Stephen H. Cypen, Esq., Editor

1. RECENT TREND TOWARDS LATER RETIREMENT:

The Center for Retirement Research at Boston College has released a new Issue in Brief entitled “The Recent Trend Towards Later Retirement.” A dramatic decline in work at older ages persisted over most of the twentieth century. Recently, however, retirement ages stabilized, prompting debate as to whether the early retirement trend had stopped or simply paused. The Brief shows that the trend towards earlier retirement has not just leveled off but has apparently reversed, with especially large increases in labor supply of women in late middle age. It then offers some explanations for this apparent reversal. Many of the likely causes of delayed retirement could potentially have greater effects on successive birth cohorts nearing retirement, making it possible that the trend towards delayed retirement will continue. A final point is that many of these changes are associated with increased uncertainty about the future economic environment surrounding retirement, about the long-term viability of Social Security and potential benefit reductions, about risks associated with the massive shift from DB to DC pensions and about future health and long-term care costs. The rise in uncertainty may itself induce people to delay retirement in order to work and save more.

2. CENSUS BUREAU OVERESTIMATES NUMBER WITHOUT HEALTH INSURANCE:

Under the category of hardly-worth-the-print, the U.S. Census Bureau fessed up that it has been overestimating the number of people without health insurance. The error has persisted for over ten years. However, even revised estimates show that 44.8 million people (15.3%) were without health insurance in 2005, compared to the original estimate of 46.6 million (15.9%). We sure feel a lot better now.

3. DB OR DC? -- DECISION POINTS:

From CCA Strategies: the following is a summary of key decision points to be addressed in considering which plan design -- defined benefit or defined contribution -- is right. (The summary may be especially useful for companies considering a DB plan freeze.):

1. Risk. DC plans are “account based;” DB plans are “formula based.” The practical consequences of this are in DB plans the employer bears the investment risk if earnings fall short (or the investment benefits if earnings exceed the projected rate of return). In DC plans, the participant bears the risk of losses and benefits from any earnings. Generally, in DB plans all of the risks are borne by the employer, while in DC plans, they are borne by the participant. The biggest risk (after investment) is mortality/longevity -- the possibility that the participant may live longer than expected and thus need a bigger benefit than anticipated. Although DC plans may have virtue from the employer’s point of view because of reduced employer risks, the employer is generally better able to bear and diversify these risks than are individual participants.

2. Accrual pattern. DB plans target benefits at older employees. DC plans do not. DB benefits are generally described as an annuity beginning at normal retirement: the closer to normal retirement, the more valuable the benefit. Final average pay formulas and early retirement subsidies may exaggerate older-employee bias. Younger participants do not value DB benefits as much as older participants, because these benefits are worth very little to them. Older participants, on the other hand, believe they have a right to continued DB benefits that have been promised if they stay in the plan until they get older. The result: when sponsors try to terminate DB plans, older employees resent it.

3. Transparency/predictability/volatility of costs. DC plans are more transparent than DB plans. One always knows what a DC plan costs. But DB plans involve an accrual today of a promise to pay benefits into the future. Changes in interest rates and asset returns will affect the current valuation, year-to-year, of these benefits and the plan’s funded status in a unpredictable way. Certain financing options may reduce (at a cost) DB liability/expense valuation unpredictability and volatility, but the fact remains, DC costs are more certain.

4. Portability. DB benefits are paid as annuities, although many DB plans now provide a lump sum option. More critically, final pay DB plans put a premium on staying with an employer and getting pay updates on past service. These features of DB plans make them less “portable,” less appealing to an employee who does not expect to be at an employer for his entire career. DC benefits are simple account balances typically paid as lump sums and are therefore the ultimate portable benefit. The portability issue cuts both ways. For employers who are concerned primarily with providing a current benefit with a clear and fair financial value, regardless of length of tenure, a DC benefit is ideal. For employers concerned with retaining valuable employees, the “tenure equity” and lack of portability that DB benefits provide may be an advantage.

5. Culture. DC benefits ideally fit a “what have you done for me lately” corporate culture, where the focus is on financially transparent compensation for current service, and there is no deep loyalty expected either from the employer to the employee or from the employee to the employer. DB benefits ideally fit a “total career” culture, where the expectation is that the employee will spend most of his career at the employer. The DB vs. DC decision may depend more on the issue of culture than on any other issues. Companies that migrate from a “total career” culture to a “what have you done for me lately” culture may face significant resistance in moving away from a DB plan.

6. Efficiency. DB plans may cost less to administer. One can also argue that DB plans “point” retirement dollars where they are most appreciated -- at older employees approaching retirement. But DC plans allow those participants with a preference for retirement savings to save and those with a preference for cash not to save. Perhaps the most glaring inefficiency of DC plans is investment underperformance: at larger employers, DC plans underperformed DB plans by around 125 basis points. There are at least three possible reasons for DC underperformance -- poor participant asset allocation decisions, higher transaction costs and more limited investment strategies.

7. Not necessarily so:

a. “DC plans cost less.” They do not. It may be possible to reduce benefits in switching from DB to DC, but, axiomatically, benefits cost what they cost. A rich DC plan costs more than a poor DB plan. Indeed, taking into account administrative costs and asset underperformance, an argument can be made that DC plans cost more than DB plans. As noted, however, DC plans are more transparent, less volatile and less unpredictable than DB plans.

b. “DB plans involve greater litigation risk.” Generally, DB plans involve less litigation risk because the employer is “on the hook” for plan losses. But, as noted, redesigning or getting out of a DB plan often disappoints expectations that has led to litigation. Generally, DC plan litigation risk has been limited to risks involving company stock, although recent fee litigation may indicate an increase in DC plan sponsor exposure.

c. “Participants ‘like’ DC plans more.” Generally, younger participants like DC plans more, but older participants like DB plans more, for the obvious financial reasons described above.

All in all, a fairly balanced piece, particularly considering that CCA Strategies is part of JPMorgan Chase.

4. NEW JERSEY ADOPTS PENSION FORFEITURE LAW:

Under a New Jersey law just adopted, the board of trustees of any state or locally-administered pension fund or retirement system created under the laws of the state is authorized to order the forfeiture of all or part of the earned service credit or pension or retirement benefit of any member of the fund or system for misconduct occurring during the member’s public service, which renders the member’s service or part thereof dishonorable and to implement any pension forfeiture ordered by a court. A person who holds or has held any public office, position or employment, elective or appointive, under the government of the state or any agency or political subdivision thereof, who is convicted of any listed crime or of a substantially similar offense under the laws of another state or of the United States, which would have been a crime under the laws of New Jersey, which crime or offense “involves or touches such office, position or employment,” shall forfeit benefits. Some of the listed crimes are theft by extortion, commercial bribery, money laundering, bribery in official matters and tampering with public records or information. In evaluating a member’s misconduct to determine whether it constitutes a breach of the condition that public service be honorable and whether forfeiture is appropriate, the board of trustees shall consider and balance the following factors in view of the goals to be achieved under the pension laws: member’s length of service; the basis for retirement; the extent to which the member’s pension has vested; the member’s public employment history and record covered under the retirement system; the nature of the misconduct or crime, including the gravity or substantiality of the offense; the quality of moral turpitude or the degree of guilt or culpability, including the member’s motives and reasons, personal gain and similar considerations; and other personal circumstances relating to the member which bear upon the justness of forfeiture. Section 112.3173, Florida Statutes, Florida’s Pension Forfeiture Statute, contains six specified offenses (including a “catchall”). The Florida Statute also does not permit a board of trustees to consider any factor that might mitigate the forfeiture.

5. POSSESSION OF DISCRETION NOT REQUIRED FOR FIDUCIARY STATUS UNDER ERISA:

Ellis, as successor trustee and administrator under the plan, brought an action under the Employment Retirement Income Security Act of 1974 against Rycenga Homes, Inc., plan sponsor; Ronald Retsema, former trustee of the plan; and Edward D. Jones & Co., a securities broker that maintained accounts for the plan from 1984 to 2004. Ellis contended that Jones was a fiduciary and is liable for Retsema’s wrongdoing under the provisions of ERISA governing fiduciary liability. Jones denied being a fiduciary under ERISA. A United States magistrate judge (acting by consent in behalf of a United States district judge) granted summary judgment to Ellis on this point. The ERISA statute contains its own definition of the term “fiduciary.” ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), provides as follows:

[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.

The definition is a functional one, intended to be broader than the commonlaw definition and does not turn on formal designations or labels. The test is objective; a person's subjective belief that he is or is not a fiduciary is immaterial. The text of the statutory definition of fiduciary in ERISA reveals that a person may be deemed a fiduciary in two general circumstances. The first involves the exercise or possession of discretionary authority or control. Section 3(21)(A)(i) defines a fiduciary as a person who exercises discretionary authority or control respecting management of a plan or any control over its assets. Likewise, subsection (iii) deems a person a fiduciary if he "has" discretionary authority or responsibility in the administration of a plan. Clearly, both subsections (i) and (iii) contemplate that the fiduciary exercise, or at least possess, discretionary authority with regard to the plan or control of its assets. Subsection (ii), however, is different. It defines a fiduciary as a person who renders investment advice for a fee or other compensation, direct or indirect, with respect to plan assets or a person who has any authority to do so. Contrary to Jones's argument, fiduciary status under subsection (ii) does not require exercise of discretionary authority or control. Although it is certainly true that the possession of discretionary authority and control is generally the benchmark for fiduciary status under ERISA, it is also true that, in the special case of those providing investment advice, the existence of discretionary authority is not necessary to a finding of fiduciary status. Ellis v. Rycenga Homes, Inc., Case No. 1:04-cv-694 (WD Mich., March 15, 2007).

6. NEVER GIVE UP THE SHIP...HONEST:

Few great leaders have encountered defeat so consistently before finally winning. Consider the following about one such individual:

1. 1831 Failed in business;

2. 1832 Defeated for Legislature;

3. 1834 Failed in business;

4. 1835 Sweetheart died;

5. 1836 Had a nervous breakdown;

6. 1838 Lost political race;

7. 1843 Defeated for Congress;

8. 1846 Defeated for Congress;

9. 1848 Defeated for Congress;

10. 1855 Defeated for U.S. Senate;

11. 1856 Defeated for Vice President;

12. 1858 Defeated for U.S. Senate

Who was this loser? Why, Abraham Lincoln, who was elected President in 1860. Never give up the ship.

7. QUOTE OF THE WEEK:

“When a man says he approves of something in principle, it means he hasn’t the slightest intention of putting it into practice.” Bismark