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Cypen & Cypen
November 15, 2012

Stephen H. Cypen, Esq., Editor

1.      IS SHRINKING NUMBER OF DB PLANS ALL BAD?: Washington Post says that the shrinking number of traditional pensions may not be all bad.  Old-fashioned pensions have been disappearing from the benefits landscape for decades.  In the opinion of an often overlooked group of retirement-security experts, it may not all be bad for workers.  They argue that most DB plans that pay retirees a guaranteed amount of money every month for the rest of their lives were never very generous for most workers.  To be sure, those pensions tend to work well for highly compensated employees and people fortunate enough to stay with the same employer for most of their careers. But many workers have not been so lucky, mainly because high pay and lengthy tenure have always been more the exception than the rule.  Largely, there has been this notion that in the good old days, people did not change jobs much; but for the overall labor force, the statistics do not support that idea.  Men over age of 55 median job tenure peaked at 15.3 years in 1983 according to Employee Benefits Research Institute.  Now, median tenure for men approaching retirement is less than 11 years. For women in that age median tenure is 10 years, an all-time high. All of that has made for more lousy pensions than many people remember.  In 1975, when nine out of ten private sector workers with retirement plans were covered by DB plans, only about one in five ended up receiving any income from them.  And the pensions those lucky few received were puny: the median was $4,700 a year, in 2011 dollars.  The share of retirees who receive retirement income from private sector plans rose by almost half from 1975 to 2010, from 21 percent to 31 percent. And the median benefit rose by almost one-third, after adjusting for inflation, thanks to both improvements in DB pensions and the growth of 401(k) plans.  Nothing suggests that traditional pensions are a bad thing. The payouts have improved since 1975, largely because of more robust federal regulation. Just over a quarter of people age 60 or older received a traditional pension in 2010, and the median payout was $14,400 a year.  But the same regulations that improved pension payouts are contributing to the decision of many employers to drop the plans. Fewer than one-in-five private sector workers now are covered by them. With Social Security in the crosshairs of lawmakers looking to trim entitlement benefits as part of a plan to address the nation’s long term debt, the challenge confronting policymakers is coming up with a retirement vehicle that both makes sense for a mobile workforce and encourages workers to put aside enough money for retirement. Some policymakers are exploring pension-type accounts that would be set up by governments and fed by contributions from employers and workers. In theory, at least, 401(k)s and other defined contribution plans could also do the trick, even if they put the risk of bad investment returns squarely on the shoulders of workers. But for those plans to work best, workers would have -- many of whom feel financially squeezed already -- to make larger, continuous contributions to their retirement accounts. They would also have to refrain from cashing them out when they changed jobs or faced financial hardship. And those may be the biggest challenges of all.
Internal Revenue Service has issued final regulations effective November 8, 2012 that provide guidance under the anti-cutback rules of Section 411(d)(6) of the Internal Revenue Code.  Those rules generally prohibit plan amendments eliminating or reducing accrued benefits, early retirement benefits, retirement-type subsidies, and optional forms of benefit under qualified retirement plans. These regulations provide an additional limited exception to the anti-cutback rules to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer defined benefit plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) under the plan if certain specified conditions are satisfied. These regulations affect administrators, employers, participants and beneficiaries of such a plan.  Here is the back-story according to  American Airlines proposed terminating its employee pensions, including the plan for pilots.  The termination would have dumped responsibility for the pensions upon the Pension Benefit Guaranty Corp., and, for employees making more than the PBGC maximum pension, a reduction in their pensions when they retired.  Under pressure from the PBGC, American relented; it agreed to freeze the pensions. The freeze meant that the employees could not accrue any greater pension than they had accrued at the time of the freeze. It also meant they would get all the monthly pension benefits that they had earned up to that point.  Problem:  pilots hired before Nov. 1, 1983 were protected by a supplement in the contract that said American could not reduce their retirement benefits, ever.  Among the benefits was an option to take their accrued pension as a lump sum upon departure, rather than monthly payments. American said that deal would not fly. Nevertheless, it could not do away with the lump sum because federal regulations provide that would be impermissibly reduce accrued benefits.  The amendment creates an exception to allow the elimination of the lump sum option.  The company has to meet a certain number of requirements, like having an underfunded pension plan, being in bankruptcy, and having a finding from a bankruptcy judge and the PBGC that the plan will be terminated otherwise.  Presumably, the exception was promulgated in accordance with American’s facts.  Although the pilots opposed the change, the union preferred the elimination of the lump-sum option to the termination of the plans.  The freeze will preserve our pilots’ accrued benefits, and will continue plan funding.  Ah, yes, government work. 
Release of the Federal Reserve’s 2010 Survey of Consumer Financesis a great opportunity to reassess Americans’ retirement preparedness as measured by the National Retirement Risk Index.  The NRRI shows the share of working households who are “at risk” of being unable to maintain their pre-retirement standard of living in retirement. The index compares projected replacement rates -- retirement income as a percentage of pre-retirement income -- for today’s working households with target rates that would allow them to maintain their living standard, and calculates the percentage at risk of falling short.  The NRRI was originally constructed using the Federal Reserve’s 2004 Survey of Consumer Finances. The SCF is a triennial survey of a nationally representative sample of U.S. households, which collects detailed information on households’ assets, liabilities, and demographic characteristics. The 2007 SCF did not allow for a meaningful update, because stock market and housing prices plummeted right after the survey interviews were completed. Thus, the 2010 survey issued by Center for Retirement Research at Boston College is the first opportunity to see how the financial crisis and ensuing recession have affected Americans’ readiness for retirement. In the update, the discussion proceeds as follows. The first section describes the nuts and bolts of constructing the NRRI and how the new SCF data were incorporated. The second section updates the NRRI using the 2010 SCF, showing that the percentage of households at risk increased by nine percentage points between the 2007 and 2010 surveys -- 44 percent to 53 percent. The third section identifies the impact of various factors on the change. The final section concludes that the NRRI confirms what we already know: today’s workers face a major retirement income challenge. Even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, more than half are at risk of being unable to maintain their standard of living in retirement.  And the beat goes on.  October 2012, Number 12-20. 
      WILL YOUR BENEFITS BE THERE WHEN YOU GET THERE?:  Entitlement programs such as Medicare and Social Security are facing cash deficits. As more people approach and actually reach eligible retirement age, that could impact your retirement planning. In a recent study, 64% of today’s workforce and 61% of retirees said they are not confident that Social Security will continue to provide benefits of at least equal value to benefits received by retirees today. When asked the same question on the topic of Medicare, 64% of workers and 49% of retirees said they are not confident that benefits would last.  According to the survey from MFS Fund Distributors, Inc, an entitlement is a government program that guarantees and provides benefits to a particular group. However, that guarantee could be in question in the years to come.  Incidentally, by the year 2030, the percent of total resident population expected to be age 65 or over is 19% (100 million people).
According to, the following are ten things your 401(k) plans will not tell you:

  • We were not meant to carry the weight of your future.  That is a lot of pressure to put on plans that started out as a source of extra cash for individuals who were already guaranteed a secure monthly retirement income. The double-digit interest rates of the early 1980s made it relatively easy for companies to meet their obligations through low-risk bonds.  But pensions have become more expensive for companies as interest rates began to fall and plans had to project for even lower rates in the future.
  • We have no clue how much cash you will need in retirement.  When it actually comes to figuring out how much to save to live a comfortable retirement, most workers are on their own. And once they stop working, it is up to workers to figure out how to turn their nest egg into an income stream.   
  • And figuring out how much you will need is not high on our agenda.  Nearly three-quarters of large employers say they offer a 401(k) plan to help provide for workers’ income in retirement. But when companies were asked to name the top issues driving plan design, workers’ ability to retire came in fifth.  
  • The system is not working for employees -- or employers. The aggregate retirement income deficit for all Baby Boomers and Gen Xers is $4.3 trillion dollars.  Clearly, folks are not setting aside enough for their post-work lives. The average employee contributes 6.4% to a 401(k), whereas advisers recommend 10% as a baseline minimum (and for those who start later, 15%). 
  • Fee transparency? What fee transparency?  New Department of Labor regulations went into effect this year, requiring plan providers to disclose the amount in fees that both companies and their workers pay for their 401(k) plans. To be sure, some say it would be very difficult to arrive an average 401(k) fee, since there are so many variables, including number of plan participants and type of investments. 
  • You are losing years’ worth of savings to fees…. Take for example a portfolio that says its fee is 1%, a number that would not be uncommon. That number may not sound like a whole lot, but when it is chipped annually from your retirement nest egg, the cumulative effect can be significant.   
  • …But things are starting to improve. The Department of Labor’s spotlight on fees has already pushed plan providers to offer lower-cost options, such as exchange-traded funds, in 401(k)s. Some rolled out new offerings earlier this year, before the first disclosures came out.    
  • Fewer choices does not mean better ones.  Just as drug stores have pruned their shampoo offerings to prevent shoppers from getting overwhelmed, plan providers have recently reduced the number of fund options in 401(k) plans.
  • Small business employees are missing out.   Just half of workers in companies with fewer than 100 employees have access to retirement accounts, compared with 79% of workers in companies with up to 499 workers and 86% of workers in large companies.   
  • Auto-enrollment alone will not save you.  Auto-enrollment has risen in recent years, placing employees in 401(k) plans even if they do not opt in. Nearly a quarter of large firms offered auto-enrollment to all employees in 2012, up from just 10% in 2009.  Because few employees who are auto-enrolled bother to opt out, companies often set a deliberately low default contribution rate so they do not have to match as much. 

6.      LAW ENFORCEMENT UNION SUES OVER WISCONSIN COLLECTIVE BARGAINING LAW:  A law enforcement union filed a lawsuit challenging the constitutionality of a Wisconsin law effectively ending collective bargaining for most public workers. reports that the Wisconsin Law Enforcement Association seeks to strike down the law, as a violation of constitutional rights of free speech, association and equal protection. While state troopers and motor vehicle inspectors were exempted from the law, University of Wisconsin officers, Capitol police and Department of Transportation field agents were not.  The lawsuit comes less than two months after a Wisconsin judge ruled the law unconstitutional as it applies to school district and local government workers.  That ruling came in a case brought by Madison teachers and city workers, but did not apply to state workers. The state has appealed the earlier ruling. 
  I'm so miserable without you it is almost like you're here.
 The confusion of one man multiplied by the number present. 
      QUOTE OF THE WEEK:   A politician is a fellow who will lay down your life for his country. Texas Guinan
 In 1960, OPEC (Organization of Petroleum Exporting Countries) forms.
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