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Cypen & Cypen
November 7, 2019

Stephen H. Cypen, Esq., Editor

On November 6, 2019, the IRS announced the new 2020 retirement plan limits. The applicable cost of living index increased sufficiently, allowing many standard limits to increase for 2020. The elective deferral limit under 402(g), for example, increased by $500 to $19,500. Similarly, the catch-up deferral limitation for those who are age 50 or older on 12/31/2020 also increased by $500, to $6,500, allowing these individuals to defer $26,000 in 2020. The Social Security Administration (SSA) also announced that the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $137,700 in 2020, up from the 2019 limit of $132,900. Cammack Retirement Group, November 6, 2019.

The Financial Industry Regulatory Authority ordered the brokerages to pay restitution to clients allegedly sold more expensive share classes in 529 college savings plans.
Merrill Lynch and Raymond James’ employee and independent brokerage units have settled with the Financial Industry Regulatory Authority for a total $12 million in client restitution for allegedly selling higher-cost share classes in 529 college savings plans than other classes available. The firms neither admitted nor denied the charges. Earlier this year, FINRA launched a larger initiative aimed at discouraging brokers from selling higher fee share classes in 529 plans. Under the initiative, FINRA won’t fine firms that self-report supervisory failures related to recommendations of 529 plan share classes. But the Merrill and Raymond James matter predates the initiative, FINRA said. In a statement, Merrill said it self-reported the potential violations in June 2015. Merrill Lynch and Raymond James’ employee and independent brokerage units have settled with the Financial Industry Regulatory Authority for a total $12 million in client restitution for allegedly selling higher-cost share classes in 529 college savings plans than other classes available. The firms neither admitted nor denied the charges. Earlier this year, FINRA launched a larger initiative aimed at discouraging brokers from selling higher fee share classes in 529 plans. Under the initiative, FINRA won’t fine firms that self-report supervisory failures related to recommendations of 529 plan share classes. But the Merrill and Raymond James matter predates the initiative, FINRA said. In a statement, Merrill said it self-reported the potential violations in June 2015. “Even prior to FINRA’s involvement, Merrill implemented corrective measures, including enhanced policies and procedures to ensure clients receive the most appropriate shares in their accounts,” said Bill Halldin, Merrill spokesman. “As part of an industry-wide review of share class selection in 529 savings plans and related supervision, and after many months of extensive cooperation with FINRA, Raymond James has agreed to a settlement where it will credit current and former eligible clients, including interest,” said Raymond James spokeswoman Kelly Gonzalez, in a statement. “The firm’s policies and processes were previously enhanced to address the issues in FINRA’s findings, and the remediation costs have been fully reserved. The firm is pleased to have resolved this matter.” FINRA claims the firms failed to properly supervise reps who sold Class C shares of 529s to young clients, which have no front-end sales load but higher annual fees than Class A shares. Class C shares, therefore, tend to be more expensive for clients over the long-term. FINRA said the firms did not have adequate written supervisory procedures in place. Merrill Lynch agreed to pay $4 million in restitution to affected clients; Raymond James & Associates, the firm’s employee channel, will pay more than $3.8 million, while Raymond James Financial Services, its IBD, will pay $4.2 million. "FINRA member firms must be cognizant of all costs to their customers when recommending a product,” said Jessica Hopper, senior vice president and acting head of FINRA’s Department of Enforcement. “This is particularly important where an unsuitable recommendation may cause customers to incur higher fees year-after-year, especially in the case of young beneficiaries. Returning money to harmed investors as quickly and efficiently as possible remains a priority." Diana Britton, WealthManagement.com, November 06, 2019.
U.S. retirement systems ranked 16th out of 37 countries.
The Netherlands and Denmark have the strongest pensions systems in the world, while Thailand and Argentina have the worst pension systems according to a recent study released by professional services firm Mercer. The study analyzed 37 retirement income systems representing more than 63% of the world’s population and found a wide gap among systems around the world, with scores ranging from a high of 81.0 for the Netherlands to a low of 39.4 for Thailand. “Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens,” David Knox, author of the study, said in a release. “It’s imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future.” As the top ranked systems, the Netherlands and Denmark were also the only countries to receive a score above 80. The study graded any country with an 80 or above as an A grade, and defined these systems as “first class and robust” systems that deliver good benefits, are sustainable, and have a “higher level of integrity.” The US ranked 16th out of 37, and was a little above the overall average of 59.3 with a score of 60.6, which was slightly better than France’s 60.2, and tied with Malaysia. Rounding out the top five retirement systems after the Netherlands and Denmark were Australia, Finland, and Sweden, which scored 75.3, 73.6, and 72.3 respectively. The only other countries to score above a 70 were Norway (71.2), New Zealand (70.1), and Singapore (70.8). In addition to ranking the world’s retirement systems, the study also found a “strong correlation” between the levels of pension assets and net household debt. Its analysis showed that growth in household debt in developed economies paired with the growth in assets held by pension funds. The study said growth in pension funds assets allows households to feel more financially secure in having future income from their nest egg, which leads them to borrow more to improve their living standards. “As the wealth of an individual grows, whether it be in home ownership, investment portfolios or their retirement savings, so does their comfort with amassing debt,” said Knox. “The evidence suggests on a global basis, for every extra dollar a person has in pension assets, their net household debt rises by just under 50 cents.” Michael Katz, Chief Investment Officer, October 25, 2019.
Florida Insurance Commissioner David Altmaier has ordered an average 7.5% reduction in workers’ compensation insurance rates effective Jan. 1. Altmaier issued an order Thursday directing the National Council on Compensation Insurance to submit a revised rate proposal to his office with a 7.5% cut. Altmaier asked that the organization known as NCCI make the filing by Nov. 4. In his order, Altmaier also directed NCCI to include in future rate filings a “detailed explanatory memo and quantitative analysis regarding the effect the recent Supreme Court decision of Castellanos is having on the Florida workers’ compensation market and the data used to support future rate filings.” Altmaier was referring to a 2016 Florida Supreme Court ruling in the case of Castellanos v. Next Door Company in which justices rejected restrictive caps on fees charged by attorneys who represent injured workers. Business groups have long argued that higher attorney fees will increase costs in the workers’ compensation system and drive up rates. The average 7.5% reduction in Thursday’s order is greater than a 5.4% reduction that NCCI recommended this summer. NCCI makes rate filings each year for the workers’ compensation industry. In rejecting the NCCI proposal, Altmaier said NCCI projections that there would be a 2.5% reduction in indemnity claims--claims for such things as lost wages--and a 2% reduction in future medical claims “appear to be unreasonable.” “Oh my,” Bill Herrle, executive director of the National Federation of Independent Business in Florida, said when told of the rate decrease. “Rates going down is always going to be welcome news to Florida employers.” Herrle praised Altmaier for directing NCCI to continue collecting data on the impact of the Castellanos decision. “We hope that the commissioner continues to keep a close eye on attorneys’ fees within the system,” he said. News Service of Florida, October 25, 2019.
Despite low joblessness, academic concludes, most work still fails to generate enough money for later years.

The link between low unemployment and wage gains is broken, according to New School economics professor Teresa Ghilarducci--and that has undermined retirement savings. September’s employment report showed that average hourly compensation for private sector workers rose 2.9%, which was faster than the 1.7% rise in annual inflation, but nothing special. Meanwhile, unemployment is at a 50-year low. This persistent slow growth is evidence of continuing structural problems in the US economy. The Economic Policy Institute calculates a target for wage growth based on the Federal Reserve’s inflation target of 2%, the current productivity growth trend, and the relative shares of national income going to labor and capital. Wages should grow by 3.5% to 4%, EPI finds, not including increases in labor’s overall economic share. For retirement funds, “stagnant wages mean stagnant pension contributions,” said Ghilarducci, a noted scholar on retirement and labor issues, wrote in an email, following her latest published work on those subjects. All retirement savings, except for traditional defined benefit plans, are voluntary contributions and each dollar competes with all other expenses, she pointed out. Research shows that wages for typical workers, adjusted for inflation, declines after about age 45. That fact means the so-called catch-up contributions--where people over 50 can put more into their tax deferred retirement accounts--is a benefit just for the privileged few who have high incomes that increase after age 50. Only those at the top 20% have enjoyed steady wage increases over the past 30 years, she said. At least, she went on, low unemployment rates permit some to make retirement plan contributions, and people are less tempted to take money out of their 401(k)s early. “The only thing I worry about are in periods of low employment, workers go from job to job searching for higher wages and having to wait a year before they can join their company‘s 401(k),” she said. Staff Report, Chief Investment Officer, October 25, 2019.
Pension participants filed suit after program’s pullout from healthcare coverage.
A judge threw out a class action lawsuit against the Ohio Police & Fire Pension Fund over its shucking of a group health insurance plan in favor of a flat fee for retirees to use in finding their own care. The suit, filed in December in the Franklin County Court of Common Pleas, claimed the Ohio Police and Fire Board breached a contract by altering rules to retirees’ healthcare plans. The plaintiffs complained that they were saddled with high deductibles and a limited network of doctors. But Judge Richard Frye dismissed the action, ruling that the pension plan’s board was not responsible for furnishing retirees with healthcare coverage. “Despite these difficulties, it is abundantly clear in the record that the OP&F Board was thorough and conscientious in trying to accomplish the transition,” the judge wrote. Starting in 2019, Ohio police and fire retirees were moved from a group insurance plan to a stipend system that forces them to buy private, individual plans. This mainly affected retirees who were not yet eligible for Medicare, which begins at 65. The new system only distributed monthly stipends to retirees to assist in paying for coverage purchased in the private marketplace. Retirees accused board members of failing to adequately investigate the healthcare platform AON, which provided the private insurance marketplace. They said AON representatives had meetings around the state and made promises they could not deliver. Staff Report, Chief Investment Officer, October 25, 2019.
One adviser charges a flat fee up to certain asset levels and then additional basis points as plans grow, while another emphasizes the detailed, time-intensive fiduciary work he does for clients when asking for a fee increase. Despite fee compression, some retirement plan advisers have begun pushing back, pointing out to clients all of the value they bring to retirement plans and, in some cases, negotiating slightly higher fees for the work they do. When Ellen Lander, principal of Renaissance Benefits Advisors Group, founded her practice, she charged a flat fee for all of her clients. “Five years later, I realized that was a terrible mistake,” she says. “While we are close with all of our clients and encourage dialog, I struggle with speaking with them about what fees are appropriate and reasonable. For example, I have one client who has been with our firm for 11 years. Their assets have tripled and now encompass three plans. I have handled three RFPs [requests for proposals] for them, and I have never increased my fee. “Many of my other clients have expanded their businesses through mergers and acquisitions, whereby a plan that was $30 million in assets becomes a $100 million plan with all of the work that involves, and I have not increased my fees,” Lander continues. Ideally, Lander says, advisers should charge an hourly fee like attorneys and accountants, but clients are highly resistant to that. She recommends that advisers charge a flat fee up to $50 million in assets and then add a two to three basis point “cost of risk factor” on assets up to the next level of $100 million, and continue in that fashion as assets grow. “Other advisers say, just renegotiate your fees every three years. I am uncomfortable with that,” Lander says. “Rather, this feels like a fair way that takes into consideration the growth of the plan.” Lander says advisers should also have the mettle to tell clients who ask for additional work that it is “out of scope,” and charge a hourly fee for that work. “I have had to learn painfully to speak up quickly and boldly when something is out of scope,” she says. “The cautionary tale is to stay on top of it and realize up front that you cannot envision how a plan will grow. We know that as plans grow, there is additional liability.” Don Duncan, managing director of Savant Capital Management, says that when negotiating a fee increase with his clients, he emphasizes to them all of the 3(21) and 3(38) fiduciary work he does for them. He says he is also willing to take on more work for clients by offering more education and, potentially, financial planning for employees and corporate executives. The main thing for advisers to consider, Lander and Duncan say, is that it is warranted for advisers to justify the value they bring to clients and, when necessary, have a discussion with them about what fees are reasonable. Lee Barney, Planadviser, October 16, 2019.
The news that General Electric (GE) was freezing its pension for 20,000 workers this week and offering buyouts to 100,000 former employees sent the company’s beleaguered stock up slightly, but dealt the two fierce blows to two great American institutions.
The first: GE itself. An American staple and iconic industrial company that has employed hundreds of thousands--if not millions--of Americans over the years and paid benefits loyally to its workforce showed yet another flicker, like the incandescent bulbs it famously made.

The second: The American pension.

It’s no secret the private-sector pension is on its last breaths. Over the past 20 years, the percentage of Fortune 500 companies that offer a traditional pension plan has fallen from 59% to 16%, according to Willis Towers Watson. Pension plan freezes have been on the rise as well. For the entire workforce, only 4% of today’s workforce has access to a traditional defined benefit pension plan, according to the Bureau of Labor Statistics. But the fact that GE, the shining example of a one-company-for-life, is shelving the practice and pushing the existing employees into 401(k)s is one of the last nails in the coffin for this retirement planning option. Similar corporate titans like IBM (IBM) and Boeing (BAceased pensions in the 2000s. Pensions and 401(k)s both provide means to save for retirement and to pay money out, but the way they accrue money has one key difference: who owns the risk and responsibility of investment management. For a pension, the company and employee pay into a pool of money. Then the company invests that money and hopes that it’s enough to pay a defined benefit when the employee retires. If the company isn’t a successful investor and the money in the portfolio doesn’t grow enough, the company has to pay the difference out of its own profits. According to JPMorgan Asset Management, the last 10 years have seen the funding of top pensions drop from over 100% (assets to liabilities) to around 84%. For a 401(k) however, the individual takes on all the risk. They must do all the investing and administrative work, and then must hope the market gods smile down on them and that the amounts they decide they can take out every month are enough to live on--but not too much so they’ll run out. With the death of the pension comes a great big hole in the American concept of retirement, a hole leaves stress and uncertainty. Companies have been pivoting towards 401(k) plans for quite some time, as it’s much less costly. In many respects, it makes a lot of sense. Particularly because it’s portable. Workers don’t stay at one company their entire working lives anymore--they jump around and need a retirement framework with savings that can follow them. As Brookings fellow and pension expert. Mark Iwry, has noted, “longevity risk” of outliving your savings presents an extremely challenging dilemma. How can you use a life expectancy table, when there’s a 50% chance you will end up on the wrong side. The 401(k) and IRA plans may offer people means to mimic what pensions have done in the past, but in addition to placing the risk of investment failure on employees and retirees, they also place the work. In their glory years, pensions were ingrained into company culture. In the case of GE, the company’s famously generous pension was sometimes a key reason people chose to work there. Contrast this with today. Many companies offer 401(k) plans and many of them even automatically enroll employees into them and match contributions up to a point. Ethan Wolff-Mann, Yahoo Finance, October 12, 2019.
What GAO Found 
State tax credit scholarship (TCS) programs--programs that offer state tax credits for donations that can fund scholarships for students to attend private elementary and secondary schools--have established various key requirements for the scholarship granting organizations (SGO) that collect donations and distribute awards. For example, all 22 TCS programs in operation as of January 2019 require SGOs to register with or be approved by the state and limit the percentage of donations they can use for non-scholarship expenses. In addition, almost all of these programs--which received over $1.1 billion in donations and awarded approximately 300,000 scholarships in 2017--also require SGOs to undergo annual financial audits or reviews (19 programs). Fewer programs have requirements about SGO fundraising practices (9 programs) or the qualifications of SGO leadership personnel (10 programs), such as restrictions on officials having previous bankruptcies. States also have various key requirements that apply to private schools that enroll students with TCS scholarships. For example, private schools in most of the 22 programs must follow certain academic guidelines related to curriculum content (18 programs) and instructional time (19 programs), and have staff undergo background checks (18 programs). Schools in fewer programs are required to conduct academic testing (11 programs), ensure their teachers have specified qualifications (12 programs), or undergo an annual audit or financial review (4 programs). The three states with the largest TCS programs--Arizona, Florida, and Pennsylvania--implement and oversee their programs in different ways. In all three states, state agencies administer the tax credits while SGOs are generally responsible for managing donations and awarding scholarships; the details of these processes varied based on the requirements of each program. For example, Arizona and Pennsylvania’s programs allow donors to recommend that funds go to specific schools, which can affect how SGOs solicit donations and award scholarships. Florida does not permit recommendations. All three states require SGOs to report on operations and undergo annual financial audits or reviews, while the states differ in how participating private schools are overseen. Florida’s TCS programs use multiple monitoring methods, while all Arizona programs and one of two Pennsylvania programs generally rely on SGOs to confirm that schools comply with program requirements.
Why GAO Did This Study 
All TCS programs are state programs. States develop program policies and requirements, including establishing the roles and responsibilities of SGOs and participating private schools. The President’s fiscal year 2020 budget request included a proposal for federal tax credits for donations to stateauthorized SGOs. GAO was asked to review key characteristics related to accountability in state TCS programs that can fund K-12 educational expenses. This report examines (1) key requirements state TCS programs have chosen to establish for SGOs, (2) key requirements for private schools participating in state TCS programs, and (3) how selected states implement TCS programs and assess whether SGOs and participating private schools are following key state requirements. GAO identified key requirements states may choose to establish related to accountability for SGOs and schools based on relevant research and prior work. GAO also reviewed program documents from all 22 TCS programs to identify whether they had these key requirements as of school year 2018- 2019 and then verified this information with state program officials. GAO did not conduct an independent review of state laws and regulations. GAO visited Arizona, Florida, and Pennsylvania, which have the largest TCS programs. In each of these states, GAO reviewed program documents and interviewed officials at state agencies and staff at selected SGOs and private schools (selected to provide variation in size and other characteristics). For more information see here. GAO-19-664, United States Government Accountability Office, September 2019.
Never let yesterday use up too much of today.
Age is an issue of mind over matter. If you don't mind, it doesn't matter. - Mark Twain
On this day in 2000, Controversial US presidential election between George W. Bush and Al Gore is inconclusive; the result, in Bush's favor, is eventually resolved by the Supreme Court.

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