Stephen H. Cypen, Esq., Editor

1. 2007 DB PLAN GAINS WIPED OUT IN FIRST QUARTER OF 2008:

The top 100 corporate defined benefit pension plans last year gained some seven percentage points in funded status, to bring them to 106% funding by December 31, 2007, according to Milliman’s 2008 Pension Funding Study. However, falling interest rates and lackluster investment performance in the first quarter of 2008 erased that gain, leaving plans slightly under-funded today. Milliman now tracks current year changes in funded status through its Milliman 100 Monthly Pension Funding Index, which reflects impact of market returns and interest rate fluctuations of the pension funded status of the 100 corporations in the annual study, based on actual reported asset values, liabilities and asset allocation. Total assets of the 100 plans in the Milliman study equal some $1.3 Trillion. For the first time this century (That sounds like a long time, but it is only eight years!), liabilities of pension funds surveyed last year decreased, from $1.249 Trillion to $1.243 Trillion because interest rates increased from 5.75% to 6.20%. Investment returns of 9.9% exceeded anticipated returns of 8.3%. These results meant the funded status of plans reached 106% by the end of 2007. However, January 2008 saw a worst-case scenario for pension plans -- falling interest rates and asset losses. Coupled with similar problems in subsequent months, gains of the entire previous year were wiped out in one quarter.

2. HEDGE FUND COMPENSATION JUMPS 50%:

Emii.com says the credit crisis and wild market volatility had little impact on compensation received by hedge fund professionals last year. According to Alpha magazine, hedge fund pay packages rose 50% in 2007, with CEOs at multi-strategy hedge funds doing best with an average compensation of $5.3 Million. That amount is about 40% higher than the $3.8 Million their peers at single-manager funds got and almost three times the $1.8 Million average by CEOs at fund-of-hedge-funds. In fact, multi-strategy CEOs had the widest range between best and worst among them: $9.25 Million on the high end and $1.38 Million on the low. By contrast, single-manager CEOs ranged from $4.94 Million to $2.625 Million, while chief executives at fund-of-hedge-funds ranged from $2.9 Million to $680,000. Base salaries at multi-strategy hedge funds were between $205,000 and $1.376 Million, while bases at single-manager hedge funds were $311,000 to $639,000. At fund-of-hedge-funds, it was $86,000 to $411,000. The average compensation package for junior traders at multi-strategy and single-manager hedge funds was more than $200,000 last year, while senior traders averaged $819,000 at multi-strategy funds and more than $1.6 Million at single-manager funds. (Those last numbers may be reversed, as they seem to contradict the previous ones.)

3. BEST PRACTICES FOR HEDGE FUND PARTICIPANTS:

Two blue-ribbon private-sector committees established by the President’s Working Group released separate yet complementary sets of best practices for hedge fund investors and asset managers, in the most comprehensive public-private effort to increase accountability for participants in the industry. The PWG tasked the committees with collaborating on industry issues in developing a set of best practices for their respective groups of stakeholders. The best practices for asset managers call on hedge funds to adopt comprehensive best practices on all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. The best practices for investors include a Fiduciary’s Guide and an Investor’s Guide. The Fiduciary’s Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor’s Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. Both best practices documents recommend innovative and far-reaching practices that exceed existing industry standards. The recommendations complement each other by encouraging both types of market participants to hold the other more accountable. Given the global nature of financial markets, the best practices were designed to be consistent with work that was done in the United Kingdom to improve hedge fund oversight.

4. THE FUTURE SHOCK OF RETIREMENT:

As much popular literature suggests, many people believe that future generations of American retirees will face a shortfall, with assets insufficient to support their objective standard of living in retirement. The shortfall is believed to be caused by broad-based demographic forces, insufficient savings and suboptimal investing, and it is likely to coincide with a reduction in government benefits. But reviewing some recent academic literature yields a surprising conclusion: at least superficially, Americans appear better prepared for retirement than previously believed. A piece from Barclays Global Investors seeks to resolve the discrepancy between popular belief and recent research through a detailed assessment of a sample of individuals on the doorstep of retirement. The authors break their subjects’ wealth profiles into components and identify concentrations in wealth by various types of wealth cohorts. They then run scenario analyses to simulate the sensitivity of wealth to potential future “shocks.” It is through this scenario analysis that the authors determine the source of the discrepancy. Specifically, the surprisingly benign outlook for American retirement stability depicted in some recent academic literature is predicated on an assumption that current costs and benefits remain stable in the future. The authors find this assumption unrealistic based on their survey of the state of American retirement as represented by government programs, corporate pensions and personal savings. In the paper, the authors separate their subjects’ total wealth into financial and non-financial wealth, the present value of future earnings, employer pensions, life insurance, annuities, welfare payments and Social Security. They then simulate shocks to future government benefit programs and home equity. Through these simulations, the authors can see how tenuously prepared for retirement large cohorts of our population remain. The results clearly indicate a bleaker picture than suggested by recent research. Finally, the authors identify strategies that may help alleviate pressure on the most vulnerable preretirement groups.

5. FIVE MISTAKES THAT WILL SINK YOUR RETIREMENT:

U.S. News & World Report says that as you near your goal of retirement, avoid these poor choices:

Mistake Number 1: The biggest blunder is cutting back on contributions to a 401(k) plan, since most companies offer matching funds -- the ultimate cash freebie. In general, 401(k) plans are set up so that the employer adds 50 cents to each dollar a worker contributes, typically up to 6% of the worker’s salary. The result is an immediate 50% return on investment.

Mistake Number 2: Using your retirement money as a bank is a major no-no. Yes, it is reassuring to know you can borrow from your 401(k). But even when times are tight, borrowing is bound to be trouble. If you take a loan and then get laid off or bought out, you will probably have to pay back the loan right away. If you cannot repay the loan, it will be treated as an early withdrawal, which means you will owe income taxes (and, depending upon your age, perhaps a 10% penalty).

Mistake Number 3: When you see a retirement account balance is falling, it is reasonable to want to avoid losses by reinvesting in safer bets. Do not. As gut-wrenching as it might be, it pays to hold your ground. If you get out of equities, you will miss the upturn when markets rebound. History tells us that timing the market simply does not work.

Mistake Number 4: One fast way to undo all your good retirement planning and squash your future nest egg is cashing out of your 401(k) balance when switching jobs or being ushered out the door with an early retirement incentive plan.

Mistake Number 5: An important error is not creating a post-retirement plan. As you approach retirement, you should know all your sources of income, ranging from pensions to investments to Social Security. Also, consider the amount of equity you have in your home. Then establish a plan for how you will spend those funds in retirement. In general, you will want to tap into your tax-deferred savings last.

Good retirement planning does require patience -- and fortitude. Don’t blow it.

6. CITY FIRE ALARM INSPECTORS NOT ENTITLED TO FLSA OVERTIME FOR CARRYING FILES FROM HOME TO WORK AND BACK:

A United States Court of Appeals recently decided whether City of New York Fire Alarm Inspectors must be compensated under the Fair Labor Standards Act for all or part of their commuting time from home to work and back because they are required by their employer to carry and keep safe necessary inspection documents during their commutes. Singh appealed from a judgment of the United States District Court granting summary judgment in favor of the city and denying his cross-motion for summary judgment. The court held that, in the particular circumstances of the case presented, the mere carrying of inspection documents without any other active employment-related responsibilities while commuting is not work under FLSA, except to the extent that it increases duration of the commute. The record showed that any increase in commuting time was de minimis as a matter of law and thus not compensable under FLSA. Therefore, the appellate court affirmed the district court’s grant of summary judgment, concluding that none of plaintiff’s commuting time is compensable under FLSA. In addition, the court concluded that Singh’s First Amendment retaliation claim was without merit because his speech was not a matter of public concern and was made only in his capacity as an employee and not as a citizen. Singh v. City of New York, Case No. 06-2969 (U.S. 2d Cir., April 29, 2008).

7. APPELLATE COURT AFFIRMS THAT PROVIDING PENSION BENEFITS ESTIMATES NOT A FIDUCIARY FUNCTION:

Claiming that The Gillette Company had provided him with miscalculation of pension benefits estimates prior to his retirement, Livick sued the company and alleged that its negligence amounted to a breach of fiduciary duty to him (see C&C Newsletter for June 21, 2007, Item 9). He asked the court to remedy the alleged breach under Section 502(a)(3) of the Employee Retirement Income Security Act, by using its equitable power to issue an injunction ordering the company to pay him the benefits that the Human Resources Department initially represented. Although not specifically raised in his complaint, Livick also suggested that, in the alternative, the court should equitably estop the company from paying benefits in a manner inconsistent with its previous representations. ERISA Section 502(a)(3) does allow equitable remedies for breaches of fiduciary duty, to recover under such theory, but the defendant must have been acting as a fiduciary of the plan or engaged in the conduct about which plaintiff complains. The Federal District Court granted summary judgment in favor of the company: provision of pension estimates is a purely ministerial non-fiduciary duty. On appeal, the district court’s grant of summary judgment for defendants was affirmed. The pension Livick is receiving accounts for all his years of service. It is the amount provided for under the clear terms of the plan. Livick understood (or should have understood) these clear terms due to multiple personal letters he received from the company and from his own research on the company website. Nothing in ERISA secures to him a windfall when a ministerial employee makes a mistake in an estimate, a mistake of which the beneficiary is or should be aware because of the company’s clear and accurate ERISA disclosures. There was no breach of fiduciary duty and there was no reasonable reliance on pension estimates. Livick v. The Gillette Company, Case No. 07-2108 (U.S. 1st Cir., April 17, 2008).

8. GREENWICH SAYS CORPORATE DC PLANS PATCH RETIREMENT SAFETY NET:

A news release from Greenwich Associates indicates that U.S. pension plan sponsors have embarked on a campaign to improve performance of their defined contribution plans -- an effort that received a considerable boost last year with implementation of several important provisions of the Pension Protection Act of 2006. According to a new study, DC plans have grown to account for 46% of pension assets among U.S. companies with more than $250 Million in pension assets and 74% of assets among companies with smaller funds. DC plans will continue to attract assets as companies continue to close their defined benefit plans to new employees, a process that seems to be accelerating as the U.S. pension industry moves closer to mandated mark-to-market accounting rules. The Greenwich study documents adoption of several positive practices and structures by an increasing number of U.S. DC plan sponsors:

Automatic Enrollment. More than a third of U.S. DC plan sponsors are using automatic enrollment in their 401(k) plans, up from about a quarter of plans in 2006.

Smart Investment Options and Default Investments. The percentage of large U.S. plan sponsors saying they offer target retirement funds as an investment option in their 401(k) plans increased to almost 80% in 2007, from 60% the previous year. At the same time, the share of non-users saying they are seriously considering offering target retirement date funds in the next two years increased to 48% in 2007, from 36% in 2006.

Maximizing Contributions. Among companies with more than $250 Million in DC plan assets, more than 30% now say they contribute to employees’ 401(k) plans even if participants do not make any contributions on their own. More than 40% of plan sponsors with less than $250 Million in assets say they make DC contributions regardless of whether individual participants decide to contribute.

Diversified Investments, International Exposure. The average allocation to international equities increased to 8.4% of DC plan assets in 2007 from 6% in 2006 among funds with more than $250 Million in plan assets. Allocations among smaller funds increased to 9% of total assets, from 8%.

Changes being enacted by corporate plan sponsors will have a positive effect on DC plan participation rates, investment returns and, ultimately, outcomes for both participants and plan sponsors.

9. THE MIRACLE OF FUNDING BY STATE AND LOCAL PENSION PLANS:

It is generally agreed that each generation of taxpayers should pay the full cost of public services it receives, according to a new Issue Brief from Center for Retirement Research at Boston College. If a public employee’s compensation includes a defined benefit pension, cost of the benefit earned in that year should be recognized, and funded, at the time the worker performs that service, and not when the pension is paid in retirement. The discipline in making state and local governments pay the annual costs also discourages governments from awarding excessively generous pensions in lieu of current wages. Many states and localities also have some unfunded pension obligations from the past, either because they did not put away money at the time benefits were earned or because they provided benefits retroactively to some participants. The cost of these unfunded liabilities also needs to be distributed in some equitable fashion. The question of funding has gained increased urgency as baby boomers are about to begin retiring in large numbers. To the extent that sponsors are paying less than required contributions today, taxpayers tomorrow will face rising benefit costs, in addition to the pay-as-you-go cost of retiree health benefits. Public sector workers also risk benefit cuts, primarily in discretionary improvements such as post-retirement cost-of-living adjustments. But pension benefits earned by state and local government workers generally have strong legal protections. So most experts see future taxpayers bearing the primary burden resulting from current funding shortfalls. The brief examines three aspects of funding of state and local pension plans: regulatory environment under which they operate, their cost/funding requirements and their current funding status. Judging adequacy of funding, however, requires more than a snapshot of the ratio of assets to liabilities. The key issue is whether the sponsor has a funding plan and is sticking to it. Therefore, the analysis considers funding programs based on several measures of funding adequacy. The conclusion that emerges is that, despite absence of a federal mandate, state and local plans have generally made great strides toward funding and are about as well funded as plans in the private sector. The conclusion holds even though public plans pay larger benefits and use a more stringent funding yardstick. One key finding is that state and local pension plans, overall, have assets covering nearly 90% of liabilities. Some -- mostly small plans -- fall below acceptable levels.

10. I SMELL REFUND:

Taxpayers who have filed their federal income tax returns and are expecting refunds can use Internal Revenue Service’s online tool, “Where’s My Refund?,” to check status of their refunds. “Where’s My Refund?” is fast, easy, safe and convenient. Nearly 9.7 million taxpayers have checked status of their 2007 federal income tax refunds online, up about 18% over the same time period last year. To receive personalized refund information, taxpayers should be ready to enter their:

• Social Security number (or taxpayer identification number)
• Filing status (single, married filing jointly, married filing separately, head of household, or qualifying widow(er)).
• Exact refund amount showed on tax return.

Reach “Where’s My Refund?” at http://www.irs.gov/individuals/article/0,,id=96596,00.html.
IR-2008-064 (April 22, 2008).

11. QUOTE OF THE WEEK:

“Everybody likes a kidder, but nobody lends him money.” Arthur Miller