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Cypen & Cypen
OCTOBER 7, 2010

Stephen H. Cypen, Esq., Editor

1. ANNUAL FLORIDA P & F CONFERENCE:   Don’t forget that the 42nd Annual Police Officers’ and Firefighters’ Pension Conference is scheduled for October 11-13, in Orlando at the Florida Hotel.  Additional information can be found on the Division of Retirement’s website at

2. CALIFORNIA SUPREME COURT UPHOLDS UNPAID FURLOUGHS:   On December 1, 2008—faced with (1) a large current sate budget deficit that was projected to grow to more than $40 billion by the end of the 2009-2010 fiscal year and (2) the very serious prospect that by as early as February 2009 the state would run out of cash to pay its ordinary expenses—the Governor of California declared a fiscal emergency, called the Legislature into special session and submitted to the Legislature a comprehensive plan to address the budget problem.  The Governor’s budget plan included a mandatory one-day-a-month unpaid furlough of most executive branch state employees, a proposal that would save the state approximately $37.5 million per month.  Shortly thereafter, the Legislature passed its own proposed comprehensive budget legislation, which did not include the Governor’s recommended furlough provision.  The Governor then issued an executive order, directing implementation of a mandatory two-day-a-month unpaid furlough of most executive branch state workers (See C & C Newsletter dated August 12, 2010, Item 17).  After issuance of the executive order, the recognized, exclusive bargaining representatives of a majority of the workers employed by the State of California filed three separate, but similar, lawsuits contending the Governor lacked authority to implement unilaterally any involuntary furlough of represented state employees that reduced such employees’ hours and earnings by approximately 10%.  The trial court issued a single ruling rejecting the broad attacks made by the employee organizations, concluding that the Governor possessed the authority to impose the furlough in response to the fiscal emergency.  The employee organizations appealed to the court of appeal, but the Supreme Court of California exercised its state constitutional authority to transfer the matter to that court.  The Supreme Court of California has now concluded that, under existing constitutional provisions and statutes, the Governor possessed the authority to institute a mandatory furlough of representatives of state employees, reducing earnings of such employees, only if specifically granted such unilateral authority in an applicable memorandum of understanding entered into between the state and the employee organization representing the affected employees.  Although there was considerable doubt whether the applicable memorandum of understanding granted the Governor such authority, the high court further concluded that even if the Governor lacked authority to institute the challenged furlough plan unilaterally, the employee organizations’ challenge to the furlough plan must still be rejected.  Shortly after the furlough program went into effect the Legislature enacted, and the Governor signed, legislation that revised the Budget Act of 2008 by, among other means, reducing appropriations for employee compensation contained in the original 2008 Budget Act by an amount that reflected savings the Governor sought to obtain through the two-day-a-month furlough program.  Such legislation further provided that the specified reduction in the appropriations for employee compensation could be achieved either through the collective bargaining process or through “existing administrative authority.”  That phrase, in the context in which the revised budget was adopted and in light of the provision’s legislative history, reasonably included the furlough program that was then in existence and that had been authorized by the current gubernatorial administration.  The Legislature made specific reference to furlough-related reductions of employee compensation costs.  Thus, the Legislature’s 2009 enactment of the revisions to the 2008 Budget Act operated to ratify the use of the two-day-a-month furlough program as a permissible means of achieving reduction of state employee compensation mandated by the act.  Accordingly, the Supreme Court of California concluded that the 2009 budget legislation validated the Governor’s furlough program at issue, and rejected the employee organizations’ challenge to that program.  Professional Engineers in California Government v. Schwarzenegger, Case No. S183411 (Cal. October 4, 2010.)

3. PSCA RELEASES 53RD ANNUAL SURVEY OF PROFIT SHARING AND 401(K) PLANS:  The Profit Sharing/401(k) Council of America, a national non-profit association committed to retirement savings through employer-sponsored defined contribution programs, has released its “53rd Annual Survey of Profit Sharing and 401(k) Plans,” which provides the most up-to-date information available on current practices and trends in profit sharing and 401(k) plans.  The latest survey shows that as markets fluctuated and the 401(k) system came under pressure, plan sponsors responded proactively with an increased concentration on plan investments.  Plan investments are more frequently monitored, with 64.4% of plan sponsors reviewing investments quarterly.  A large majority of plans (86%) have an investment policy statement—up from 54.3% ten years ago.  Twenty percent of plans made changes to their investment lineup in 2010.  Here are some additional highlights from the survey:

  • Asset Allocation.  The average plan has approximately 60% of assets invested in equities.  Assets are more frequently invested in actively-managed domestic equity funds (29% of assets), target retirement date funds (10%) and stable value funds (10%).
  • Automatic Enrollment.  About 38% of plans have an automatic enrollment feature.  Most common default investment option is a target retirement date fund (57% of plans).
  • Employee Eligibility and Participation.  Almost 90% of US employees at respondent companies are eligible to participate in an employer-sponsored defined contribution plan.
  • Investment Options.  The number of funds offered to plan participants appears to be leveling out after many years of steady increase.  Plans offer an average of 18 funds (!) for both participants and company contributions.  The funds most commonly offered are actively managed domestic equity funds (87% of plans), actively managed international equity funds (86%) and indexed domestic equity funds (82%).
  • Target-Date Funds.  The availability and use of target-date funds continue to grow, with 62% of plans now offering them.  The average allocation of plan assets has more than doubled since 2007, to 10%.

The annual survey reports on 2009 plan-year experience of 931 plans with 8.6 million participants and more than $628 billion in plan assets.  The plans represented are diverse, representing companies of all sizes and regions across the United States. 

4. CALIFORNIA GOVERNOR VETOES BILLS ON EXCESSIVE PENSIONS:   Got your attention, eh?  Saying they did not go far enough, Governor Arnold Schwarzenegger has vetoed two bills passed in response to a pay scandal in the Los Angeles County City of Bell (See C & C Newsletter dated September 23, 2010, Item 11).  The Sacramento Bee reports that the Governor blocked a bill that would have barred employees of some counties from “pension spiking,” using last-minute retirement incentives to drive up benefits.  The bill would have prevented pension spiking by state employees covered by California’s two largest pension funds, California Public Employees’ Retirement System and California State Teachers’ Retirement System.  The Governor’s veto message says the bill did not provide real pension reform. 

5. FAMILY SUES OVER UNHEEDED 911 CALLS:   Children of a man who died after waiting 30 hours for help during a Pittsburgh snowstorm despite repeated calls to 911 are suing.  The lawsuit, according to The Associated Press, claims the city, the county dispatch center and various paramedics/emergency medical services brass are responsible for the February death of the 50-year-old-man.  The man died after ambulance crews did not reach him, despite his repeated calls to 911 over 30 hours, as a storm dumped two feet of snow on the city.  One paramedic was fired, and three others were suspended over the death, which was later determined to be of natural causes.  The lawsuit claims three ambulance crews could not drive to the man’s home because of snow--clogged roads.  But, instead of paramedics walking to the home, the crews repeatedly insisted the man walk at least one block to them and, at one point, even suggested he take a bus. 

6.  EMPLOYEE WHO CANNOT PASS DRUG TEST MAY BE ENTITLED TO DISABILITY!:  In September 2005, Barry, a military veteran and former commercial courier driver, filed a claim for social security disability insurance benefits and supplemental security income benefits.  Before his alleged disability, Barry worked about 14 years as a military communications and computer supervisor, followed by about 6 years as a courier driver.  He left his job as a courier driver in 2000.  His social security claim was denied upon the finding that he could return to his past relevant work, and therefore was not disabled.  That finding was based in part on the conclusion that whether Barry could pass a drug test was irrelevant to the determination of the disability, even if Barry could prove that he needed to be able to pass such a test to perform his past relevant work.  The Ninth U.S. Circuit Court of Appeals disagreed with that conclusion, and remanded for further administrative proceedings.  If it is true, as Barry offered to prove, that his prescribed medication regime to treat his potentially-disability condition would categorically prevent him from obtaining work as a courier by rendering him physically unable to pass a drug test that is mandatory across employers, then he cannot meaningfully be said to be capable of working as a courier.  The mandatory requirement that employers cannot hire people with a certain level of pain medication in their blood is in essence a physical demand of the job.  The Administrative Law Judge was not permitted to ignore the possibility that such mandatory requirement exists, in face of Barry’s offer of proof, merely because no such physical demand appears in the Dictionary of Occupational Titles.  Barry v. Astrue, Case No. 09-35421 (US 9th Cir. September 22, 2010).

7. DO TARGET DATE FUNDS MISS THE TARGET AND HIT THE FIDUCIARIES?:  Target date funds (also referred to as “lifecycle funds”) have become a popular investment choice to help guide 401(k) plan participants on a path to retirement (for example, using a “2025 fund” if you are scheduled to retire in 2025).  Such funds provide a vehicle for investing in a mix of assets through a single mutual fund that—if it works the way it was designed—should both rebalance its asset allocation periodically and shift its focus from growth to income as the participant’s approaches retirement.  However, according to DrinkerBiddle, these funds are not as simple as often presented by the fund providers, and must be carefully examined by plan fiduciaries to protect plan participants and prevent potential liability.  In addition, the poor investment performance of many target date funds in recent years has caused them to come under scrutiny from the U.S. Department of Labor, The Securities and Exchange Commission and the U.S. Senate.  In general, the asset allocation mix of target date funds varies over time, becoming more conservative each year by reducing the fund’s equity exposure and keeping the participant’s investment in an “age-appropriate asset allocation” throughout his life.  The pattern of how the allocation of assets varies over time is typically called the target date fund’s “glide path.”  With many retirement plan participants not saving enough to retire comfortably, and too many plan participants making poor investment choices or not knowing anything about the choices they make, target date funds were established to be the “no thought required” alternative for retirement investing.  However, the losses sustained by target date funds during the economic downturn—the average 2010 target date fund lost 26% of its value in 2008—have raised concerns about the design and transparency of target date funds.  Furthermore, research has also shown that most investors do not understand what they are investing in when they choose target date funds.  Even worse, some plan fiduciaries may not understand what they are offering to employees participating in their plans when they choose to allow investments in target date funds.  Target date funds vary greatly from fund provider to fund provider in overall investment philosophy, underlying assumptions, glide path and what constitutes an appropriate portfolio for a given participant’s anticipated retirement age.  The fiduciary responsibility of plan sponsors for selecting and monitoring target date funds is the same as that applicable to selection and monitoring of any other investment plan.  To assist fiduciaries, the following is a list of relevant questions to be considered when offering target date funds as plan investment options:

A. How is the investment performance of the target date fund as a whole and the individual investments that make up that fund? 

B. What asset classes are used within the target date fund to achieve diversification? 

C. Who is the asset manager responsible for investing assets in the target date fund and by whom is the asset manager’s performance reviewed?

D. Are the target date funds in your plan aggressive or conservative when compared to all other target date funds?

E. Under what circumstances, If any, does the manager of the target date fund have discretion to vary from the stated asset classes, asset allocations and glide path that were originally provided to the fiduciaries when considering use of the target date funds?

F. What are the fees associated with the target date fund?

G. Does the target date fund provider supply any information to educate participants about the way that the target funds operate, including the makeup of the underlying investments and the fees associated with the funds?

H. Is the target date fund held to the same high standards as other investment options and are the expenses deemed to be reasonable relative to similar investment options?

I. Is the risk of the target date fund appropriate for plan participants’ needs?

J. Does the investment manager of the target date fund exhibit sufficient skill and care to merit inclusion of the target date fund in the plan?

Target date funds can be an effective investment tool when used properly.  Plan fiduciaries need to be aware of the various issues involved with offering all investment choices, including target date funds.  A closer examination of some of the uses associated with target date funds will assist plan sponsors and fiduciaries in determining whether their plans should offer target date funds, how they select the funds and how they should educate the participants on these funds.

8. GASB AT CENTER OF PENSION DISPUTE:   The seven-person Governmental Accounting Standards Board is the nonprofit organization that sets accounting rules for thousands of state and local governments.  And, as reported by The Wall Street Journal, that board is at the center of a debate over how government should account for money owed to retired workers.  (Critics say board members have conflicts of interest because they work for local, state or county governments, giving them a vested interest in accounting standards that would help public pension funds minimize future distributions.)  At heart of the debate is the issue about how funds calculate the size of their future obligations to retirees.  By reducing this discount rate, GASB could force some governments to put more money into pension plans.  Some say current rates used by many funds are too high, because they largely are based on unrealistic return expectations for the funds’ investments.  GASB has proposed a blended rate, depending on expected level of assets in a pension fund.  Some contend that the proposed accounting change is not tough enough on pension systems that have not owned up to the true size of their liabilities to retired workers.  GASB’s release in June, 2010 of its Preliminary Views has put GASB in the cross hairs.  GASB has heretofore been overshadowed by its corporate-accounting cousin, Financial Accounting Standards Board.  Although the two organizations share an office in Norwalk, Connecticut, their worlds apart in many ways.  FASB rules are enforced by the Securities and Exchange Commission; GASB rules are voluntary, although governments that do not follow its standards risk unnerving municipal-bond investors, possibly leading to higher borrowing costs.  In fact, GASB has no government oversight whatsoever, and its funding comes from selling trade publications and contributions from state and local governments and the municipal-bond industry.  There is another difference: for corporate pension funds, FASB uses a discount rate based on interest rates of a portfolio of highly-rated bonds (roughly 6%), which rate is lower than the discount rate used by many public pension funds.  GASB’s Preliminary Views would essentially blend two discount rates.  Pension systems that expect to have enough assets to cover their retiree obligations for many years to come could use their current expected rate of return.  For pension plans that expect to deplete their assets, the proposal calls for certain retiree obligations to be discounted based on municipal-bond rate, currently averaging 2% to 3%.  GASB received at least 180 comments about the Preliminary Views by the September 17, 2010 deadline.  GASB will seek additional comments in hearings to be held before year-end.  A final vote is not expected until at least early 2012. 

9. NEW CALIFORNIA LAW REQUIRES PLACEMENT AGENTS TO REGISTER AS LOBBYISTS:   California Governor Arnold Schwarzenegger has signed into law legislation that requires that state placement agents register as lobbyists.  Placement agents doing business with California State Teachers’ Retirement System and California Public Employees’ Retirement System now must not only register as lobbyists but also follow ethics rules under the California Political Reform Act.  The act also bans the agents from making campaign contributions or setting up contingent fee arrangements, according to

10. EEOC SUES NONPROFIT OVER FIRING OBESE WORKER:   The federal government has accused a national nonprofit group that helps the disabled, homeless and those recovering from addictions of firing a New Orleans employee because she was obese.  The Equal Employment Opportunity Commission told that its federal lawsuit alleges that Lisa Harrison had a federally-protected disability.  According to the agency, Harrison worked with young children of mothers undergoing addiction treatments.  The suit against Resources for Human Development Inc. alleges that Harrison was fired even though she could do anything required by her job.  After filing an EEOC complaint, Harrison died, but the suit will continue in the name of her estate.

11. A FIDUCIARY DUTY FOR IRA ROLLOVERS?:   Many older retirees have fewer protections than younger investors who stash their money in government-regulated workplace savings plans, says  A Harvard University economics professor who studies the relationship between aging and the ability to make financial decisions contends the situation needs to change.  He is concerned because older investors suffer the highest rates of dementia and other cognitive problems, meaning that they are at greater risk of financial mismanagement and fraud.  The inability to solve certain problems becomes profound by the time adults reach age 65.  About half of retirees between ages 80 and 89 suffer from full-blown dementia or a lesser cognitive problem.  The professor calls for a fiduciary duty to apply to management of funds rolled over into IRA’s from employer-sponsored qualified retirement plans, such as 401(k) plans.  Federal law requires employers who sponsor such plans to act as fiduciaries, for purposes of designing and administering the plan.  Employers must also appoint a “named fiduciary” who is responsible for selecting and monitoring plan investments.  Employees, however, make the final decision on how their retirement plans are invested.  Advisors often encourage investors of all ages to roll over funds from those plans into IRAs.  The legal protections then vanish: unsuspecting retirees who make bad decisions are most at risk because they have less time to recoup losses.  The Dodd-Frank Act gives the Securities and Exchange Commission until January 2011 to complete a study of a possible single-standard for broker-dealers and investment advisors who provide personalized advice to retail investors.  Brokers are now required to recommend investment that are suitable.  Investment advisors, however, must act as fiduciaries by putting clients’ best interests ahead of their own.  The professor suggests creating a safe harbor of financial products for rollovers from defined-contribution plans, which could be used by older people.  The products would include diversified low-fee funds that automate required withdrawals after age 70 and one-half, as well as low-fee and deferral annuities.  Large withdrawals and transfers would require a notarized signature from the asset owner, physician, spouse or relevant fiduciaries.  Oh well, just something else for fiduciaries to worry about.

12. S & P 1500 PLANS’ FUNDING IMPROVES TO 76%:  Strong equity returns improved the aggregate funding ratio of S & P 1500 companies’ pension plans to 76% in September, up 5 percentage points from a month earlier, reducing the deficit by $79 billion to $428 billion, according to a Mercer report reviewed by  Equity returns, using the S & P 500 Total Return index, were 9% for the month, marking the best performance in 2010.  Mercer’s estimated aggregate value of pension plan assets of S & P 1500 companies was $1.33 trillion, compared with aggregate liabilities of $1.76 trillion.

13. PARDON OUR GLITCHES:  Last week’s issue of our newsletter contained some apparent typographical errors.  While we abhor such errors, this time it was not our fault.  Something in the software had a glitch, and created these anomalies.  We apologize and can assure you they were not our fault.  Of course, in the printed version, corrections have been made. 

14. ALL PUNS INTENDED:  If FedEx and UPS were to merge, would they call it Fed UP?

15.         OXYMORON:  Sometimes the silence can be like the thunder.

16. AGING JOKES: It's hard to be nostalgic when you can't remember anything.

17. FABULOUS RANDOM THOUGHTS:  When everything is coming your way, you're in the wrong lane.

18. QUOTE OF THE WEEK:  “Nothing makes you realize you don’t know what you want more than getting what you want.”  Jane Wagner

19. 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. 

20. PLEASE SHARE OUR NEWSLETTER:  Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at  Thank you. 

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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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