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Cypen & Cypen
October 5, 2012

Stephen H. Cypen, Esq., Editor

1.      Please excuse our tardiness; this Newsletter is being released a day late because of office-wide computer problems.  We apologize for any inconvenience. 
2.      RETIRING DURING ECONOMIC BOOMS COULD CAUSE FINANCIAL HARDSHIP:  The recent economic downturn and volatile financial markets have drastically reduced the retirement accounts of many current and future retirees. A new study found that many Americans choose to retire when the economic markets are peaking, an action that can, ironically, cause major problems for the long-term financial stability of retirees. Potential retirees often will first meet their targeted retirement savings goals during an up-market, and will be tempted to retire at that point.  The problem with this strategy is that the economy runs in cycles, meaning that after a peak, the market will take a downturn. People who have retired shortly before an economic downturn run a serious risk of losing a significant portion of their retirement savings, which will shorten the longevity of their retirement income. The result could mean many retirees outliving their retirement savings and facing financial hardships toward the end of their lives.  The study recommends that potential retirees hold off on retiring immediately upon reaching their target savings goals, particularly during an economic boom. Potential retirees should retire during an economic downturn, as long as they have saved enough to be comfortable. That way, once the markets recover, retirees’ savings will increase above their initial target goals, which will create an adequate financial cushion for future economic downturns. The study, was published in the Journal of Personal Finance.  
3.      CONGRESSIONAL COMMITTEE SETUPS “STRAW-MAN” ISSUE OF FEDERAL PENSION BAILOUT:  Addressing the “inevitable” request for state pension bailouts, a Republican Joint Economic Committee has issued a staff commentary.  It begins by saying that state and local government employee pension funds are significantly underfunded. By standard accounting methods, some state pension funds will run out of assets in the near future.  When that circumstance occurs, states will have to use general government tax revenue to pay their pension benefits, which in most cases hold the highest priority of payment. Depending on states’ constitutions and their individual policy choices, maintaining full pension benefits without sufficient pension fund assets will require tax increases, cuts in government services, or additional debt issuance. When these austerity measures prove too severe for states and localities to handle – politically or economically – governors and mayors will inevitably come to Washington, requesting federal bailouts. And despite the massive federal debt and fiscal imbalances, it will be hard for Washington policymakers to deny sympathetic retired teachers, police, and firefighters after a previous Congress bailed out Wall Street and the U.S. automakers.  When the states with the worst pension systems come knocking at Washington’s door for a bailout, it will ultimately be taxpayers in more prudent states that will pay for the recklessness of the negligent states.  Already, federal grants to the states result in significant income redistribution. For example, the five states with the highest level of per capita federal grants receive nearly three times as much as the five states with the lowest amount. And the five states with the highest per-capita federal tax burden pay more than four times as much in total federal taxes as the five states with the lowest burden.  If the states with the most troubled pension funds come to Washington for a federal bailout, the burden of this bailout will be borne disproportionately by states that already pay the highest share of per capita federal taxes and states with relatively sound pension systems.  As more and more states come to the federal government for bailouts, taxpayers in fiscally sound states will grow increasingly frustrated and hostile toward the fiscally reckless states. This tension could lead to a severe divide between the fiscally responsible and irresponsible states, just as we are seeing occur in the Eurozone today. The only way to prevent a federal bailout of state pension funds is for states to take action today to curb their underfunded and unsustainable pension systems. Enacting pension reform will not be easy, particularly in the states with the greatest unfunded liabilities, but if a federal bailout remains on the table, states will have no reason to impose fiscal discipline.  This scenario reminds us of the old “jack story.”   
4.      IRISH NATIONAL PENSION VICTIM IN TRANSITION MANAGEMENT OVERCHARGING SCANDAL:  A report from the reveals that the Irish National Pensions Reserve Fund was overcharged millions of Euros after its transition manager claimed to be an agent, but acted as a "riskless principal.”  According to a recently-released report, markups of an estimated 2.65 million Euros--5.5 times the contractual fee--were applied to transition fees paid by the pension fund. The amount has since been reimbursed by the manager, State Street Bank Europe LTD.  The pension funds had retained State Street for the disposal of assets for a management fee based on the value of the assets disposed.  No other compensation, other than certain foreign exchange costs, was to be paid to State Street.  After disposing of the assets valued at 4.7 billion Euros, the bank collected the contracted amount of 698,000 Euros. 
5.      THE EVOLVING ROLE OF DC PLANS IN THE PUBLIC SECTOR:  A research project conducted by the Center for State and Local Government Excellence has yielded “The Evolving Role of Defined Contribution Plans in the Public Sector.”  The report touched on the major issues and considerations surrounding DC Plans in the public sector.  Currently, DC plans play a supporting role to defined benefit plans and Social Security for the vast majority of public sector employees, and that will likely continue for some time. However, pension reforms across state and local governments are increasing the importance and dependence on DC plans for producing a larger portion of retirement income, or in rare instances, even becoming the primary source. Hybrid plans may also grow in popularity over the next several years. With the increasing importance of the DC plan portion of retirement savings, it is worthwhile to consider the benefits and limitations of this savings instrument so that it can be used best to serve public employees.  The following key findings that emerged from this research can assist retirement plan administrators and public policy makers in their review and implementation of defined contribution plans:
•Between 2009 and 2011, 43 states enacted pension reform. These changes will necessitate increasing reliance on personal savings.
•Some experts predict a continuing trend toward increased reliance on a DC plan component in the public sector to provide retirement income. Furthermore, some foresee an increase in hybrid plans, which maintain a core DB supplemented by a DC plan.
•Research in this report found the definition of what constitutes an adequate retirement income for employees varies. Experts recommend replacement revenue benchmarks ranging from 70 to 100 percent of pre-retirement income, depending upon multiple factors, such as pre-retirement income, household debt, family obligations and rising health care costs.
•Behavioral research suggests that most people lack the skills effectively to manage their own retirement investments, which is particularly troubling in a DC environment.
•Automatic enrollment is an effective tool for increasing participation in DC plans because it overcomes individual inertia.
•Best practice recommends that in a DC environment employees have access to lifetime income options to protect against longevity risk.
•Financial literacy and counseling can help employees improve their investment and retirement planning choices, particularly those with lower education and income.
6.      PUNOGRAPHICS:    Venison for dinner again?  Oh deer! 
7.      QUOTE OF THE WEEK:  Politicians are the same all over. They promise to build a bridge even where there is no river.  Nikita Khrushchev
8.      ON THIS DAY IN HISTORY:  In 1924, first Little Orphan Annie-strip appears in NYC Daily News.
9.      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. 
10.    PLEASE SHARE OUR NEWSLETTER:  Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at  Thank you.




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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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