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June, 2000

Stephen H. Cypen, Esq., Editor

1. SEC CHAIRMAN URGES MORE COMPETITION IN OPTIONS: In a speech last month at an options-industry conference, Securities and Exchange Commission Chairman Arthur Levitt said he wants the quotation of options pricing to be expanded to indicate the number of people willing to buy and sell at the advertised market price. Levitt's appearance at the 18th Annual Options Industry Conference in Palm Beach Gardens, Florida, was his first appearance since the SEC began investigating allegations at options exchanges. Currently, quotes only indicate the prices at which dealers are willing to buy and sell options contracts, a basic function that sometimes exceeds the capacity of the options industry's computer system. Look for comments from the exchanges on how they think computer space should be allocated.

2. MILWAUKEE SETTLES PENSION DISPUTE: From a BNA report we learned that Milwaukee's Common Council has passed an ordinance authorizing a plan to settle a long-standing legal dispute over administrative changes made to its pension plan. The dispute dates back to 1996, when the Milwaukee Police Association challenged a series of changes the City made in the way it administers city pension funds. The changes include an attempt to combine the pension fund and a separate disability fund for fire and police officers. The city move followed an actuarial finding that the pension plan was overfunded and the disability fund was underfunded. A second dispute involved payment of performance-based fees. The city attempted to pay such fees out of fund earnings, but a trial court ruled that they were among the system's necessary administrative and operational expenses that were required to be paid from regular city revenues. In any event, if the global settlement receives approval of the required super-majority of plan participants, the city will seek final court approval. The settlement will increase pension benefits for active police officers by 14.6%, at a cost of $74 Million; for active fire fighters by 14.1% ($36 Million); for active general city employees by 14.3% ($115 Million); and for current retirees by 12.8% ($169 Million). The retirement plan's $1 Billion surplus will be tapped to pay the costs.

3. AMERICANS MAY LACK PENSION ASSETS: Earlier this year the Federal Reserve Board released its 1998 Survey of Consumer Finances. The survey indicates that 54% of households participate in employer-sponsored retirement plans, one-third of which are defined benefit plans and two-thirds of which are defined contribution plans. (About 10% with annual incomes under $10,000.00 participate in such plans, while 77% with incomes over $100,000.00 so participate.) An analysis of the fed data shows that 55% of those participating in either a DB or DC plan will have adequate savings; only 24% of those not participating will. Another interesting finding: the 61% of households with DB plans will accumulate adequate retirement savings compared to only 56% of households that have DC plans. We thank BNA for its report on the survey and its analysis.

4. MOST WORKERS WILL NOT RECEIVE ADEQUATE PENSIONS: Although lack of adequate pensions may be a problem for some Americans, the problem here is nothing compared to other places: about 90% of workers around the world do not belong to a pension program that will provide sufficient income after retirement, according to a report from the International Labor Organization. ILO, the United Nations body charged with labor issues, said many countries are currently considering, planning or implementing major changes to their existing pension programs. The two main challenges facing pension programs in most countries are the issues of coverage and governance. Many countries find it impossible to offer universal coverage because many citizens are self-employed, so earnings cannot be easily monitored or contributions collected. To solve this problem of coverage, governments might reinforce compliance efforts and make sure that firms of all sizes contribute to national programs. Regarding governance, ILO says many pension plans face financial problems simply because of an inability to collect all revenues due to them, to invest any reserves wisely or to pay benefits promptly and in full. A summary of the 800-page survey was published by BNA.

5. THE ART OF CONFERENCE-GOING: The May 2000 issue of Plan Sponsor has some helpful tips on the art of conference-going. The one relevant to public pension trustees is "to learn/build an information sharing network of peers." Within this framework: (1) choose a conference that has at least three topics relevant to you; (2) before the conference, call others you know will be attending and ask to meet with them to do some brainstorming; (3) collar interesting speakers at the first break or meal after their presentation and pick their brains for in-depth specifics or get their business cards and call them; (4) watch who asks questions about topics you are interested in and approach them at the break to learn about what they already know; and (5) if you wind up sitting with strangers at the lunch table, throw out a question about what you came to learn -- you never know who might have the answer.

6. THE NEW RETIREMENT PARADIGM: Pension Benefits in its May 2000 issue summarizes a piece by Beverly J. Orth, contending that the three-legged retirement stool (Social Security benefits, employer-provided benefits and individual savings) is outdated and should be replaced. The new system should serve a more mobile work force, one that will experience a retirement process, not a retirement event. The retirement system should be changed to a two-pillar approach. The first pillar would be the defined-benefit-based Social Security System, requiring very little in the way of fundamental changes from its present form. The second pillar would be a blend of employer-provided benefits with individual savings. The second pillar's basis would be enhanced individual retirement accounts -- super IRAs. As currently, individuals would control the selection of custodian and investment choices. For those unwilling or unable to make such decisions, there could be a government-directed option in which investments would be managed by professional money managers, using asset allocation strategies that vary according to age. The annual contribution limits for these super IRAs might be $30,000.00 (indexed for inflation) or 15% of pay, whichever is larger. The contributions would be fully tax deductible for lower- and middle-income workers, but deductions could be phased out for very high earners and wealthy individuals. As part of the transition from the present system, employer-provided benefits could be converted to an equivalent lump sum and then transferred to the employee's super IRA. After the transition, employers would also contribute a minimum amount of pay, say 2% or 3%, to their employees' super IRAs. Optional employer contributions would be permitted within specified limits. Without defined benefit plans, a stronger Social Security pillar may be necessary. Congress should increase employer payroll taxes to fund enhanced Social Security benefits. Finally, Congress should abolish tax referral through nonqualified plans, so all workers are subject to the same tax rules. Keep dreaming, Lady.

7. A BRIEF DISCUSSION ON CASH BALANCE PLANS: Cash balance plan conversions have become one of the most controversial issues in recent years, as at least 325 companies, with pension assets exceeding $330 Billion, have adopted them. Supporters of cash balance plans claim they are an appropriate response to changing work patterns and a key element in preserving the defined benefit system. Opponents claim they are discriminatory and unfair to older employees. There is no reference to cash balance plans in the Internal Revenue Code of 1986. However, the Treasury Regulations define a cash balance plan as "a defined benefit plan that defines benefits for each employee by reference to the employee's hypothetical account. An employee's hypothetical account is determined by reference to hypothetical allocations and interest adjustments that are analogous to actual allocations of contributions and earnings to an employee's account under a defined contribution plan." The Department of Labor's website explains that a cash balance plan is "a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of the stated account balance. Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. Traditional defined benefit plans define an employee's benefit as a series of monthly payments for life to begin at retirement, but cash balance plans define the benefit in terms of a stated account balance." A cash balance plan is a defined benefit plan because under the Internal Revenue Code any plan that is not a defined contribution plan is a defined benefit plan -- and the Internal Revenue Code says that a defined contribution plan is "a plan that provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account." This item was adapted from an article in the Spring 2000 issue of Journal of Pension Benefits.

8. WORKERS IN 38 STATES HAVE PRE-TAX SPENDING ACCOUNTS: A report from Workplace Economics Inc., summarized by BNA, finds that state employees in 38 states have access to pre-tax flexible spending accounts to assist with health care and related expenditures. Under such plans, employees may designate a portion of their salaries to be placed in individual spending accounts on a pre-tax basis. The employee may draw on money in the account to pay for certain expenses qualified under the Internal Revenue Code. Typically, employees use the funds to pay for unreimbursed health care costs, their share of health premiums, prescription drugs, life insurance and disability insurance. In 31 states employees share the cost of individual health care coverage; 19 states pay the full cost (while just 7 states pay the full premium for family coverage). Pre-tax dependent care accounts are available to employees in every state except Hawaii, which is planning to offer such accounts this year. Other findings: all 50 states offer employees the right to set aside a portion of income, usually until retirement, through deferred compensation plans and all states make health insurance available to retired state employees under the age of 65.

9. IRS GUIDANCE PRIORITY LIST INCLUDES THIRTY FIVE RETIREMENT BENEFITS PROJECTS: The Internal Revenue Service has released its 2000 Guidance Priority List that sets forth areas in which it plans to release guidance this year. Among the thirty five projects in the retirement benefits area are final regulations relating to plan loans; proposed regulations regarding additional issues relating the plan loans; final regulations relating to direct rollovers involving qualified plans; guidance on required minimum distributions; guidance on the mortality tables used for determining required minimum distribution rules; and the anxiously-awaited guidance relating to cash balance pension plans.

10. QUOTE OF THE MONTH: "If you hear my voice trailing off, don't worry. I'm just jumping out the window." A midcap growth manager, in the June 2000 Smart Money magazine.

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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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