Cypen & Cypen
NOVEMBER 9, 2006
Stephen H. Cypen, Esq., Editor
1. IRS ANNOUNCES 2007 STANDARD MILEAGE RATES:
The Internal Revenue Service has announced the 2007 Optional Standard Mileage Rates used to calculate deductible cost of operating an automobile for business, charitable, medical or moving expenses (IRB-2006-168). Beginning January 1, 2007, the Standard Mileage Rates for use of a car (including a van, pickup or panel truck) will be 48.5¢ per mile for business miles driven; 20¢ per mile driven for medical or moving purposes; and 14¢ per mile driven in service to a charitable organization. The new rate for business miles compares to a rate of 44.5¢ per mile for 2006. The new rate for medical and moving expenses compares to 18¢ in 2006. The primary reasons for the higher rates were higher prices for vehicles and fuel during the year ending in October. The Standard Mileage Rates for business, medical and moving purposes are based on an annual study of fixed and variable costs of operating an automobile. Runzheimer International, an independent contractor, conducted the study for IRS. The mileage rate for charitable miles is set by statute.
2. DEPARTMENT OF LABOR FINALIZES AMENDMENT ON SECURITIES LENDING EXEMPTION:
The U.S. Department of Labor’s Employee Benefits Security Administration has announced adoption of a final class exemption expanding opportunities for securities lending between employee benefit pension plans, banks and broker-dealers (PTE 2006-16). The exemption, which consolidates two existing class exemptions, provides conditions to safeguard assets of plans involved in securities lending transactions. The updated requirements will permit pension plans to earn additional income by lending securities from their portfolios to a greater universe of permissible borrowers. Under the exemption, categories of permissible borrowers have been expanded to include broker-dealers and banks of the United Kingdom, Canada and certain other foreign broker-dealers and banks. In addition, the types of collateral that may be offered to plans for securities lending transactions have been broadened to include negotiable certificates of deposits payable in the United States, mortgage backed securities, the British pound, the Canadian dollar, the Swiss franc, the Japanese yen, the Euro, securities issued by Multilateral Development Banks, rated foreign sovereign debt and irrevocable letters of credit issued by certain foreign banks. If the plan’s U.S. domiciled lending agent agrees to indemnify the plan against losses resulting from a borrower’s default, the final exemption permits a plan to accept any other type of collateral currently permitted by the Securities and Exchange Commission under rules of the Securities Exchange Act of 1934. The Employee Retirement Income Security Act gives the Labor Department authority to grant an exemption from the law’s prohibited transaction provisions. The department grants class exemptions when it determines that the exemption is in the interest and protective of rights of benefit plan participants and beneficiaries. The final exemption, which was published in the October 31, 2006 Federal Register, also revokes and replaces two prior PTEs.
3. FEDERAL APPELLATE COURT REVERSES ITSELF IN KENTUCKY DISABILITY CHALLENGE:
Under Kentucky’s retirement plan for certain state and county employees, one who becomes disabled prior to reaching normal retirement age is credited with unworked years in determining the benefit amount. The Equal Employment Opportunity Commission challenged the system under the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act. The United States District Court granted a summary judgment against EEOC. On appeal, the United States Court of Appeals for the Sixth Circuit affirmed based upon prior Sixth Circuit precedent, which requires that the system be upheld even though under the plan certain younger employees (those below normal retirement age) are eligible to receive credit for additional years of service that they did not in fact work, with the result that a younger employee receives greater retirement benefits than an older employee with the identical final or average salary and years of actual service (see C&C Newsletter for September 28, 2005, Item 6). Now, sitting en banc, the full Sixth Circuit has reversed the lower court’s ruling. The new decision concludes that EEOC has established a prima facie violation of ADEA, because the Kentucky Retirement Systems’ plan is facially discriminatory on the basis of age. Supreme Court authority on disparate-treatment-discrimination claims as well as persuasive authority of many other circuits and history of ADEA (as amended by OWBPA) demonstrate that KRS is not entitled to summary judgment. When an employment policy or benefit plan such as the KRS plan is facially discriminatory, the plaintiff challenging that policy does not need additional proof of discriminatory animus in order to establish a prima facie disparate-treatment claim. The circuit’s prior precedent is inconsistent with Supreme Court authority as well as rulings of several other circuit courts in cases involving the similar role of age in employment-benefit plans, and is thus also overruled. Equal Employment Opportunity Commission v. Jefferson County Sheriff’s Department, Case No. 03-6437 (U.S. 6th Cir., October 31, 2006) (en banc).
4. EX-HOLLYWOOD POLICE CHIEF WILL GET THIRD TRIAL:
After he was terminated as Police Chief of the City of Hollywood, Richard Witt brought an action for damages based on breach of contract and violation of the whistle-blower’s act. A jury returned a verdict favorable to the chief on both accounts. However, on appeal, the appellate court reversed (see C&C Newsletter for July, 2001, Item 3). That decision held the chief could not prevail on the breach of contract count and that the City was entitled to a new trial on the whistle-blower count because the lower court had refused to allow the City to present evidence that termination was predicated on lawful grounds. On retrial of the whistle-blower count, the jury once more found in favor of Witt. The City appealed anew, and the appellate court reversed again: the lower court erroneously refused to allow the City to present evidence that Witt failed to comply with the notice requirement of the whistle-blower statute. Now, Witt will have another jury trial on his whistle-blower claim. Perhaps the third time will be the charm. City of Hollywood v. Witt, 31 Fla. L. Weekly D2584 (Fla. 4th DCA, October 18, 2006).
5. WHEN IT COMES TO EXECUTIVE COMPENSATION, SIZE DOES MATTER:
Plansponsor.com has analyzed a study of chief executive pay at the largest 1,000 U.S. firms. In 2005, the median CEO pay ranged from $3.2 Million at the smallest companies to $16.8 Million at the largest companies. The overall median for 2005 was $5 Million. (Remember that the “median” is not the “average,” which is the total amount of compensation divided by the number of companies. The median is the mid- point, where one-half are above and one-half are below.) The study also showed that company size makes a difference in pay structure. The percentage of compensation in equity (for example, performance/restricted stock/options) and other forms of long-term incentives is highest among the largest companies. Total long-term pay reached 72% of total compensation for CEOs at companies with revenues over $50 Billion, compared to 50% at companies with revenues below $2.5 Billion.
6. CALSTRS WILL NOT INVEST IN BIG DONORS:
Trustees of the California State Teachers Retirement System voted to stop doing business with financial investment firms that make large political contributions to the governor or other statewide officials -- a move that experts said could prompt pension boards across the nation to follow suit. The action follows a series of pension scandals involving board members of the multibillion-dollar funds seeking investments toward their political patrons, according to latimes.com. The vote is an attempt to purge such influence peddling. The new rule will limit firms the fund does business with and their employees from giving more than $1,000 in campaign cash yearly to board members -- who include the state treasurer and controller -- or the governor, who had several appointees on the board. Previously, most of the firms were limited only by state campaign finance rules, which in an election year allow individuals and companies to give up to $44,600 to a candidate for governor and $11,200 to treasurer and controller candidates. An analysis shows that financial firms, including investment banks, venture capitalists, hedge funds and financial advisory services gave at least $27 Million this year to the governor, treasurer and controller! Nevertheless, the treasurer and the controller both voted for the new rule. Talk about political pressure. Meanwhile, separately, the Sacramento Bee reported that the California Public Employees’ Retirement System directed its staff to develop a contribution ban proposal along the lines of CalSTRS’s.
7. TRENDS IN MUTUAL FUND INVESTING:
According to Investment Company Institute,
combined assets of the nation’s mutual funds increased
by $137.50 Billion, or 1.4%, to $9.722 Trillion in September.
Long-term funds (stock, bond and hybrids) had a net inflow
of $11.71 Billion in September, versus an inflow of $11.93
Billion in August. Stock funds posted an inflow of $6.47
Billion in September, compared with an inflow of $5.06 Billion
in August. Among stock funds, world equity funds (U.S. funds
that invest primarily overseas) posted an inflow of $9.43
Billion in September, versus an inflow of $8.76 Billion
in August. Funds that invest primarily in the U.S. had an
outflow of $2.97 Billion in September, compared to an outflow
of $3.70 Billion in August. Hybrid funds posted an inflow
of $640 Million in September. Those funds had an inflow
of only $236 Million in August. Meanwhile, bond funds saw
an inflow of $4.60 Billion in September, compared with an
inflow of $6.64 Billion in August.
In an opinion piece in the San Jose Mercury News, president of the union representing most Palo Alto employees responded to a column criticizing city workers’ new retirement plan. Bristling at the characterization “cushy deal” in the original column, the writer said the benefits are conservative and fiscally sound. He referred to the fact that 88% of pension benefits are paid through investment returns and employee contributions. A quality retirement ensures that public bodies enlist and retain a professional, quality workforce, which is paramount to the general public’s health and safety: meaning hiring -- and keeping -- the best firefighters, police, health care, public service professionals and teachers to protect our communities and educate our children. In order to accomplish those goals, local and state governments must remain competitive with the private industry. It is well-known that public employees make considerably less money compared with similar jobs in the private sector. The difference in retaining well-trained public service workers is offering solid retirement plans and health care benefits. “Should we renege on pension promises to public employees who have dedicated their careers to serving the public? Should we promote the Wal-Mart model of employment, in which workers have nothing to count on in retirement? Should we push health care costs on to workers, thereby raising the huge number of uninsured Americans?” A decent retirement and quality health care are basic rights for all people. Instead of government hacking away at retirement and health benefits for public employees, the public sector should catch up and improve these benefits for its own employees. Well said.
9. DOL ADVISORY OPINION ON ASSET ALLOCATION STRATEGIES FOR PENSION PLANS:
Within the framework of the Employment Retirement Income Security Act of 1974's prudence, exclusive purpose and diversification requirements, the U.S. Department of Labor, Employee Benefits Security Administration, believes that plan fiduciaries have broad discretion in defining investment strategies appropriate to their plans. In this regard, the Department does not believe that there is anything in the statute or regulations that would limit a plan fiduciary’s ability to take into account risks associated with benefit liabilities or how those risks relate to the portfolio management in designing an investment strategy. For these reasons, a fiduciary would not, in the Department’s view, violate duties under Sections 403 and 404 of ERISA solely because the fiduciary implements an investment strategy for a plan that takes into account liability obligations of the plan and risks associated with such liabilities and results in reduced volatility in the plan’s funding requirements. [Those sections of ERISA require plan fiduciaries to discharge their duties with respect to a plan solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan. They also require plan fiduciaries to act with care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims.] Whether any specific investment strategy is prudent with respect to a particular plan will depend on all the facts and circumstances involved. Department of Labor Advisory Opinion 2006-08A (October 3, 2006).
10. RETIREMENT PLAN PROVISIONS PREVAIL OVER PRE-NUP:
Sandler was a participant in his law firm’s pension plan. The plan provided that upon death of a participant, relevant account balances would be distributed in accord with an applicable designation of beneficiary. Under the plan, if no designation was properly made, participant is deemed to have designated beneficiaries in the following order of priority: (a) decedent’s surviving spouse; (b) decedent’s surviving children, in equal shares; and (c) decedent’s estate. The plan also provides that a participant may designate a beneficiary other than the spouse only if such spouse consents in writing to a specific beneficiary and acknowledges the effect of such consent. The matter became complicated when Sandler married his second wife, who executed an antenuptial agreement, providing, among other things, for waiver of any claim against Sandler’s pension, profit-sharing or other retirement benefit plan. When Sandler died, a dispute arose between his widow and his children from a prior marriage. ERISA provides that federal law shall supersede all state laws that relate to an ERISA plan. This particular provision supplies all the rules for determining beneficiaries under an ERISA plan, and that plan administrators should strictly follow plan documents for such purpose. A divorce judgment provision does not effectively waive a spouse’s interest as an ERISA beneficiary. Waivers contained in a prenuptial agreement are conceptually identical and should be so treated. Therefore, if the plan administrator does not receive a proper designation naming a non-spouse beneficiary and reflecting spousal consent, pertinent provisions of the plan designate the participant’s widow as beneficiary. The antenuptial agreement did not meet the plan’s requirements for designation of a new beneficiary or spousal consent to such action. Note, the court was impressed by the fact that no evidence was discovered that Sandler ever requested his second wife to execute any consent form to change the plan beneficiary or that she refused to execute any other documentation to verify or confirm such change. (Otherwise, the children may have had a cause of action for breach of contract, which could have offset the widow’s recovery under the plan.) A plan administrator must follow the plan documents as written. While such principle may not always produce distributions precisely consistent with a participant’s most recent intent, it does help prevent fraud, avoids conflicting liabilities and insures that beneficiaries receive benefits without confusion of interpreting third party documents, all of which are important to the broad use and operation of ERISA plans by millions of Americans. Greenebaum Doll & McDonald LLC v. Sandler, Case No. 3:05CV-754-H (W.D. Ky., October 24, 2006).
11. PENSION PLAN CAN OFFSET FOR PAST OVERPAYMENTS:
Northcutt and Smith brought an action seeking pension plan benefits withheld from them by their employer, General Motors Corporation. GM had suspended payment of these benefits and was treating the amount otherwise due each month as reimbursement for past disability and pension plan overpayments. Northcutt and Smith claimed that Section 502 of the Employee Retirement Income Security Act prohibits GM from invoking contractual remedies for reimbursement, and instead requires GM to seek equitable relief before a court. (Section 502 merely makes available a “civil action” in certain circumstances. It does not address possibility of a recoupment device to recapture overpayments by a plan.) The district court granted summary judgment for GM, determining that Section 502 did not preclude enforcement of recoupment provisions. The court of appeals affirmed the judgment: GM modified performance of its current payment obligations in accordance with a contractual provision entitling it to do so. The modification does not violate any aspect of ERISA and does not violate a clearly articulated policy of ERISA. Indeed, it fosters integrity of a written plan and ensures availability of funds for other participants. Northcutt v. General Motors Hourly-Rate Employees Pension Plan, Case No. 04 C 337 (U.S. 7th Cir., November 2, 2006).
12. IMPROVING PENSION LIABILITY MANAGEMENT WITH LIABILITY BENCHMARKS:
Sponsors of defined benefit plans increasingly recognize benefits of aligning the plan’s asset allocation with its liabilities: reduced funding and expense risk, with more consistent funding levels. At the same time, there has been a dearth of good information on how liabilities are performing in a real-time, real world environment. Benchmarking of both assets and liabilities is an important component of an effective asset/liability strategy. In response, Mellon has created its Pension Liability Indexes, a set of benchmarks that closely tracks market value of actual pension liabilities, using current discount rates. The total return of these benchmarks can be compared to a range of investment portfolios with different asset and risk profiles. These comparisons allow the plan sponsor to evaluate effectiveness of investment strategies under a variety of economic and interest rate conditions. The principal function of a pension fund is to pay benefits due its retirees. The ultimate measure of success is whether assets of the plan can grow faster than liabilities. The relationship between market value of a plan’s assets and its liabilities is called the “funded ratio.” If assets grow faster than liabilities, the funding ratio will generally increase over time. If liabilities grow faster, the plan will become less well funded. Historically, pension plan sponsors have had good information about asset benchmarks and the market value of plan assets. Unfortunately, there has been much less information about liability benchmarks and market value of liabilities. In many cases, sponsors do not receive actuarial valuation reports until 15-18 months after the valuation date. The Mellon Pension Liability Indexes provide a comprehensive analysis of three hypothetical pension liability indexes compared to four representative portfolios. The Pension Liability Indexes will be updated on a monthly and quarterly basis, and should prove to be a useful tool for plan sponsors interested in understanding the relationship between defined benefit plan assets and liabilities.
13. WORKERS COMP ACT DOES NOT PERMIT SUSPENSION OF BENEFITS ON UNILATERAL DETERMINATION OF FRAUD:
The Florida Workers’ Compensation Act prohibits claimants from knowingly making false, fraudulent or misleading statements for purpose of obtaining benefits. For several years, Wetherington’s former employer and its carrier made permanent total disability payments and furnished medical benefits necessitated by compensable accidents. Following clandestine, videotaped surveillance of Wetherington’s activities over a period of some seven months, the employer/carrier suspended permanent total disability payments upon the unilateral conclusion that Wetherington had knowingly made false, fraudulent or misleading statements for the purpose of obtaining benefits. Needless to say, Wetherington sought redress before a judge of compensation claims, who ultimately found that the employer/carrier had failed to sustain the burden on the fraud defense. On appeal, the order was affirmed: the record fully supported findings that the judge of compensation claims made with regard to Wetherington’s conduct. Besides, the Workers’ Compensation Act contains no authority for suspension of benefits based on a payor’s unilateral determination that a claimant has violated its anti-fraud provisions. The appellate court came down very hard on counsel for the employer/carrier, finding that her brief had shrilly and unremittingly misrepresented the record. Contrasting the finding that Wetherington had been truthful, the appellate court said “we wish we could have the same confidence in the veracity and good faith of the statements in appellants’ brief written for the purpose of avoiding responsibility for benefits due an injured worker under the Workers’ Compensation Act.” Wow. Pavilion Apartments v. Wetherington, 31 Fla. L. Weekly D2772 (Fla. 1st DCA, November 6, 2006).
14. PBGC COMINGS AND GOINGS:
The Deficit Reduction Act of 2005 increased the Pension Benefit Guaranty Corporation’s per participant flat premium rates for the 2006 plan year to $30 for the Single-Employer Program and $8 for the Multiemployer Program. The Act provided for these flat premium rates to be adjusted each year for inflation, based on changes in the national average wage index, as defined in the Social Security Act. The 2007 flat premium rates for PBGC’s two insurance programs will be $31 per participant for the Single-Employer Program and $8 per participant for the Multiemployer Program.
15. THANK YOU, DIVISION OF RETIREMENT:
On October 25, 26 and 27, the Division
of Retirement sponsored its Thirty Eighth Annual Police
Officers’ and Firefighters’ Pension Trustees’
Conference in Orlando, at the Barcelo` Hotel. As always,
the group (Keith Brinkman, Trish Shoemaker, Melody Mitchell,
Martha Moneyham and Julie Browning) sponsored a terrific
program. The speakers and their topics were beneficial to
all trustees, and the materials presented in the handbook
provide instant reference and answers to many of your burning
questions. Those of you who did not attend this year’s
conference should make plans to be there next year. You
will enjoy the program and increase your knowledge ... thus
making your job as trustee much easier.
“Our task now is not to fix the blame
for the past, but to fix the course for the future.”
John F. Kennedy
Copyright, 1996-2006, all rights reserved.
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.