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Cypen & Cypen
MAY 4, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


H. C. Foster & Company’s Retirement and Welfare Plans Newsletter believes there is positive news about defined benefit pension plans. Positive signs have emerged over the past few months for defined benefit pension plans at what may be the high point of the Section 401(k) fad, including:

  • The public’s repudiation of the Bush Administration’s Social Security “Private Accounts.”
  • Heightened interest in retirement plans by university and think-tank groups, as illustrated by the increasing number of scholarly dissertations about workplace security issues in general.
  • Frequent references in the nightly newscasts to loss of pension benefits that can never be replaced by Section 401(k) plans.
  • Effective Section 401(k) plan utilization is typically about 25% of the employee group.

Several recent publications address retirement and welfare plan issues, setting forth the following:

1. Employees are highly dependent on employer-provided pension benefits to supplement their Social Security retirement benefits,

2. Few employees have both the discipline and the financial means voluntarily to build meaningful retirement benefits over their working lifetimes and

3. Defined benefit plans are the most effective means to meet retirement plan objectives.

Foster observes the following about the current retirement and welfare plan debate, which has finally emerged from the shadows:

A. Many pension plan freezes and terminations have arisen from declining manufacturing segments that, if retained in the United States, are replaced by foreign ownership, e.g., the automotive industry. Moreover, foreign-owned replacement facilities both here and abroad compete with non-union labor.

B. Another source of pension cessation results from employers’ ability to outsource labor. Included are high-tech industries and a broad base of employers that cannot compete in global markets with U.S. labor costs that continue to rise. The cost to retain a U.S. factory worker is easily $200 or more per day with benefit costs.
C. Many types of employers are truly dependent on their labor forces because (1) management cannot substitute for labor; (2) labor cannot be outsourced; and (3) the birth dearth of the 1970s leaves a skilled labor source that is mostly age 40 and above. And, labor saving technological advances may not be available to this category of employers.

Governmental employee organizations seem to have taken the lead in the fight for defined benefit pension plans, which may indicate that similar sentiments fester within private sector employee groups.


How would you like it if your employees started hanging “Do Not Disturb” signs outside their offices? Well, according to Entrepreneur, many companies would be all for it. In fact, some cutting-edge employers are enforcing rules that provide days of peace and quiet for employees. Such days (or half-days) have all kinds of names: alone days, free days, focus days, buffer days, thinking days. The goal can be to work on the business instead of in it. Letting employees use the days as they wish or for a specific reason can also boost the staff’s overall performance. Some companies use the days for brainstorming, thinking or catching-up sessions. Hmmmm.


National Conference of State Legislatures has released a report summarizing selected pension and retirement legislation that state legislatures enacted in 2005. The sources are retirement systems’ web sites and direct communication with legislative and retirement system staff. The report’s goal is to help researchers and policy makers know how other states have addressed issues that could arise in any state. The report is organized according to topics that legislatures addressed in 2005. The long-term security of defined benefits was the issue of broadest concern to state legislatures last year. Action on it took many forms, including, among others:

  • Termination of defined benefit retirement plans in Alaska
  • Increases in employer and employee contribution levels
  • Reduction of benefits packages
  • Modification of provisions for service purchase to ensure that purchaser bear the cost.

This very informative 21-page document is available at


Employees of Detroit Edison Company appealed the district court’s determination that Detroit Edison paid them on a salary basis, making them ineligible for time-and-a-half overtime compensation. Because Detroit Edison had established that plaintiffs “regularly receive a predetermined amount constituting all or part of” their compensation, and because that amount was “not subject to reduction because of variations in the quality or quantity of work performed,” the company satisfied Fair Labor Standards Act’s salary-basis exemption. And because “an employee’s time-entry error or omission that results in an initial payment by the Company to an employee of less than” the predetermined amount “is not an unlawful ‘docking’ or deduction,” pay variations caused by sporadic under-reporting of plaintiffs’ hours do not alter their exempt status. In affirming, the United States Court of Appeals relied in part on a U.S. Department of Labor Wage and Hour Division Opinion Letter dated July 9, 2003: an employee’s time-entry or omission or other clerical or mechanical error or omission that results in a partial payment by the Company to an employee of less than 1/26th of the employee’s annual salary in a biweekly pay period is not an unlawful “docking” or deduction in the typical sense (such as a prohibited disciplinary deduction), does not call into question the Company’s intention to pay on a salary basis and does not affect exempt status. Any shortfall that results from the employee’s error or omission may be adjusted by completing an adjustment form. The fact that an adjustment process exists to correct such errors indicates that any initial underpayments caused by time-entry errors, like clerical and mechanical errors, are inadvertent and may be part of any payroll system that is subject to human error. Acs v. The Detroit Edison Company, Case No. 05-1042 (U.S. 6th Cir., April 24, 2006).


The 2006 Social Security Trustees Report shows little change in the projected financial status of the Social Security program over last year. The Trustees Report projects that the Social Security Trust Funds will be exhausted in 2040 -- one year sooner than last year’s projection. And, as they have done for more than a decade, the Trustees recommend that projected trust fund deficits be addressed in a timely way to allow for gradual changes and advance notice to workers. In the annual report to Congress, the Trustees announced:

  • The projected point at which tax revenues will fall below program costs comes in 2017 -- the same as the estimate in last year’s report.
  • The projected point at which the Trust Funds will be exhausted comes in 2040 -- one year earlier than the projection in last year’s report.
  • The projected actuarial deficit over the 75-year long-range period is 2.02% of taxable payroll -- up .09% from last year’s report.
  • Over the 75-year period, the Trust Funds require additional revenue equivalent to $4.6 Trillion in today’s dollars to pay all scheduled benefits. This unfunded obligation is $600 Billion higher than the amount estimated last year.

Other highlights of the report include:

  • Income including interest to the combined Old-Age and Survivors, and Disability Insurance (OASDI) Trust Funds amounted to $702 Billion in 2005 -- a $44 Billion increase from 2004.
  • During the year, an estimated 159 million people had earnings covered by Social Security and paid payroll taxes.
  • The Trust Funds paid benefits of nearly $521 Billion in calendar year 2005 -- an increase of $27 Billion from 2004. There were 48 Million beneficiaries at the end of the calendar year.
  • The cost of $5.3 Billion to administer the program in 2005 was a very low 1.0% of total expenditures.
  • Total expenditures from the combined OASDI Trust Funds amounted to $530 Billion in 2005.
  • Assets of the combined OASDI Trust Funds increased by $172 Billion in 2005 to a total of $1.86 Trillion.
  • Interest earned on the invested assets of the combined Trust Funds was $94 Billion in 2005. The combined Trust Fund assets earned interest at an effective annual rate of 5.5%.
  • Trust Fund exhaustion is one year sooner and the unfunded obligation is higher than last year’s report generally because of the passage of a year and small revisions to several key assumptions including a lower assumed real interest rate.

The entire report is posted at


As is evident from the previous item, Social Security Trustees have just issued their 2006 Report on the financial outlook for the system. The report uses three sets of cost assumptions -- high, low and intermediate. A new Issue in Brief from Center for Retirement Research at Boston College focuses on the intermediate assumptions and puts this year’s numbers in perspective. The 2006 Trustees’ Report reconfirms what has been evident for two decades; namely, Social Security is facing a long-term financing shortfall. Changes in the underlying assumptions are unlikely to eliminate the problem. Although future rates in immigration, disability, mortality and real wage growth are uncertain, switching any of the individual assumptions to the Trustees’ “low cost” scenario closes only part of the gap. Therefore, this problem can be solved only by putting more money into the system or by cutting benefits. There is no silver bullet. Mmmmmmm Kemo Sabe.


“The future has a way of arriving unannounced.” George Will

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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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