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Cypen & Cypen
DECEMBER 23, 2010

Stephen H. Cypen, Esq., Editor

1.      CHANGE IN PUBLIC EMPLOYEE RETIREMENT SYSTEM WOULD MEAN BIG UPFRONT COSTS:    A panel that oversees Nevada’s public employee retirement system was told it would cost about $1.2 Billion over the next two years to change from the current defined benefit plan to a defined contribution plan for new state and local government workers. The increased costs would come about as the Public Employees’ Retirement System moved fully to fund the existing plan for current state workers and retirees who would remain in the defined benefit plan. The increased funding would have to continue over the next several years, adding costs to state and local government budgets. While the cost of the current retirement plan is shared between workers and their government employers, employers might end up having to bear the entire increased cost. Some lawmakers have advocated a change to a defined contribution plan for new hires as a way of containing long-term unfunded liability for current defined benefit plan. The change from a defined benefit plan, where retirement payments are guaranteed based on salary and years worked, to a defined contribution plan, where public employees contribute to employee retirement without any guarantees of pension amounts upon retirement, is being pushed for public employee retirements around the country. Such change would eliminate unfunded liability for future hires. Currently, there is a prohibition against changing the plan for workers currently in the system. Advocates for the current system say Nevada’s plan is well managed, is being funded appropriately and will be fully funded over time, according to 

2.      TOO EARLY TO ASSESS IMPACT OF FRS GROWTH FUND INVESTMENTS:  The Florida Legislature Office of Program Policy Analysis & Government Accountability says that, as of November 2010, Florida Growth Fund managers had invested $73 Million in seven Florida-based technology and growth companies and four private equity funds that invest in such companies. These investments represent 29% of the fund's total $250 Million in assets. Although some of these companies report creating jobs, it is too early to assess total economic benefits to the state provided by these investments. The Florida State Board of Administration is composed of the Governor, Chief Financial Officer and Attorney General, who oversee state funds, including the $109 Billion Florida Retirement System. The 2008 Florida Legislature authorized SBA to invest up to 1.5% of net state retirement system trust fund assets in technology and high-growth businesses with a significant presence in Florida. Prior to passage of this legislation, SBA invested pension funds in Florida-centered technology and high-growth industries as part of its overall investment portfolio. OPPAGA is required annually to review the growth fund, which review must include:

  • the dollar amount of fund assets invested in state technology and growth industries and the investments' percentage share of the system's trust fund net assets
  • a list of investments in state industries the board identified as technology and growth investments within each asset class
  • an analysis of the direct and indirect economic benefits to the state resulting from the investments.

OPPAGA’s third annual report concludes it is too early to assess total economic benefits of growth fund investments because the state may not realize such benefits for several years. Moreover, SBA does not expect to earn competitive rates of return on such investments for at least 8 to 10 years, because such investments typically involve relatively young or start-up companies.  Such companies often have high failure rates and have difficulty attracting early-stage capital.  Report No. 10-60 (December 2010).

3.      BEST EXECUTION CARRIES HIDDEN COSTS: Achieving best execution in a fragmented marketplaceentails lots of hidden costs.  Where trades were once executed as a single trade involving a single broker, according to, they are now being split up into multiple trades involving multiple brokers, which has magnified execution costs. Not too long ago, an institutional broker dealing with a single executing broker might allocate back to four portfolios, which translates to four trade tickets. Today, with the increased use of algorithmic trading and dark pools, that same trade would be executed with three brokers, which translates to 12 trade tickets. While it is great to talk about best execution, buyside traders need to understand the true downstream and trade processing costs that best execution entails. Money managers should be asked to use a settlement aggregation service that consolidates allocation and settlements for institutional investors executing trades across multiple brokers and execution venues to a single aggregated allocation and delivery to each custodial account. Settlement aggregation empowers buyside traders to pursue their best execution goals in a fragmented marketplace, secure in the knowledge that their trade ticket costs will be contained.   Although the settlement aggregation space is relatively new, with fragmentation and costs going up, look for an expansion in demand for settlement aggregation. 

4.      IRS NEEDS TO DEVELOP A STRATEGY TO ADRESS GROWING NONCOMPLIANCE WITH IRA REQUIREMENTS:  Treasury Inspector General for Tax Administration issued a report presenting results of its review to determine whether Internal Revenue Service actions to identify and correct individual excess contributions to Individual Retirement Accounts and nondisbursements of required minimum distributions from IRAs are needed. There are two types of IRAs:  traditional IRA and Roth IRA. Both types allow individuals to contribute up to $4,000 per year ($5,000 if age 50 or older) and provide tax-preferred ways to save for retirement. Any amount contributed to a traditional or Roth IRA for the year that exceeds the contribution limit or any amount contributed to a traditional IRA by an individual who has reached age 70½ is an excess contribution. Generally, if the excess contribution for the year is not withdrawn by the due date of the tax return, there is a 6 percent excise tax on the amount of excess contribution. Individual noncompliance with IRA excess contribution and minimum distribution requirements continues to grow since TIGTA’s previous reviews, which identify potential revenue losses associated with: 

  • 295,141 individuals improperly making excess contributions totaling $756,792,044 for 2007, with estimated excise tax and income tax losses of $56,000,000.
  • 255,498 individuals not taking required minimum distributions totaling $175,000,000 for 2007, with estimated excise tax loss of $87,000.000.

The prior review concluded that IRS’s processing procedures for IRAs do not ensure that individuals are complying with IRA rules. In the current review, TIGTA again found that IRS procedures are inadequate to identify individuals who make IRA contributions in excess of what the law allows or individuals who are not taking required minimum distributions. In response to concerns raised in the prior audit report, IRS initiated four studies. To date, results are available for only one of IRS’s studies, and these results confirm what TIGTA had previously reported to IRS: individuals are making excess contributions. Based upon such analyses, TIGTA believes the remaining three studies will confirm what was previously reported: individuals are making excess contributions and individuals are not taking required minimum distributions. Apart from initiation of the four studies, IRS has not taken sufficient action to address significant revenue losses associated with IRA noncompliance. TIGTA recommends that IRS develop a service-wide strategy to address growing IRA noncompliance. In response, IRS management agreed that a service-wide strategy is warranted. Reference Number: 2010-40-043 (March 29, 2010). 

5.      ANNUAL 401(k) SURVEY ADDRESSES RETIREMENT READINESS: Deloitte’s Annual 401(k) Survey spotlights retirement readiness. In 2010, 62% of plan sponsors surveyed feel that their responsibility includes taking an interest whether employees are tracking towards a comfortable retirement (that is, offering an option that allows participants to plan for a reasonable replacement ratio).  This year, surveyors asked respondents to rank importance of "participant retirement readiness," and it moved right to the top as the most important improvement plan with which sponsors want providers to help. Only 15% of plan sponsors surveyed believe most employees will be prepared for retirement.  While plan sponsors appear to be concerned with the retirement readiness of their employees, they appear unsure about which tools and offerings are most effective at helping participants manage this task. Just 25% of plan sponsors surveyed offer managed accounts.  However, more than half make individual financial counseling/investment advice available to all participants.  An additional 16% are considering adding this feature in the nexttwo years.  For those that do not offer this service, potential fiduciary responsibility continues to be listed by 60% as the top reason for not offering it. Retirement income products -- options that generally include an annuity to provide a lifetime income stream -- are relatively new to the 401(k) marketplace, and have lacked significant rates of early adoption among providers, plan sponsors and employees.  Less than 5% of plans currently offer retirement income products.  Further, only 12% of plan sponsors surveyed indicate they are currently considering adding in-plan or at-retirement income options. Plan sponsors and 401(k) plans have made it through significant economic challenges in the last two years.  Showing a substantial rebound from 2009, 39% of plan sponsors surveyed responded that the average participant account balance exceeds $75,000 (compared to 25% in 2009).  A majority of surveyed plan sponsors indicated participants are taking a "wait and see" approach before diving back in to increase contribution rates and resuming the level of activity seen in prior years. Demonstrating participants' cautious approach, plan sponsors reported the most common actions taken by participants over the past 12 months were 

  • Increased loan activity (49%)
  • Decreased deferral rates (41%)
  • Increased withdrawals:  hardship, in-service (40%)
  • No changes (23%)
  • Rebalancing portfolios to be less aggressive (21%)

While participants remain cautious, plan sponsors appear to be more trusting of the recovery, as they begin to shift from cost cutting back towards ongoing management.  In 2010, plan sponsors offering employer matching contributions increased to 66% from 59% the year before.  Among those that previously suspended matching contributions, 55% reported that they plan to reinstate matching contributions within the next 24 months. The survey is also sponsored by International Foundation of Employee Benefit Plans and International Society of Certified Employee Benefit Specialists. 

6.      SEI 2011 UPDATE ON PENSION ACCOUNTING DISCLOSURE ASSUMPTIONS:  SEI has released its annual research study on pension accounting, showing that the range of discount rates being used by defined benefit plan sponsors continues to widen compared to years past. The database of plan sponsors used for the research shows a 161 basis-point range of discount rates used for 2009 pension disclosure, a 20 basis-point increase in range from the previous year.  Companies can use the study as guidance for setting the discount rate and return on asset assumptions plan sponsors will use for 2010 year-end disclosures. Sixty-one percent did not lower their ROA between 2008 and 2009, while 39 percent decreased it.  Corporate defined benefit plan sponsors continue to deal with market volatility, as well as an interest rate environment that remains historically low.  Following a dismal 2008, the funded status of DB plans in the United States has improved. The average funded ratio on a projected benefit obligation basis for fiscal year ending 2009 was 77%, compared with 71% for fiscal year ending 2008.

7.      REVENUE RULING MODIFIES RULES FOR GROUP TRUSTS:  Internal Revenue Service has issued Revenue Ruling 2011-1, to modify rules for group trusts described in Revenue Ruling 81-100, as clarified and modified by Revenue Ruling 2004-67. The modifications revise the generally applicable rules for these group trusts and, if certain requirements are met, permit participation in group trusts of custodial accounts under IRC § 403(b)(7), retirement income accounts under § 403(b)(9) and governmental retiree benefit plans under § 401 (a)(24).  In addition, the revenue ruling provides related model language that may be used by group trusts to comply with these new provisions.  The revenue ruling also modifies transition relief relating to certain plans.   Specifically, on or after January 10, 2011, provided that certain requirements are satisfied, assets of qualified plans under § 401 (a), IRAs and eligible governmental plans under § 457(b) may be pooled in a group trust described in Revenue Ruling 81-100, as clarified and modified by Revenue Ruling 2004-67, and the subject revenue ruling, with assets of custodial accounts under § 403(b)(7), retirement income accounts under § 403(b)(9) and § 401(a)(24) governmental plans without affecting the tax status of the group trust or the tax status of each of the separate group trust retiree benefit plans participating in the group trust. In addition, IRS requests comments on whether annuity contracts or other tax-favored accounts held by plans described in § 401(a) or § 403(b), such as pooled separate accounts supporting annuity contracts that are treated as trusts under § 401(f), should be permitted to invest in the group trusts described in the revenue ruling. Here is a very short summary of the revenue ruling: consult your tax counsel. 

8.      SEC PROPOSES RULES ON REGISTRATION OF MUNICIPAL ADVISORS: The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 to require municipal advisors to register with the Securities and Exchange Commission effective October 1, 2010. To enable municipal advisors temporarily to satisfy this requirement, the Commission adopted an interim final temporary rule and form, effective October 1, 2010, but expiring on December 31, 2011 (see C&C Newsletter for September 16, 2010, Item 3). The Commission is now proposing new rules and new forms under the Exchange Act. The proposed rules and forms are designed to give effect to provisions of the Dodd-Frank Act that, among other things, would establish a permanent registration regime with the Commission for municipal advisors and would impose certain record-keeping requirements on such advisors. The statutory definition of “municipal advisor” includes distinct groups of professionals that offer different services andcompete in distinct markets.  The three principal types of municipal advisors are (1) financial advisors, including, but not limited to, broker-dealers already registered with the Commission that provide advice to municipal entities with respect to their issuance of municipal securities and their use of municipal financial products; (2) investment advisors that advise municipal pension funds and other municipal entities on investment of funds held by or on behalf of municipal entities (subject to certain exclusions); and (3) third-party marketers and solicitors. Public comments should be received on or before 45 days after publication of the proposed rule in the Federal Register. [Release No. 34-63576; File No. S7-45-10]

9.      DOES THE FIRST AMENDMENT HAVE ANY LIMITATIONS?:    Locked up in a California jail, Malcolm Alarmo King wanted healthier meals.  In an argument apparently made to a friendly court, he won a ruling from a California Superior Court Judge that he should be fed double-portion kosher meals. Battling to keep its food costs down, the sheriff's department argued that King himself admitted "healthism" was the so-called religion justifying this request.  But the judge was not daunted, according to He called a sidebar with King's lawyer and the county prosecutor, asking for suggestions about a religion he could cite in the kosher-meal order to nail the issue down once and for all. The lawyer said “Festivus,” and Festivus it was.  The prosecutor argued (to no avail) that the holiday (Festivus for the rest of us) was a running gag on the Seinfeld television show. There was no pick. 

10.    REMARKABLE QUOTES FROM REMARKABLE JEWS: Look at Jewish history. Unrelieved lamenting would be intolerable. So, for every ten Jews beating their breasts, God designated one to be crazy and amuse the breast beaters. By the time I was five I knew I was that one. Mel Brooks

11.    BLESSED ARE THE CRACKED, FOR THEY LET IN THE LIGHT:  I don't suffer from insanity; I enjoy every minute of it. 

12.    AGING JOKES:  It's scary when you start making the same noises as your coffee maker. 

13.    FABULOUS RANDOM THOUGHTS:   If Carmen San Diego and Waldo ever got together, their offspring would probably just be completely invisible. 

14.    QUOTE OF THE WEEK:   “I really didn’t say everything I said.” Yogi Berra

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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We wish you and yours a very Merry Christmas!!!!

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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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