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Cypen & Cypen
November 19, 2015

Stephen H. Cypen, Esq., Editor

1. S&P 1500 PENSION FUNDED STATUS INCREASES BY 4% IN OCTOBER: The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies increased by 4% to 83% as of October 31, 2015, as equity markets increased while rates remained the same as the previous month end, according to a piece in the International Foundation of Employee Benefits. As of October 31, 2015, the estimated aggregate deficit of $386 billion reflected a decrease of $71 billion as compared to the end of September. Funded status is now up by $118 billion from the $504 billion deficit measured at the end of 2014, according to Mercer. The S&P 500 index gained 8.3% and the MSCI EAFE index gained 7.7% in October. Typical discount rates for pension plans as measured by the Mercer Yield Curve remained the same at 4.14%. October was a welcome relief after three straight months of declines, equity markets rallied, returning to positive territory year-to-date. Still, the outlook for pension plan sponsors is cloudy, with the new federal budget deal set significantly to increase PBGC premiums. Sponsors should look to take advantage of these gains and execute on strategies to avoid these increased costs. The estimated aggregate value of pension plan assets of the S&P 1500 companies as of September 30, 2015, was $1.75 trillion, compared with estimated aggregate liabilities of $2.21 trillion. Allowing for changes in financial markets through October 31, 2015, changes to the S&P 1500 constituents, and newly released financial disclosures, at the end of October the estimated aggregate assets were $1.82 trillion, compared with the estimated aggregate liabilities of $2.21 trillion.

2. SHIFTING FROM DB TO DC HAS UNFORTUNATE SIDE EFFECT: As the retirement world continues to shift from defined benefit to defined contribution plans, the investment risk is being moved from the plan sponsor to the employee. That fact most people understand. However outliving savings is another risk individuals must face -- and it is less predictable than investment risk. Outliving retirement savings is not as much of a concern in DB plans. Longevity risk gets pooled. With everyone together, defined benefit arrangement takes care of the uncertainty around longevity risk. Pooling does not work to mitigate investment risk. If investment returns are good for you, they are probably good for me. If they are bad for you, they are bad for me. Most in the industry have a decent grasp of investment risk, and understand that the equity market has a certain amount of volatility. We do not like it, but we have a sense of how big that is. However, if you ask someone if the risk of outliving their money is bigger, smaller or the same as investment risk, there is not necessarily an intuitively answer. Once you pass 70, it starts to become a bigger consideration. A significant portion of the population is projected to live well past their 70s. About one in four of today’s 65 year olds will live past 90, and one in 10 will live past 95. Starting to save for retirement early in a career is part of the solution. Creating pools also helps alleviate some of the risk of outliving savings. But it does not go away completely. Annuities have been one way participants can pool longevity risk with others, yet Americans have not shown a big interest in them. Annuities are not that popular. There are certain things about them that people do not like. In particular, you are putting all of your money into one product, which is a very big commitment.  Well, we will not repeat it here, but you know what we always say. See item 17 below. This article appeared in Employee Benefit Adviser.

3. LAW CLOSES LUCRATIVE SOCIAL SECURITY LOOPHOLE:Married couples have no shortage of options for deciding when to collect Social Security benefits. But the budget deal that President Barack Obama recently signed into law gets rid of one of the key strategies that has increased lifetime Social Security benefits by up to roughly $60,000 for some high-earning couples according to The Washington Post. The strategy is known as file-and-suspend, in which one spouse could file to receive Social Security retirement benefits and then suspend the payouts. That tactic allows both people to delay Social Security retirement benefits while one person collects spousal benefits based on the other's work history. The couple could essentially live off the spousal benefits and other savings until they could both receive larger Social Security retirement benefits at age 70. (Social Security retirement benefits grow by about 8% for each year beyond full retirement age that a person delays collecting, up until age 70.) The move had come to be known as a loophole because it allowed couples to collect some cash from Social Security while still growing their benefits. Higher earners collecting the maximum Social Security received the largest payout from the strategy, but all workers could use the approach to boost their income in retirement. Under the new rules, retirees will be able to claim spousal benefits only if their spouse is already collecting Social Security retirement benefits. And people will only be able to receive either their own benefit or their spousal benefit, whichever is greater. Retirees will no longer be able to receive spousal benefits first and then switch to their own retirement benefits later on. Similarly, divorced people will be able to collect only their benefit or benefits based on their ex-spouse's record, whichever is greater. Like spousal benefits, current rules let divorced people collect ex-spousal benefits while allowing their own benefits to grow until age 70. Retirees still have some time to evaluate their options, the change will kick in about six months from now, meaning people age 66 and older, or who will turn 66 during the next six months, still have time to file and suspend their benefits. And people who are already using the strategy to collect spousal benefits alone can keep doing so. The rule also makes an exception for people who are 62 now or who will turn 62 this year. They will still be able to claim spousal benefits alone after they reach their full retirement age and then collect their own larger benefits at age 70. Married couples will still have other strategies to maximize their Social Security benefits, advisers say. Each spouse can use the basic strategy of delaying retirement benefits until age 70 to receive the larger payments. If the couple cannot afford for both to wait, one spouse can collect his or her Social Security retirement benefits first while the higher earner spouse delays benefits until 70. That move could grow the higher earner's monthly benefits and later ensure a greater survivor's benefit. Of course, delaying benefits pays only for people who live long enough to make up for the benefits they would have received had they started collecting earlier. Someone who waits until 70 to start collecting Social Security retirement benefits would need to live at least until 80 to come out ahead and have more money in total than if he or she had started receiving reduced benefits at age 62.

4. FIDUCIARIES’ DUTY TO MONITOR DOES NOT ENCOMPASS DUTY TO INFORM: A Federal Judge has found that defendants named in an Employee Retirement Income Security Act lawsuit are not fiduciaries. The court also dismissed some claims that BP failed to monitor fiduciaries. According to plaintiffs, defendants’ actions or inaction cost plan participants hundreds of millions of dollars in losses following the Deepwater Horizon explosion. The court had earlier dismissed plaintiffs’ complaint holding that plaintiffs had failed adequately to rebut the so-called “Moench presumption of prudence”. The court then also dismissed plaintiffs’ duty-to-monitor claims on the grounds that such claims are a form of secondary liability only, requiring a primary violation to be viable. The court denied plaintiffs’ motion for leave to amend because the proposed amendments would have been futile in light of the Moench presumption Moench v. Robertson, 62 F. 3d 553. Plaintiffs appealed to the Fifth Circuit. However, the motion to dismiss issue was largely for naught, as the U.S. Supreme Court scuttled the Moench presumption and created a new framework for evaluating claims against ERISA fiduciaries. (FifthThird Bancorp v. Dudenhoeffersee C & C Newsletter for June 26, 2014, Item 4). Accordingly the Fifth Circuit vacated the denial for the leave to amend, and remanded for reconsideration in light ofDudenhoffer. On remand, the court granted plaintiffs’ leave to amend. The court held that the first question pertinent in any breach-of-fiduciary-duty claim under ERISA is whether the defendant was in fact a fiduciary. Defendants focused the brunt of their motion to dismiss on this threshold consideration, arguing that plaintiffs failed to allege specific facts showing that BP and other defendants were fiduciaries with respect either prudently to managing plan assets or monitor and inform other fiduciaries. ERISA recognizes two types of fiduciaries: “named fiduciaries” and “functional fiduciaries.” Named fiduciaries are entities or persons who are either named in the plan instrument or, pursuant to a procedure specified in the plan and identified as a fiduciary by the employer. They are expressly afforded the authority to control and manage the operation of the plan. Functional fiduciaries, on the other hand, need not be named as fiduciaries in the governing plan document.  Instead, the court looks to whether, as a practical matter, an entity or individual exercises discretionary authority and control that amounts to actual decision-making power with respect to the plan. Thus, fiduciary duties may arise either from the terms of the governing plan or from acts and practices in carrying it out. But, critically, fiduciary status under ERISA is not an all-or-nothing concept. Instead, the scope of an ERISA fiduciary’s responsibility is correlative with the scope of his duties. An ERISA fiduciary for one purpose is not necessarily a fiduciary for other purposes.  Rather, a person is a fiduciary only to the extent he has or exercises specified authority and control over a plan or its assets. ERISA is a complex statutory and regulatory apparatus, and adding additional requirements to it is not to be undertaken lightly. Plaintiffs have not provided a weighty reason to impose a duty-to-inform requirement here.  The Court therefore declined to impose a fiduciary duty that Congress and federal regulators did not see fit to include when crafting this elaborate statute and its related regulations. In Re: BP P.L.C. Securities Litigation, Case No. 4:10-cv-4214 (MD Texas October 30, 2015).

5. GHILARDUCCI ON SOCIAL SECURITY…BRIEFLY: Economist Teresa Ghilarducci is perhaps the most knowledgeable person on the broad subject of retirement. Here are some of her random ideas on Social Security. The median retirement savings account balance for the top 20% age 55 and older is around $120,000. To maintain that lifestyle, you need over a million dollars. In 1983 Social Security benefits were cut by raising the retirement age, and for the past 35 years we have experimented with a do-it-yourself retirement system. We replaced pensions with a commercially based, individually directed savings system -- IRAs and 401(k)s. The fees are too high. The average 401(k) charges nearly 1%, while the best ones charge about a third of that. So, the average plan, because of those higher fees, will leave you with savings 12% lower than if you had saved exactly as much in exactly the same investments but in a lower-fee plan. The best plan is to work longer and delay collecting Social Security until 70. You get 7% or 8% more every year you wait, and it is inflation protected. There is no other deal like that on the planet. We need to raise the Social Security minimum benefit up to the poverty level. Right now the minimum monthly payment is about $830, and the poverty line for a single person is $980. We need to add long-term-care insurance to Medicare. The expansion would really help people who live past 75 or 80, because a big part of the retirement crisis is the rise in health care spending as their income falls. If we add only 1% more to your Medicare tax, now at 2.9%, we can provide long-term-care insurance to everybody. If we eliminated the cap on income subject to Social Security taxes -- it is now at $118,500 -- and raised Social Security taxes 2.13%, split evenly between employers and employees, Social Security would be completely solvent. Add about another 1%, and you can raise the minimum benefit and eliminate poverty among the elderly. You know, we eliminated the income cap on Medicare taxes, and no one complained about it. We have actually tolerated tax increases from programs we like, and everybody likes Medicare.

6.  AMERICANS MISJUDGE SAVINGS NEEDED FOR RETIREMENT: About two-thirds surveyed believe they will need less than $1 million in today’s dollars in order to retire, or are not sure how much they will need according to Americans have some wrong ideas about how much they need to save for retirement, according to a survey conducted by Morning Consult and released by the Financial Services Roundtable. About one-third of respondents said they think they should be saving less than 10% for retirement, or are not sure how much of their paychecks should be devoted to retirement savings. About two-thirds surveyed believe they will need less than $1 million in today’s dollars in order to retire, or are not sure how much they will need. Only one-third believe they will need $1 million or more to support themselves in retirement. FSR notes that experts recommend workers aim to save at least 10% of their income toward retirement, and most Americans may need much more than $1 million in retirement as lifespans -- and time spent in retirement -- lasts longer. However, the survey found Americans get a better understanding of their retirement savings needs as they age. Fifty-six percent of 18- to 29-year-olds think they should save more than 10% for retirement, 69% of those 45 to 64 know they should save more than 10%, and 79% of those older than 65 know they should save more than 10% for retirement. The FSR poll shows workers highly value retirement benefits in the workplace, rating them as one of the two most important benefits employers can offer, along with health care, at 94% and 95%, respectively. When it comes to helping employees save for retirement, 63% of workers think employers should match between 5% and 10% of an employee’s pay. Only 5% of workers said they would likely opt-out if they were automatically enrolled in an employer retirement plan. FSR says this action highlights the significant influence employers can wield over their employees’ opportunities to secure their financial future. The poll surveyed more than 2,000 registered voters nationwide, 87% of whom said schools should teach students more about how to save and spend money wisely. Nearly 68% said 2016 presidential candidates have not been talking enough about ensuring Americans have a secure retirement.

7.  BOEING WILL PAY $57 MILLION TO SETTLE RETIREMENT FEES CASE: Boeing Co. has agreed to pay $57 million to settle a lawsuit over fees and investment options in the company's retirement plan. The lawsuit alleges the Chicago-based aerospace company's 401(k) program charged excessive fees and offered higher-cost investment options. Boeing has denied any wrongdoing. The settlement covers Boeing workers enrolled in the program, called the Voluntary Investment Plan, between 2000 and 2006. Boeing maintains that it has prudently managed and overseen the VIP at all times. The settlement will come up for approval by a federal judge in southern Illinois in early 2016. The settlement was first reported by the New York Times.

8.  CANADA LEVERAGES PENSIONS TO THE HILT:  The words “bold” and “pension fund” do not always go together easily. Then, again, neither do “bold” and “Canada.” But, according to, Canadian public pension funds are once again employing bold strategies in a world where interest rates have remained persistently low at the very moment that aging baby boomers are increasingly drawing down their retirement funds. With traditionally safe pension investments such as bonds no longer yielding enough to cover obligations, a number of Canadian plans are ramping up leverage strategies -- approaches intended to squeeze more profit from the investments by doubling down with debt. They are mortgaging some of their swankiest skyscrapers and forming in-house hedge funds that invest in complex derivatives like forwards, swaps and options, accepting more risk in an effort to keep their promises to retirees. It is not the first time the Canadian funds have pushed the envelope internationally. As early as the 1990s, some began establishing private equity arms to take active stakes in businesses, successfully competing with Wall Street giants for such assets as department stores, highways and, recently, pieces of GE Capital. Today, at least seven of Canada’s large pensions have "substantial" in-house hedge fund operations. By comparison, none do in the U.S., and only two do in Europe. Now, you might think why the U.S. cannot, public pension funds do the same thing as their Canadian counterparts? The answer: lack of proper pension governance. U.S. public pensions are plagued by too much political interference, and that is why they will never pay their pension fund managers properly to bring assets internally. It is not that they do not have smart people, they do, it is that the entire investment process has been hijacked by consultants that pretty much shove everyone in the same high fee brand name funds.

9.  VIDEO OF ACT OF KINDNESS GOES VIRAL: A California police officer is receiving a lot of praise for his act of kindness. Bruce Pierson was called to a scene outside a mall about a homeless woman that was seen behaving suspiciously near some parked vehicles. The woman told Pierson that she had been moving from car to car in an attempt to find some shade. The rest of the following short video says it all: Police officers undertake these acts of kindness every day, day in and day out.

10. INTERPRETIVE BULLETIN RELATING TO THE FIDUCIARY STANDARD UNDER ERISA IN CONSIDERING ECONOMICALLY TARGETED INVESTMENTS: Employee Benefits Security Administration, has published an Interpretive Bulletin Relating to the Fiduciary Standard Under ERISA in Considering Economically Targeted Investments, which became effective October 26, 2015. Here is a brief summary of the interpretive bulletin. The bulletin sets forth supplemental views of the Department of Labor concerning the legal standard imposed by sections 403 and 404 of Part 4 of Title I of the Employee Retirement Income Security Act of 1974 with respect to a plan fiduciary’s decision to invest plan assets in ‘‘economically targeted investments.” ETIs are generally defined as investments that are selected for the economic benefits they create in addition to the investment return to the employee benefit plan investor. In this document, the Department withdraws Interpretive Bulletin 08–01 and replaces it with Interpretive Bulletin 2015–01 that reinstates the language of Interpretive Bulletin 94–01. To read the entire Interpretive Bulletin and its background, please visit:
2015–27146 (October 22, 2015).

11. CITY OF PROVIDENCE LOSES LAWSUIT AGAINST ACTUARY:The city sued its longtime pension actuary for negligence. In short, the city alleged that the actuary overestimated the amount the city would save by suspending cost of living adjustments for the city’s pension plans, causing the city to negotiate a settlement with police officers and firefighters that it would not have agreed to had it known of the actuary’s error. The city asked the actuary to calculate the savings that would result from a ten-year suspension of COLAs. The actuary estimated such suspension would yield $180 million in savings. Relying on that estimate, the city entered into memoranda of understanding with its employees. The city contended that the actuary’s estimate negligently overestimated the city’s savings by using the incorrect start date for the COLA suspension (January 2011 instead of January 2013), and that the estimate therefore should have been $170 million instead of $180 million. The city claims that had it been provided with a proper calculation, it would not have adopted the proposed change, and it would have less financial liability. The city asserted that but that for the actuary’s over estimation, the city would have been able to negotiate a better deal with its employees, resulting in $10 million in savings. The court held that if the damages are merely speculative, summary judgment is warranted. The factfinder may consider evidence of the party’s probable, alternative conduct. However, here, there is insufficient evidence to infer what the city’s probable, alternative conduct would be. At best, the city established that it would have attempted to negotiate a better deal, but did not present any evidence showing that it actually could have succeeded in getting any further concessions from the employees, let alone in what amount. The court thereupon granted summary judgment in favor of the actuary. The City of Providence v. Buck Consultants, LLC., C.A. No. 13-131 S (D. R.I. November 13, 2015).
12. ATLANTA PENSION REFORM SURVIVES LEGAL CHALLENGE: In appeal in a class action challenging a 2011 City of Atlanta ordinance and the consequent amendment by the city of its three defined benefit pension plans (general employees’, police officers’ and firefighters’), the ordinance and amendment increased the percentage of salary required as the annual contributions of the members of the plans. The action against the city was behalf of city employees who participated in the plans prior to November 1, 2011, but not retired prior to that date, which was the start date for the increase, and were otherwise subject to the amendment. The Supreme Court of Georgia affirmed the grant of summary judgment in favor of defendants on plaintiffs’ claims of breach of contract, unconstitutional impairment of contract and their consequent requests for declaratory/injunctive relief. Prior to November 1, 2011, members were required to contribute 7% of annual salary if they did not have a designated eligible beneficiary, and 8% if they had a designated eligible beneficiary. The plans, as they existed at the time of plaintiffs’ enrollments, contained provisions that stated receipt of an executed enrollment or application card would constitute the irrevocable consent of the applicant to participate under the provisions of the governing act, as amended, or as might thereafter be amended. On June 29, 2011, the city enacted an ordinance that amended the plans. Plaintiffs’ prospective annual contributions were increased by an additional 5% of the members’ annual compensation. Further, the ordinance provided that members’ contributions might be increased by an additional 5%, up to 17% or 18% of their annual compensation, if the city’s actual required contributions to the plans exceed 35% of total city payroll. The pension contribution increases were not retroactive and did not change a member’s benefit formula, calculation of pension benefit, or actual benefit amount payable at the time of retirement. The complaint alleged that defendants breached plaintiffs’ employment contracts and violated the impairment clause of the State Constitution when defendants passed portions of the ordinance that increased the amounts that plaintiffs were required to contribute to the plans, even though plaintiffs would receive the same amount of retirement benefits to which they were already entitled prior to passage of the ordinance. Plaintiffs sought a declaration that the subject portions of the ordinance violated the Impairment Clause and that plaintiffs were not required to continue to make the increased contributions to the plans. The trial court granted summary judgment to defendants, after concluding that government employees and their beneficiaries have no vested rights in an unchanged benefit plan where the pension or retirement plan unambiguously provides for subsequent modification or amendment, and that there was no ambiguity in the enrollment provisions -- that they clearly authorized the city to amend the plans without breaching plaintiffs’ employment contracts or violating the impairment clause. Municipal corporations, creations of the State, have only those powers that have been expressly or impliedly granted to them. Such powers are delegated by the State via the State Constitution, State laws and municipal charters. Validity of a an ordinance generally involves a two-step process: first, whether the city possessed the power to enact the ordinance at issue, and, if the power exists, whether the exercise of that power is clearly reasonable. The General Assembly has expressly authorized municipalities to establish and finance retirement systems, and to provide retirement and pension benefits. The constitutional vesting of rights in pensions is grounded in the principle that pension rights are property and cannot be taken; however, they are property because they become part of the employment contract. The provision for subsequent amendment was part of the contract of employment when plaintiffs entered into it. The present case is not one in which there is an express legislative statement regarding acquisition of vested pension rights, or the lack thereof; however, it is also not a situation in which pension benefits, which have already been conferred upon pensioners, are being reduced, suspended, or terminated. Clearly, the plans, which include their legislatively established enrollment provisions are part of plaintiffs’ employment contracts. The enrollment provisions are unambiguous in authorizing the city to amend the plans. In an astute observation, the court said the city did not alter plaintiffs' pension benefits, instead, it altered their pension obligations. This distinction -- between pension benefits and pension obligations -- is warranted by the well-worn difference between earned and anticipated compensation under the contract clause. Nothing in the challenged legislation divests plaintiffs of their earned pension benefits. Instead, the increased contribution rate simply reduces plaintiffs' anticipated compensation by deducting an additional percentage from their take-home pay. Indirect effects on pension entitlements do not convert an otherwise unvested benefit into one that is constitutionally protected. Borders v. City of Atlanta, Case No. S15A0816 (GA November 2, 2015).

13. ON SECOND THOUGHT...MAYBE THEY WERE WRONG?: The idea that cavalry will be replaced by these iron coaches is absurd. It is little short of treasonous. Comment of Aide-de-camp to Field Marshal Haig, at tank demonstration, 1916.

14. TODAY IN HISTORY: In 1895, Frederick E. Blaisdell patents the pencil.

15. 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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