . Vol. 69 . No. 3 . 2009. 

12. SHERIFF HAD BURDEN BEFORE CIVIL SERVICE BOARD TO PROVE EMPLOYEE TERMINATED FOR JUST CAUSE:   Falk filed a petition for writ of certiorari in the District Court of Appeal to review an order of the circuit court sitting in its appellate capacity.  The case began when Falk's employment with Lee County Sheriff's Office was terminated, and she appealed that termination to Lee County Sheriff's Office Civil Service Board, which affirmed her termination.  After Falk’s petition for writ of certiorari to the circuit court was denied, she filed the instant petition. On second-tier review, the reviewing court is limited to deciding whether the circuit court afforded procedural due process and whether it applied the correct law.  (In reviewing the Board’s order, the circuit court was required to decide whether procedural due process was accorded; whether essential requirements of law were observed; and whether there was competent, substantial evidence to support the administrative findings and judgment.)   However, the circuit court also correctly found that the Sheriff had the burden to prove that Falk was terminated for just cause.  (On the other hand, the Board had earlier incorrectly reasoned that, because Falk was appealing her termination, she had the burden of proof as appellant to establish that her termination was without just cause.)  The fact that an aggrieved employee must initiate a hearing before a reviewing body or that such action is denominated as an “appeal” does not alter the proposition that burden of proving the basis for termination rests with the employing agency.  Because the Sheriff had the burden to prove that Falk was terminated for just cause, the Board failed to observe the essential requirements of law when it determined that Falk had such burden.  Hence, the circuit court failed to apply the correct law and erred in denying the petition for writ of certiorari.  Falk v. Scott, Sheriff of Lee County, Florida, 34 Fla. L. Weekly D2060 (Fla. 2d DCA, October 9, 2009). 

13. IN DISSOLUTION OF MARRIAGE, ERROR TO OFFSET PARTY’S DEPLETED RETIREMENT FUNDS AGAINST OTHER  PARTY’S PENSION PLANS:  The Wife appealed the final judgment of dissolution of marriage, alleging error in the equitable distribution award.  At trial, the Wife testified that the Husband's employment with both of his employers, including the City of Tampa, began during the marriage, and that he had a pension plan, retirement plan and a 401(k) plan.  Among those plans, the balances totaled over $14,000. On the other hand, the Wife testified that her retirement plan accumulated during the marriage, amounted to $5,400, but she had received those funds and used the proceeds to purchase a car.  The trial court offset the Husband's retirement plans with the Wife's depleted retirement plan, ordering that the parties retain their pension/retirement accounts currently in their name only.  It was error for the trial court to include the Wife’s depleted assets in the equitable distribution scheme because she used such assets during pendency of the dissolution proceedings, and no misconduct was asserted.  Section 61.075(1), Florida Statutes, provides that distribution of assets and liabilities should be equal unless there is a justification for an unequal distribution.  The appellate court reversed  the equitable distribution provisions of the final judgment, and remanded for further proceedings.  Mobley v. Mobley, 34 Fla. L. Weekly D2072 (Fla. 2d DCA, October 9, 2009). 

14. TAX CONSEQUENCES AND PROPER REPORTING OF EMPLOYMENT-RELATED JUDGMENTS AND SETTLEMENTS:  Office of General Counsel, Internal Revenue Service, has issued a memorandum outlining information necessary to determine income and employment tax consequences, and appropriate reporting of employment-related judgments or settlement payments made by Internal Revenue Service.  The memorandum includes charts that can be used as reference tools, and supersedes the memorandum dated September 9, 2004.  Determining correct treatment of employment-related settlement payments is a four-step process.  First, determine character of the payment and nature of the claim that gave rise to the payment. For example, a payment could be for a lost wages claim brought under Title VII of the Civil Rights Act of 1964.  Second, determine whether payment constitutes an item of gross income.  Third, determine whether payment is wages for employment tax purposes (Federal Insurance Contributions Act and income tax withholding).  Fourth, determine  appropriate reporting for payment and any attorneys' fees (Form 1099 or Form W-2).  The entire 20-page memorandum is available at  Although the memorandum is dated last October, apparently it was just released this summer. 

15. CALIFORNIA LIMITS ON PENSION AGENTS BECOME LAW:  The Sacramento Bee reports that the Governor of California has signed a bill clamping down on placement agents, the marketing middlemen at the heart of a multistate probe into corruption of public pension funds.  The law requires disclosure of fees paid by investment firms to placement agents.  It also requires agents to notify pension system governing boards of any campaign contributions or gifts they have made to board members.  Placement agents are door openers:  They are hired by private equity groups and other investment firms to secure business from public pension funds.  Placement agents have secured hundreds of millions in investment dollars from California Public Employees’ Retirement System and State Teachers’ Retirement System.  CalPERS adopted a placement agent policy in May, requiring investment firms to disclose whether they have hired placement agents (see C&C Newsletter for May 14, 2009, Item 5, C&C Newsletter for June 11, 2009, Item 1, C&C Newsletter for June 25, 2009, Item 2, C&C Newsletter for July 16, 2009, Item 8, C&C Newsletter for July 30, 2009, Item 2, C&C Newsletter for August 6, 2009, Item 4 and C&C Newsletter for August 13, 2009, Item 9).  CalSTRS created a similar back policy in 2006, but, apparently, nobody has ever heard of it.  The new state law imposes additional controls and extends them to all public pension funds in California.  

16. ABBOTT & COSTELLO EXPLAIN STIMULUS PACKAGE:  If you have been having difficulty deciphering the recent stimulus package, take heart, help is on the way. Just link to the following simplified explanation by the memorable comedy duo Abbott & Costello,  Now, how complicated was that? 

17. AN OLD FARMER’S ADVICE:  When you wallow with pigs, expect to get dirty. 

18. IDIOSYNCRASIES OF OUR LANGUAGE:  Why is it called tourist season if we can't shoot at them? 

19. QUOTE OF THE WEEK:  “I always wanted to be somebody, but I should have been more specific.”  Lily Tomlin


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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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