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Cypen & Cypen
October 15, 2015

Stephen H. Cypen, Esq., Editor

1.  CHICAGO PARK DISTRICT UNION CHALLENGES CONSTITUTIONALITY OF PENSION REFORM LAW: Pensions & Investments reports that a union for Chicago Park District employees, along with one active and one retired worker, filed a lawsuit challenging constitutionality of a 2014 Chicago pension reform for members of the $424.5 million Chicago Park Employees' Annuity & Benefit Fund. SB 1523, signed into law in January 2014, raised the minimum retirement age, increased both employer and employee contributions and lowered cost-of-living adjustments for members of the park district retirement fund. The highest court in the state has unanimously ruled that cuts and diminishments of pension benefits are unconstitutional, said the president of the local. In July, a County Circuit Judge ruled unconstitutional a pension reform law that took effect January 1 for members of Chicago's laborers and municipal pension funds. The city appealed the judge’s decision, with oral arguments scheduled before the Illinois Supreme Court in November.

2. DO FINANCIAL ADVISERS INFLUENCE SAVINGS BEHAVIOR?:RAND Corporation has prepared for the Department of Labor a white paper entitled “Do Financial Advisers Influence Savings Behavior?” There is substantial evidence that Americans tend to have low financial literacy, and are struggling with building sufficient wealth for a secure retirement. Financial advisers can play an important role by helping individuals make better financial decisions and improving their financial situations. However, there is limited and mixed evidence about the benefits to using a financial adviser. For example, there is a substantial body of work that finds that individuals who invest through a broker earn lower returns than those who invest directly. However, these studies generally do not account for selection issues and the other benefits that investors might receive from financial advisers. One benefit, other than investment returns, that financial advisers might provide is helping clients improve their financial and savings habits. In fact, in a survey, 71% of respondents with an ongoing advisory relationship indicated that ensuring that they are saving enough to meet their financial goals was a “major” reason for consulting an adviser. In this report, the authors review the literature providing evidence about whether working with an adviser improves savings behavior, in general, as well as saving for long-term goals, particularly retirement. While financial advice usage and savings are correlated, there are several possible directions of causality. First, it might be that working with a financial adviser leads to improvements in financial behavior, resulting in increased savings. Second, it is possible that the direction of causality runs the other way -- namely, that those with greater savings are more likely to seek out financial advice. And, third, it is possible that the same underlying characteristics make an individual more likely to seek out financial advice and, simultaneously, more likely to save. The authors reviewed the evidence regarding these three possibilities. In reviewing the literature, the authors use a broad definition of financial advising. In the United States, investment advisers and brokers-dealers provide investment advice to retail clients, even though they have different legal definitions and obligations to clients. Financial planners tend to provide more-general financial advice, and the authors include research on their impacts in their review. 

3. DOCUMENT RETENTION RULES FOR 401(k)S MADE SIMPLE:Eric Droblyen asks if you knew that ERISA requires all employers to retain detailed 401(k) documents, including testing results, transactions and employee activity -- for at least 6 years? If you did not, you have got a lot of company. Nevertheless, it is important to understand and comply with these rules. While only small civil penalties are possible if required plan records are not preserved, missing records can make it more difficult for a 401(k) sponsor to defend plan operations or the accuracy of benefit payments if they are ever challenged by the IRS, DOL or plan participants. In general, 401(k) plan records must be kept for a period of not less than six years after the filing date of the IRS Form 5500 created from those records. However, records necessary to a participant’s claim for plan benefits must be kept longer. These records must be kept as long as a possibility exists that they might be relevant to a determination of the benefit entitlements of a participant or beneficiary. Another words, indefinitely. Some of the most common plan records a 401(k) sponsor must retain are itemized below. To organize this information, the author recommends using three files: a file to store documents that govern plan operation, a file for participant records, and a file for plan year information. Here are more specifics:

  • Plan Document File. Items to keep in the Plan Document File include:
  • Plan Documents – adoption agreement, base document, IRS advisory letter, amendments, QDRO policy, and loan policy (if loans are permitted). 
  • Participant Disclosures – Summary Plan Description, Summary of Material Modification.
  • Corporate Actions – resolutions, agendas, minutes, and documents distributed at meetings.
  • Service Agreements – Includes all plan service provider contracts.
  • 408b-2 Fee Disclosures – Includes fees and services delivered by plan service providers.
  • Fidelity Bond – ERISA Section 412(a) requires every fiduciary of an employee benefit plan and every person who handles funds or other plan property be bonded.
  • Participant File. This file should contain forms provided by plan participants. Generally, these forms direct the 401(k) sponsor to take certain actions on the participant’s behalf. Items to keep in the Participant File include:
  • Payroll Records.
  • Participant Deferral Election Forms.
  • Investment Election Change Forms. 
  • Beneficiary Designation Forms.
  • Distribution Request Forms (with any supporting documentation).
  • Loan Request Forms.
  • Rollover Requests.
  • QDRO Split Requests (with supporting documentation).
  • Plan Year File.  This file should contain important records related to a plan year. A Plan Year file should exist for each plan year the plan has existed. Items to keep in the Plan Year File include:
  • Annual Valuation – Contains participant-level transaction information for the plan year, including contribution, distribution and fee activity. If received quarterly, file all four quarters.
  • Annual Trustee/Custodian report – Contains trust-level transaction information for the plan year, including all purchases and sales that occurred in trust. If received quarterly, file all four quarters.
  • Annual Nondiscrimination Testing – 401(k) plans have various testing requirements. Most common tests include:
  • Coverage (IRC Section 410(b)) testing.
  • Actual Deferral Percentage and Actual Contribution            Percentage testing (non-safe harbor 401(k) plans only).   
  • Excess Deferral (IRC Section 402(g)) testing.
  • Annual Addition (IRC Section 415(c)) testing.
  • Top Heavy (IRC Section 416) testing.
  • Rate Group (IRC Section 401(a)(4)) testing (“new comparability” plans only)    
  • Annual Participant Notices – Any notices provided to participants, including (as applicable):
  • Participant fee disclosure (ERISA 404a-5) notice.
  • Safe harbor 401(k) plan notice.
  • Qualified Default Investment Alternative notice.
  • Automatic (negative) enrollment notice.       
  • Form 5500 – Copy of Form 5500 with related schedules as filed with Department of Labor (DOL)
  • Independent Audit Report – If required to be filed with Form 5500
  • Summary Annual Report – Summary of Form 5500 provided to participants.

4. RETIREMENT TSUNAMI: As the point person for Houston, Texas’s initiative to maintain a quality workforce in the face of a rising tide of retirements, Kelly Schreck practices what she preaches. So, according to American City and County, as head of employee development, she asked two employees in her department with very different specialties to swap jobs for a year. For 12 months, each woman trained the other on how to perform her duties, so that each mastered the technical details of handling labor relations and public information. Now she has back-up for her operation, two people who could each do the job. Such innovative human resource management is increasingly becoming the norm in the public sector, as senior leaders and elected officials tackle the vast changes resulting from the exodus of Baby Boomers, who are reaching retirement age. Houston is not alone in its efforts to meet the mass turnover in the workforce expected in the next decade. Cities and counties around the nation are developing such programs as leadership institutes, onsite graduate level education, internship programs and extensive outreach to the next generation as their response to the demographic shift. The public sector workforce is getting older. According to the Pew Research Center, approximately 10,000 Americans per day will turn 65 between 2011 and 2030, eventually 26% of the U.S. population. Other studies have found 4-in-10 responding organizations indicated they would lose 20% or more of their employees to retirement in the next 5 years. Other studies have confirmed that retirements, if unanticipated, threaten all public sector employers to a greater degree than the private sector. The local government workforce is especially vulnerable, with the percentage of workers at least 50 years of age (37%) significantly greater than the private sector (28%). A recent Center for State and Local Government Excellence workforce study workforce study found that recruiting and retaining qualified personnel and workforce succession planning were the two most important issues facing human resources managers. In fact, every manager surveyed cited recruiting and retaining as important or somewhat important. Succession planning trailed slightly, in the high 90% range. Despite the apparent need for preparation, only 27% of survey respondents said they had succession plans in place, citing, among the reasons, the press of day-to-day business, competition for resources and time and insufficient commitment from top leadership.  While the deep recession that began in 2008 prompted many eligible retirees to reconsider their departure dates in light of their falling retirement accounts, giving governments a breather of sorts, not all communities took advantage of the time to prepare for resumption of the wave. Some agencies said they do not have to worry about retirements because people are staying; but those that took the time to get ready were very smart. Those communities that took the time to prepare were able to promote the advantages of working in the public sector, which has always been attractive for its strong benefit package, even if wages lag in the public sector. While benefits in many communities have been trimmed in recent years, most compensation professionals still give the edge to the public sector, especially those that have been able to maintain their defined benefit plans.

5. SEVEN QUALITATIVE FACTORS FOR EVALUATING INVESTMENTS: Due diligence is the heart and soul of investment selection. A good due diligence process objectively whittles down the universe of available funds to just those that meet your high standards for inclusion in an investment portfolio. Investment due diligence typically begins on the quantitative side by evaluating funds against set benchmarks and in relation to peers. The fi360 Fiduciary Score, for example, is calculated using nine quantitative factors considered to be the minimum due diligence criteria one should use when evaluating an investment. But in addition to quantitative analysis, fiduciaries should consider applying qualitative factors, which can help detect organizational instability. Organizational instability, over time, usually leads to underperformance. Here are seven qualitative factors that fiduciaries should consider implementing into their due diligence process:

  • Manager quality -- does the portfolio manager have the necessary experience to manage type and size of portfolio you are investigating? In addition to credentials, take a look at prior experience. Such experience is especially important if the manager is new to the firm.
  • Staff turnover -- along with the portfolio manager, you should also look at the professional staff of the investment company. Has there been significant turnover?  If significant turnover is found, you should dig deeper to find out why.
  • Organizational structure -- you should also investigate any structural changes to the investment company.  It is important to examine the firm’s mergers or acquisitions to see if the organization is more focused on castle building than managing money. If they are building the firm, how will it benefit you?
  • Level of service provided -- does the investment company provide a better level of service than other firms in the marketplace for a comparable fee? Does the money manager provide other share classes for a fund or separately managed accounts? Depending on your situation, you may be able to invest with the same portfolio manager, but at a lower cost.
  • The quality and timeliness of the money manager’s reports -- registered investment companies are required to report information to the Securities and Exchange Commission, but do they do so in a timely manner? In addition, does the manager provide an adequate amount of information to make an informed decision? If they do not, what is the cause of delay or omission?
  • Response to requests for information -- like every other service company, the investment company has customers, primarily advisors and investors.  Do they treat their customers with care? If you request information from the investment company, do they provide it in a timely manner with a relevant response?
  • Investment education -- does the portfolio manager provide an adequate explanation of the investment decisions made and factors considered in making decisions? Is the portfolio manager able easily to articulate the portfolio mandate, the plan to follow the mandate, and any problems seen in achieving the mandate?

This list is by no means a comprehensive. Rather, it is a demonstration of the type of probing analysis an advisor can use in your selection and monitoring process.

6.  TOP STATES WITH FINANCIAL WELL-BEING: Improving financial well-being is important for employers and health plans, as it is an often overlooked determinant of overall health, medical costs and workplace performance. The 2014 Financial Well-Being State Rankings, from Employee Benefit News, is the sixth in a row. Results are from surveys across all 50 states. The research aims to take a holistic approach to analyzing the financial well-being of Americans, including its associations to depression, smoking and activity levels.

  • Hawaii. The Aloha state takes the top spot for states with the highest overall financial well-being. It also takes makes top 5 in all other categories. When asked, the state’s population received other high marks including having enough money for health care as well as high satisfaction rates.
  • Alaska. The 2nd place state for overall financial well-being. Additionally, it is the 2nd state to reach top 10 marks in all other categories, and the first state with No. 1 spots in two areas -- a week free of financial worries and satisfaction with compared standard of living.
  • North Dakota. North Dakota ranks 3rd overall and has two 2nd place spots in the survey statements -- “enough money to do everything you want to do” and “in the last seven days, you have not worried about money.”
  • Wyoming. Wyoming takes the No. 4 spot for overall financial well-being and also ranks No. 4 in another category -- comfortable about having enough money to buy food. The Equality State ranked 6th in the “financially stable enough to afford health care” category.
  • South Dakota. South Dakota takes No. 5 and is the first to take a top spot in another category with its state’s citizens feeling most comfortable about having enough money to buy food.
  • Minnesota. The Gopher State is the first to rank within the top 10 in all elements of financial well-being. The state’s population ranks best when asked if it was worried about money (3rd) and having enough money to buy food (2nd).
  • Nebraska. The Cornhusker State takes No. 7. As for the methodology questions, the state ranked in the top 10 in all but one -- having enough money to buy food, where the state ranked No. 12.
  • Montana. Montana ranks 8th overall for financial well-being. People in Montana also ranked their state well in the following categories -- having enough money to buy food (7th) and comparative satisfaction with their standard of living (2nd).
  • Iowa. People in Iowa ranked their state high in the following categories -- having enough money to do what you want (6th) and not having any financial worries tin the past seven days (7th).
  • Wisconsin. Wisconsin ranks 10th overall for financial well-being. People in Wisconsin also ranked their state high in the following categories -- having enough money to buy food (6th) and not having any financial worries in the past seven days (7th).

7. TRENDY CORPORATE FITNESS CLASS BENEFITS: Employers offering on-site fitness classes are providing an excellent way to improve employee health by infusing movement into sedentary office lifestyles. presents the following specialty exercise classes that are becoming more popular with today’s employees:

  • Hula Hoop. This retro toy has resurfaced as a popular new way to enjoy exercise. Hula hooping combines elements of dance and fitness to improve coordination, balance, rhythm, strength and flexibility.
  • Kangoo Jumps. Using special low-impact rebound boots, impact during cardio is reduced up to 80%. With these boots, employees bounce, hop, skip and jump, while doing leg lifts, squats and dance moves choreographed to energetic tunes.
  • Thai Yoga BodyWork. In this class, an instructor guides participants through yoga postures with hands-on assistance while massaging muscles and working along the body's energy lines and pressure points.
  • Muay Thai Boxing. Muay Thai boxing is similar to regular boxing but with the addition of kicks, knee and elbow strikes and various clinching techniques.
  • Ballet Barre. Ballet barre is a low-impact, full-body workout that combines ballet and Pilates-style movements.
  • 6 Weeks to Better Posture. This series uses strength and flexibility exercises to strengthen abdominal and back muscles, develop pelvic stability and build abdominal control.
  • Foam Rolling. This class creates deep dynamic strength and core support while releasing tight, painful areas of the body.

8.  45TH ANNUAL POLICE OFFICERS' AND FIREFIGHTERS' PENSION TRUSTEES' CONFERENCE: The 45th Annual Police Officers' and Firefighters' Pension Trustees' Conference will be held on November 17-19, 2015. You may access information and updates about the Conference, including area maps, a copy of the program when completed and links to register at the Radisson in Celebration, Florida. Please continue to check the FRS website for updates regarding the program at All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of the Chapters 175 and 185 pension plans should take advantage of this unique, insightful and informative program.

9. ON SECOND THOUGHT...MAYBE THEY WERE WRONG?: No, it will make war impossible. -- Hiram Maxim, inventor of the machine gun, in response to the question “will this gun not make war more terrible?” from Havelock Ellis, an English scientist, 1893.

10. TODAY IN HISTORY: In 1939, LaGuardia Airport opens in New York City.

11. 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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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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