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Cypen & Cypen
NOVEMBER 11, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


The lead article in GFOA’s Pension & Benefits Update is entitled “Frequently Asked Questions About DROPs.” In the past twenty years, Deferred Retirement Option Plans (DROPs) have become prevalent throughout the public sector. However, as they have grown in popularity, so has controversy surrounding the plans. The article reviews questions government finance officers should ask before implementing a DROP. Among other things, the authors explain that DROPs can be designed to be cost-neutral. However, they warn that governments should be wary of providing a noncost-neutral DROP benefit if it is predicated upon taking advantage of an actuarial surplus, since any surplus is likely to be temporary and subject to significant year-to-year fluctuations. The piece is a must-read for the uninitiated and a good refresher for everyone.


Callan Associates recently conducted a survey to which 166 fund sponsors and 134 investment managers responded. According to a report from, fund sponsors ranked management fees as a middle priority when conducting due diligence on investment managers. In fact, fees only became prominent when fund sponsors advance in the selection process, often becoming a point of contention after hiring. The survey showed that two-thirds of fund sponsors negotiate fees with their managers. Further, one-third of respondents reported calculating fees based on average month-end values, while the remaining calculate fees based on values at the end of a quarter. Use of performance fees also seems to be increasing. Sixty percent of investment managers and 30% of fund sponsors claim they use performance fees. Published fees have risen by 10% to 20%, although actual fees have declined by 5%. One other interesting factoid: 50% of fees collected cover base costs, while less one-quarter are used for bonuses. The remaining money -- about one-quarter -- is profit.


In March, 2003, the U.S. Department of Labor, Bureau of Labor Statistics, issued the National Compensation Survey: Employee Benefits in Private Industry in the United States. The 2003 NCS benefits survey obtained data from almost 3,000 private industry establishments, representing 102 million workers. Of this number, 79 million were full-time workers and the remainder, about 24 million, were part-time workers. The NCS uses the establishment’s definition of full- and part-time status to classify workers. For purposes of the survey, an establishment is an economic unit that produces goods or services, a central administrative office or an auxiliary unit providing support services to a company. For private industries, the establishment is usually at a single physical location. Now, BLS has issued a November, 2004 revision (just to correct stock options data in one table). Readers can peruse the entire 17-page revised report at


According to a new survey of nearly 2,000 recent retirees conducted by Putnam Investments, retirement is not exactly what they had expected. The study reveals that many retirees were surprised to discover that they had lower incomes and higher expenses than anticipated. As a result, financial security is now a significant concern. Although retirees tend to agree that there is more to happiness than money, their biggest regret was not saving earlier in life and saving more along the way. The group is almost evenly divided between those who have a positive view of their quality of life and retirement and those who say it has declined. Over one-fourth said they would still be working at the same job if they could. And one-fifth say they are struggling to make ends meet. Their biggest concerns are cost of health care and prescription drugs, and whether Social Security will be sound over the long term. Despite these concerns, 85% of respondents say they are generally satisfied with retirement. Even those living on low incomes express general contentment with retirement, citing the ability to spend more time with family members and to volunteer for community, religious or other nonprofit organizations. There is also a correlation between income and health: those who say their health is poor report an average household income of $28,000, while the incomes of those claiming excellent health average $65,000. Finally, the survey provides some valuable firsthand tips to those who are still on the job:

  • Start saving early -- the more time your money has to work for you, the larger your nest egg.
  • Save more through your retirement plan at work -- your retirement plan offers benefits simply cannot be found elsewhere, including matching company contributions in some cases.
  • Save more outside your retirement plan at work -- outside savings help prepare for retirement and also provide an extra source of money for unanticipated expenses while working.
  • Reduce expenses to save more for retirement -- a little belt-tightening while working decreases the chance of a serious shortfall after retirement.
  • Have a disciplined plan for building retirement income -- the most successful savers in the survey had consulted a financial advisor.

All in all, sound and commonsense advice.

Copyright, 1996-2004, all rights reserved.

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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