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Cypen & Cypen
NEWSLETTER
for
November 24, 2016

Stephen H. Cypen, Esq., Editor

1.  FOR DETERMINING STATUTE OF LIMITATIONS FOR HYPERTENSION AND HEART DISEASE, EACH DISEASE WAS SEPARATE: New Haven Police Department appealed the decision of the Workers’ Compensation Review Board, which affirmed the decision of the Workers’ Compensation Commission, awarding heart disease benefits to plaintiff, Holston, pursuant to General Statutes § 7-433c(a). On appeal, defendant asserted that the board improperly determined that plaintiff’s heart disease claim was timely. Specifically, defendant claimed that the board improperly affirmed the decision of the commission that plaintiff’s hypertension and heart disease were separate diseases, each with its own one year limitation period for filing a claim for benefits. The Supreme Court of Connecticut disagree with defendant, and, accordingly, affirmed the decision of the board. Holston v. New Haven Police Department, SC 19631, (Conn November 22, 2016).

2. DOL TO ALLOW BIG BANKS PENSION FUND CLEARANCE: The U.S. Labor Department granted temporary permission to five banks to continue managing certain U.S. pension funds after convictions of the banks or their units, potentially allowing the banks to move beyond their legal troubles over objections by some Democratic lawmakers. Employee Benefit Adviser reports that the department has offered so-called Qualified Professional Asset Manager waivers to JPMorgan Chase & Co., Citigroup Inc., Deutsche Bank AG, Barclays Plc and UBS Group AG, according to a Bloomberg. A one-year waiver will take effect immediately. The Labor Department also proposed granting the banks five-year waivers, which would become effective after a 45-day comment period, just before the Trump administration is to take over the government on January 20. “We take the ongoing process very seriously and firmly believe that the information we have provided to the Department of Labor supports the granting of a continuing exemption to allow us to serve our U.S. pension plan clients without disruption to them,” Peter Stack, a spokesman for UBS, said by e-mail. Representatives of the other banks declined to comment. The business activity covered by the waivers includes 401(k) plans and corporate pensions, among other retirement plans. Any institution or individual that manages pensions overseen by the Labor Department must seek permission to continue those operations after certain criminal convictions. The five banks were found guilty of violations that included interest-rate or currency manipulation. Regulatory waivers have become politically fraught over the last two years, with lawmakers including Senator Elizabeth Warren, a Massachusetts Democrat, and Representative Maxine Waters, a California Democrat, pressing the Labor Department, which oversees about $8 trillion in private-sector pensions, for tougher reviews of banks accused of crimes before clearing them to continue their pension-management businesses. The U.S. Securities and Exchange Commission, which issues its own waivers for certain securities activities, is not inclined to use the process as an additional enforcement tool, SEC Chair Mary Jo White said last year.

3. DOW CLOSES ABOVE 19000 FOR FIRST TIME: On November 22, 2016, the Dow Jones Industrial Average finished above 19000 for the first time, continuing a streak of milestones for U.S. stock indexes. It was November 4 when the blue-chip index last closed below 18000. Since then, a rally following the U.S. presidential election has in particular benefited the shares of industrial companies and banks, bolstering the Dow. The Dow industrials rose 67.2 points, or 0.35%, to 19023.87. The S&P 500 added 0.2% to 2203 and the Nasdaq Composite gained 0.3% to 5386 -- fresh records for both indexes according the Wall Street Journal.

4. CALIFORNIA'S TOP COURT WILL REVIEW MAJOR PUBLIC PENSION RULING: The California Supreme Court recently decided to review a ruling that would give state and local governments new authority to cut public employee pensions. The court, meeting in closed session, unanimously accepted labor unions’ appeal of a decision that said government pensions were not “immutable” and could be trimmed. But the court will not review further arguments in the case until a court of appeal resolves another pending pension dispute. That could take months. The case now before the state high court was decided in August by a three-judge panel of the 1st District Court of Appeal in San Francisco. The other pension case, which raises similar issues, is pending before a different panel of judges in the same court. That panel has not yet scheduled a hearing on it. The court of appeal’s August ruling amounted to a major change in California pensions law, scholars said. (See C & C Newsletter for October 20, 2016, Item 1). For decades, California courts have ruled that state and local employees were entitled to the pension that was in place on the day they were hired. Pensions could be cut for current employees only if an equivalent benefit were added, making it difficult for governments to cut costs. If upheld, the ruling could be a vehicle for reducing a shortfall of hundreds of billions of dollars in public pensions in California. Other states grappling with pension debt also could follow California’s lead. The court agreed to take the case in a brief order that did not reveal the justices’ thoughts. A decision in the case is likely to be issued in several months. The ruling stemmed from a pension reform law passed in 2012 by state legislators. The law cut pensions and raised retirement ages for new employees and banned “pension spiking” for existing workers. Pension spiking has allowed some workers to get larger pensions by inflating their pay during the period in which retirement is based -- usually at the end of their careers. Employees have done this by cashing in years of accumulated vacation or sick pay or volunteering for extra duties just before retirement. The practice in some cases has given employees pensions that exceeded their regular salary. The Marin County retirement system, relying on the new law, decided that pay for various on-call duties and for waiving health insurance could no longer be counted toward pensions. Unions objected. They said many employees had been counting on the long-promised benefit and may even have accepted their jobs because of it. In a ruling written by Justice James A. Richman, appointed by former Gov. Arnold Schwarzenegger, the appeals court said the Legislature can alter pension formulas for active employees and reduce their anticipated retirement benefits. “While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension -- not an immutable entitlement to the most optimal formula of calculating the pension,” wrote Richman, joined by Justices J. Anthony Kline and Marla J. Miller, both Governor Jerry Brown appointees. A trial judge in the other pension case, brought by employees of Contra Costa, Alameda and Merced counties, upheld the anti-spiking provisions but allowed some employees to count pay for regular and required on-call duties toward their pensions. Written arguments in that case were completed months ago, and the panel’s failure to schedule a hearing prompted speculation that it was waiting for the California Supreme Court to decide the Marin County dispute before ruling.

5. 401(k) PLANS -- EFFECTS OF ELIGIBILITY AND VESTING POLICIES ON WORKERS’ RETIREMENT SAVINGS: The United States Government Accountability Office has issued its report entitled: “401(k) Plans: Effects of Eligibility and Vesting Policies on Workers’ Retirement Savings.” GAO’s nongeneralizable survey of eighty 401(k) plans ranging in size from fewer than 100 participants to more than 5,000 and its review of industry data found that many plans have policies that affect workers’ ability to (1) save in plans (eligibility policies), (2) receive employer contributions, and (3) keep those employer contributions if they leave their job (vesting policies). Thirty-three of 80 plans surveyed had policies that did not allow workers younger than age 21 to participate in the plan. In addition, 19 plans required participants to be employed on the last day of the year to receive any employer contribution for that year. Fifty-seven plans had vesting policies requiring employees to work for a certain period of time before employer contributions to their accounts are vested. Plan sponsors and plan professionals GAO surveyed identified lowering costs and reducing employee turnover as the primary reasons that plans use these policies. The Employee Retirement Income Security Act of 1974 allows plan sponsors to set eligibility and vesting policies. Specifically, federal law permits 401(k) plan sponsors to require that workers be at least age 21 to be eligible to join the plan. The law also permits plans to use rules affecting 401(k) plan participants’ receipt of employer contributions and the vesting of contributions already received. However, over time workers have come to rely less on traditional pensions and more on their 401(k) plan savings for retirement security. Further, while the rules were designed, in part, to help sponsors provide profit sharing contributions, today 401(k) plan sponsors are more likely to provide matching contributions and today’s workers may be likely to change jobs frequently. GAO’s projections for hypothetical scenarios suggest that these policies could potentially reduce workers' retirement savings. For example, assuming a minimum age policy of 21, GAO projections estimate that a medium-level earner who does not save in a plan or receive a 3% employer matching contribution from age 18 to 20 could have $134,456 less savings by their retirement at age 67 ($36,422 in 2016 dollars). Saving early for retirement is consistent with Department of Labor guidance as well as previous legislation and allows workers to benefit from compound interest, which can grow their savings over decades. In addition, the law permits plans to require that participants be employed on the last day of the year to receive employer contributions each year, which could reduce savings for today’s mobile workforce. For example, GAO’s projections suggest that if a medium-level earner did not meet a last day policy when leaving a job at age 30, the employer’s 3% matching contribution not received for that year could have been worth $29,297 by the worker’s retirement at age 67 ($8,150 in 2016 dollars). GAO’s projections also suggest that vesting policies may also potentially reduce retirement savings. For example, if a worker leaves two jobs after 2 years, at ages 20 and 40, where the plan requires 3 years for full vesting, the employer contributions forfeited could be worth $81,743 at retirement ($22,143 in 2016 dollars). The Department of Treasury is responsible for evaluating and developing proposals for legislative changes for 401(k) plan policies, but has not recently done so for vesting policies. Vesting caps for employer matching contributions in 401(k) plans are 15 years old. A re-evaluation of these caps would help to assess whether they unduly reduce the retirement savings of today’s mobile workers. GAO-17-69 (October 2016.)

6. ENTREPRENEURSHIP STRENGTHENS A NATION: Retired serial entrepreneur Steve Blank, creator of the “Lean LaunchPad” methodology for startups, discusses Silicon Valley’s roots as the epicenter of electronic warfare in the mid-20th century and how the region’s innovation ecosystem formed. An adjunct professor in Stanford University’s Department of Management Science & Engineering, Blank also walks through the lean-startup movement and how its principles are now helping the U.S. government innovate faster in the areas of basic science, health, national defense and international diplomacy. To see this informative video visit: https://www.youtube.com/watch?v=ggxo7p5b2QY.

7. NEW DEVELOPMENTS IN SOCIAL INVESTING BY PUBLIC PENSIONS: A new brief from Center for Retirement Research at Boston College investigates social investing in the pursuit of environmental, social, and governance -- goals -- through investment decisions. Public pension funds have been active in this arena since the 1970s, when many divested from apartheid South Africa. They have also aimed to achieve domestic goals, such as promoting union workers, economic development, and homeownership. In the mid-2000s, the focus shifted to preventing terrorism and gun violence. This effort included “terror-free” investing in response to the Darfur genocide and to weapons proliferation in Iran. And, after mass shootings in Aurora, CO, and Newtown, CT, some public funds shed their holdings in gun manufacturers.  Most recently, states have renewed the call to divest from Iran and have increasingly targeted fossil fuels to combat climate change. The brief provides an update of social investing developments and assesses whether, in this changing environment, public funds should engage in this practice. This assessment addresses two questions: 1) can ESG-screened portfolios meet the same return/risk objectives as non-screened portfolios; and 2) are public plans the right vehicle for advancing ESG goals? The discussion proceeds as follows.  The first section explores trends in social investing and the U.S. Department of Labor’s guidance on this activity. The second section examines recent state divestment efforts. The third section analyzes the economics of social investing. The fourth section outlines the economic, political, and legal complications. The final section concludes that although social investing may be worthwhile for private investors, lower returns and fiduciary concerns make public pension funds unsuited for advancing ESG goals. We respectfully disagree. Although less screened money is held by private defined pension plans, the likely reason is that these plans are generally covered by the Employee Retirement Income Security Act of 1974, and the U.S. Department of Labor has stringently interpreted ERISA’s duties of loyalty and prudence. However, since the mid-1990’s DOL has issued three Interpretive Bulletins on a fiduciary’s ability to consider ESG factors under ERISA. The Bulletin reiterated that plan fiduciaries may not accept lower expected returns or greater risks in order to promote non-economic benefits, but, ESG goals can be considered as tie-breakers if investment alternatives present equal expected risks and returns. In 2008, the DOL replaced the 1994 Bulletin with new guidance that the use of non-economic factors in selecting investments should be rare. Fiduciaries considering these non-economic factors must demonstrate their compliance with ERISA. The 2015 Bulletin withdrew the language from the 2008 Bulletin, reinstating the 1994 Bulletin position. DOL believed that the 2008 Bulletin unduly discouraged fiduciaries from considering ESG factors. The 2015 Bulletin then went further to clarify that ESG factors may directly affect the economic returns of an investment and may be incorporated when assessing an investment. SLP Number 53 (November 2016).

8. FOR BUSINESSES THAT STILL HAVE PENSIONS, THEY ARE A GOLDEN LURE: To lure and keep top talent, companies roll out attractive new benefits every year, from subsidies for personal cellphones to repayment of employee student loans. But a small group of Massachusetts firms is sticking with an old and now extremely rare worker incentive: the pension according to the bostonglobe.com. Pensions may be the dinosaur of compensation plans, but those local companies that have retained them say they are useful in a competitive labor market, where employers are fighting hard for highly skilled workers. Community banks, nonprofits, and private companies that still fund pensions are increasingly pointing them out as an attractive benefit with unemployment in the state at 3.6%, the lowest it has been since 2001. “It is counterprogramming,” says Andy Pond, president of the Justice Resource Institute, a Needham nonprofit that provides behavioral health and other social services. “It is something that distinguishes us.” Pond says the nonprofit’s 2,500 employees, including those who earn starting salaries of about $14 an hour, qualify for the pension. During the financial crisis, when the organization’s funding from public sources threatened to dry up, it did freeze pensions for six months, Pond says. But employees came to him and said they were willing to find other ways to trim expenses rather than give up their pension benefit. “It is a shame that a pension is now seen as an extravagance,” Pond says. “But we believe that by being efficient with budget, we can make this work.” The Justice Resource Institute also has a 401(k) plan to which employees can contribute, and there’s a match from the nonprofit. A majority of American companies used to offer traditional pensions to add to Social Security to help workers prepare for retirement. Those plans gave workers income for life, based on earnings and years of service. In 1983, nearly 2-out-of-3 workers with retirement plans had a pension, but no 401(k) plan. By 2013, that had plummeted to fewer than 1-in-5 workers who depended solely on a pension plan, according to the Boston College Center for Retirement Research. Most companies have moved to 401(k)s, which are structured so workers contribute to their retirement and bear the risk if the investment market sours. The numbers of workers relying solely on such plans between 1983 and 2013 has multiplied by six -- from 12% to 71%. But experts also warn that Americans have woefully underfunded these 401(k) plans and are not prepared for retirement. The rise of 401(k)s also reflects a transformation of worker habits. Pensions are designed to reward employees who remain with a company for long stretches, but those who move around may benefit from the shorter vesting periods of 401(k) plans, says Stephen Blakely, a spokesman for the Washington, D.C.-based Employee Benefit Research Institute. American workers hold about a dozen jobs during their career now, but to get the full benefit of a pension plan, employees must stay with the same company for years and climb up the ladder, according to Blakely. Pensions are unlikely to return in full force, but their decline may have eased. In its 2016 survey of employers, the Society for Human Resource Management even found a slight uptick in pensions -- 25% of US organizations said they offered them, versus 21% in 2012.

9. SIX BIG MONEY COSTING MISTAKES PEOPLE MAKE BEFORE RETIREMENT: A lot is said about money mistakes people make after they have retired, like spending too much or cashing out pensions too early, but what about the mistakes people make before they retire? People can recover from poor investment choices or shocks in the market, but Thayer Partners LLC shares six pre-retirement mistakes that are harder to correct -- and cost a lot of people a lot of money.

  • Not saving.  This is the single biggest mistake people make -- simply not saving. Whether it is because they think Social Security will be enough or because they are paying down debts, have other immediate spending priorities or even just because they think retirement is decades away, to many workers fail to save -- and fail to save early. Putting away even just a little bit can make a difference and the sooner you start the better.
  • Thinking you know how you want to live. Many people assume they will live the exact same way once they retire. Some do not consider downsizing or moving as viable options; even fewer people curb their expenses, instead believing they can keep spending the way they do while they are working. Or perhaps thinking they will continue working forever. Others assume they will not need to work a single day after they retire. Think about how quickly life circumstances can change. Your retirement plan needs to be versatile and flexible enough to cover you, no matter what you think you want to do today, tomorrow, and when you actually retire.
  • Paying high investment fees. If you do not know how your adviser gets paid or how much you are paying them, you need to find out. High investment fees are detrimental to you; not only do they take money out of your pocket, they can also hurt your portfolio’s growth. Portfolios with high fees do not outperform others on the market, either. Look for more economical investing options and put the money you save directly into financing the kind of future you want to have.
  • Thinking you will not get sick. Some people do not like to think about “what if’s,” especially if it means that they might get sick. The truth is that a good percentage of people are going to become ill during their retirement -- or even before. Even if you want to believe you will be hale and hearty forever, you need to be pragmatic and make arrangements for healthcare in case you do get sick. After all, no one drives around thinking they are going to get into a car accident, but you have insurance on your car for precisely that reason: just in case.
  • Failing to plan. This goes hand-in-hand with believing that Social Security or a company pension is all you need when you retire, but even when people realize they will need more than one income stream, they still fail to prepare for retirement. Think of it this way: if you hop in your car to go to the store, it is a lot easier and faster to get there when you have good directions. If you have no idea where you are going, you are going to waste a lot of time driving around. The same idea applies to planning for retirement: having a “road map” that shows you where you want to go is key.
  • Believing Social Security is enough. This belief is fairly common -- plenty of people simply assume that Social Security (or their company pension) will be enough for them to retire. This belief is fueled by a lack of knowledge, such as how much you will need to retire of failing to account for inflation. While Social Security is important it should not be the be-all, end-all of your retirement planning.

10.  SLOW AND STEADY “CONFIDENT SAVERS” WIN THE RACE:The Certified Financial Planner Board of Standards, Inc. commissioned a consumer survey series examining four groups of Americans based on their saving patterns. One particular group stands out among the rest as they exhibit high confidence about their financial future due to their slow and steady approach to saving throughout their lifetime. The group, identified as “Confident Savers,” consists of older Americans who have fewer children living at home. These individuals are similar to the other cohorts identified in this study; they hold a median income range of $50K-$100K, utilize employer-sponsored retirement plans, and believe Social Security is an important source of income for retirement. Where Confident Savers differ significantly is in their attitudes about saving. These individuals save money on a very regular basis and are twice as likely as their peers to consult financial planner for advice. “What is remarkable about Confident Savers is that there is very little difference between them and the other groups except for one big difference -- they are planners,” said CFP Board Consumer Advocate Eleanor Blayney, CFP. “They are not billionaires set for life, but rather take reasonable steps, including meeting with financial planners, to prepare for retirement.” Here are a few facts why Confident Savers are ready for retirement:

  • They prioritize savings: The highest financial prerogative of Confident Savers is saving money. In this regard, they are well ahead of the other groups in terms of what they see as important.
  • They save regularly: Eighty-eight percent of Confident Savers save each and every month.
  • They save early: On average, this group started saving for retirement around 25 years old -- long before most people even start thinking about their retirement years.
  • They value outside expertise: Confident Savers are twice as likely as the other groups to hire a financial planner to manage their money.

These four basic qualities can help anyone reach financial security. Confident Savers are the tortoises, not the hares, in life’s financial contest. They do not have to push and sweat as retirement comes near -- they can take it easy in those final laps. After all, that is what retirement is for.

11. FUN WITH WORDS: He had a photographic memory which was never developed.

12. PARAPROSDOKIAN: Change is inevitable, except from a vending machine.

13. TODAY IN HISTORY: In 1950, “Guys & Dolls" opens at 46th Street Theater in New York City for 1200 performances.

14. 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.

15. 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 http://www.cypen.com/subscribe.htm.

16. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.

Copyright, 1996-2016, 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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