Stephen H. Cypen, Esq., Editor
1. IRS MAY NOT LEVY ON RETIREMENT PLAN BENEFITS UNTIL THEY ARE PAYABLE: The Internal Revenue Service Office of Chief Counsel has issued a memorandum to district counsel advising that IRS cannot levy on a retirement plan benefit until payments are due under the plan (ILM 200102021). Internal Revenue Code Section 6331(a) permits IRS to levy on all property and rights to property. Regulations Section 301.6331-1(a) states that a levy attaches only to rights and obligations that exist at time of the levy. Under the Internal Revenue Manual, IRS can only demand payment when the taxpayer's right to payment ripens, even though the obligation to the taxpayer is fixed at time of the levy. The memorandum concludes that in such circumstances IRS should not levy on the pension plan to obtain the funds because if the taxpayer cannot withdraw the funds himself, then he has no right to immediate payment that IRS can obtain by levy. If the plan administrator is willing to honor an IRS levy, but is not willing to provide the same funds to the taxpayer, then the administrator is mistaken as to IRS's levy authority. Curiously, the memorandum does not mention Regulations Section 1.401(a)-13(b)(2)(ii), which states that a plan provision satisfying ERISA (private sector) and IRC requirements that a plan's benefit cannot be assigned, alienated or subject to levy does not preclude enforcement of a federal tax levy. However, the memorandum does refer to a federal case that cites the regulation. Although the memorandum would have been stronger had it stated why, in light of the latter regulation, a federal tax levy is not enforceable against a retirement plan, nevertheless it states the current position of IRS.
"It is as bad as you think, and they are out to get you."
2. DETERMINE YOUR ELIGIBILITY FOR SOCIAL SECURITY BENEFITS: The Social Security Administration offers a tool to enable individuals to determine their eligibility for various benefits. Dubbed B.E.S.T. (Benefit Eligibility Screening Tool), it can be accessed at http://best.ssa.gov/index.cfm. Based upon the information provided, the Social Security Administration will tell you what benefits you may be eligible for. A record of your answers will not be kept.
3. SOCIAL SECURITY ONLINE FOR WOMEN: Speaking of Social Security, the Social Security Administration has a website devoted to issues for women. Among other things, the site reveals what every woman should know about retirement, survivors, disability, supplemental security income and medicare. The URL is http://www.ssa.gov/women.
4. SELF-DIRECTED PARTICIPANTS WANT ASSISTANCE: American Express recently conducted a satisfaction survey of defined contribution plan participants who have self-directed brokerage funds in their plans. The results: 11% are happier with their investment options and 10% are more likely to be satisfied with the overall plan but are also more likely to want assistance in allocating their funds. In general, these participants are more likely to be satisfied with account access, available options and rate of return on investments.
5. 401(K)-ERS MADE COSTLY MISTAKES: The 1990s' bull market swelled 401(k)s but now many participants can't take the pain of opening their performance statements. Financial experts are only beginning to understand how badly these investors were mauled last year. Although Wall Street's decline surely contributed to the damage, clearly the bull market masked many investing mistakes. Such recognition renews the debate over whether most Americans have the time, knowledge or inclination properly to manage their 401(k) plans. According to one consultant, there are no data anywhere that suggest companies have been able to educate their employees to become competent asset managers. For the first time ever, 401(k) plan assets shrank in 2000, down $72 Billion to close at $1.777 Trillion. Some participants are too conservative and overweight their portfolios with bonds and money market funds, while others are much too aggressive with technology stocks. The result: return on the average 401(k) plan has lagged the return of institutional investors, such as those who manage pension plans, by 2% annually. The majority of participants today still have a poor grasp of investment basics; many do not know what an asset class is, much less the expected return and risk differences among them. A typical novice-investor mistake is "chasing returns," moving in and out of funds based on what they did during the previous quarter. The consultant sees a simple solution: employees should be offered one additional choice on their menu of 401(k) investments -- the option not to manage their plan themselves. Instead, an employer would hire professionals to manage that money just as some do now for the traditional pension plans. Unfortunately, the rising stock market of the late 1990s inflated the expectations of many new 401(k) investors. Recent surveys of investors show that many believe a 20% return is conservative! (That's only twice in historical stock market return.)
"Time is the best teacher; unfortunately it kills all its students."
6. WISCONSIN RELEASES TRANSITIONAL RETIREMENT STUDY: The Wisconsin Department of Employee Trust Funds, responsible for administration of the Wisconsin Retirement System, has issued a study entitled "Changing the Look of Retirement." The study was conducted to examine the changing needs of public employees in Wisconsin as they near retirement. Many factors are reshaping the look of retirement, including:
- An aging workforce—the baby boom generation makes up more than 50% of civilian employees nationwide and more than 60% of public employees in Wisconsin.
- Increased life expectancy—medical advances have extended life expectancy as well as the quality of life for seniors, who are living much more actively in retirement.
- Greater need for financial security during retirement—increased health costs, as well as living expenses for the more active senior lifestyle, have resulted in higher income needs during retirement years.
- Shrinking labor supply—the public sector will likely be the hardest hit when the baby boom generation moves into retirement.
Interested readers can check out the entire forty-four (44) page study at: http://www.nctr.org/content/pdf/transitionalretirementstudy.pdf.
7. FRS MAY RECONSIDER TOBACCO POLICY: The Florida State Board of Administration, responsible for overseeing the $100 Billion Florida Retirement System, may again invest in tobacco stocks. Four years ago, at the urging of then-Governor Lawton Chiles FRS sold its tobacco stocks (see C&C Newsletters for December, 1996, Page 1, C&C Newsletter for June, 1997, Page 2 and C&C Newsletter for July, 1997, Page 7). At the time, the State was suing cigarettemakers, but the lawsuits are settled and tobacco stocks are soaring. Recently, all three SBA members -- Governor Jeb Bush, Comptroller Bob Milligan and Insurance Commission Tom Gallagher -- signaled support for reinvesting in tobacco stocks.
8. AMERICAN WORKERS FEEL OVERWORKED AND OVERWHELMED: According to a survey conducted by Families and Work Institute and reported in plansponsor.com, many U.S. workers feel overworked and overwhelmed by their workload. Almost half of respondents felt overworked, 28% felt overwhelmed by their workload and 29% felt they had no time to step back and reflect on their work. Specifically, almost a quarter said they spent 50 hours or more each week on the job, while 22% said they worked 6 to 7 days a week. (One out of every four said they don't even use vacation time to which they're entitled.) The feeling of being overworked stems not just from the number of hours spent working, but also from being pressured or pushed, feeling disrespected and feeling that one's work is of little real value. As a consequence, those who overworked were more likely to neglect themselves, feel unsuccessful in their personal/family relationships, seek employment elsewhere, feel angry with their employers and make mistakes.
"If at first you don't succeed, try management."
9. PENNSYLVANIA EMPLOYEES GET NEW RETIREMENT PACKAGE: Pennsylvania Governor Tom Ridge recently signed into law a new public employee retirement package. When negotiating with leaders of the General Assembly, the Governor insisted that three conditions be met before he would approve a pension bill: (1) the employee contributions to the retirement systems must go up by the same proportion as any benefit increase (under the bill, general state employee contributions go up 25%, the same as their benefits); (2) the General Assembly must pay the State's share of its extraordinary increase through enhanced employee contributions and by transferring approximately $11 Million from legislative surplus to the State Employees' Retirement System; and (3) Pennsylvanians must benefit -- through new education reforms, tax cuts and passage of tobacco-settlement programs.
10. EARLY INTERVENTION CAN CUT DISABILITY COSTS: A recent study conducted by Sun Life Financial and Integrated Benefits Institute confirms what we have been saying for years: employers who intervene soon after employees are first disabled can help them return to work faster and make them happier. Quick communication and accommodation of disabled workers can help them return to work 20% faster. Early intervention can help overcome two main barriers: (1) psychological - the disabled employee hasn't mentally adjusted to not working and his or her new lifestyle without work and (2) work - a close relationship still exists between the employer and employee, and everyone remains focused on recovery and return to work; before long, an employee can quickly become "out of sight, out of mind." If the employer does not recognize that a disabled worker has value and communicate this idea directly to the worker, then the employer risks losing that employee. Cities take heed. We have seen several cases where disability pensions would not have been granted (or, perhaps, even applied for) had the city not abandoned an injured employee.
"Better living through denial."
11. NC EMPLOYEES ASSOCIATION FAILS IN EFFORT TO SUE STATE: The State Employees Association of North Carolina -- encompassing employees in the Teachers' and State Employees' Retirement System, Consolidated Judicial Retirement System and Legislative Retirement System -- has challenged the State's diversion of employer retirement contributions. In an emergency budget declaration earlier this year, North Carolina Governor Mike Easley diverted employer retirement contributions for general use to help balance the budget through June 30, 2001. Although the $40 Billion system estimates the amount due at "only" $151 Million, the ramifications are profound. As SEANC's Executive Director said, "What might occur next when the State is short on cash?" The suit claims that diversion of retirement funds was neither reasonable nor necessary to assure a balanced budget. The Governor's action is also challenged as a taking of property from the members without due process of law and as breach of contract. Interestingly, ten years ago the State's retirement contribution exceeded 9%. Before the diversion of funds, the employer rate was 5.33%. The Governor is recommending to the Legislature an employer rate of 2.83% effective July 1. That rate would mean the State will put in less than half of what employees contribute. On June 1, 2001, a trial judge dismissed the suit because SEANC failed to show that it has legal standing to pursue the action. Such dismissals are usually "without prejudice," meaning the action can be refiled by the appropriate party.
12. FRS PICKS TPA: Following enactment of legislation adding a 401k-type pension plan to the Florida Retirement System (see C&C Newsletter for January, 2001, Item 23, C&C Newsletter for October, 2000, Item 12 and C&C Newsletter for July, 2000, Item 5), the Florida State Board of Administration has selected CitiStreet as third-party administrator for the soon-to-be-available optional defined contribution retirement plan that will be offered to public employees. Those in-the-know estimate that as many as 300,000 (out of 650,000) and $13 Billion in assets could end up switching from FRS's current defined benefit plan.
13. FMLA REG INVALID: A Department of Labor Regulation , 29 C.F.R. §825.110(d), purports to extend family and medical leave coverage to new employees whose employers failed to advise them of their FMLA-eligibility before they took family leave or medical leave. Four years ago we reported that a federal district judge held the regulation invalid, as directly contradicting the law's clear requirement that employees must work for twelve months and 1,250 hours to achieve eligibility under FMLA (see C&C Newsletter for April, 1997, Page 3). Last year, the U.S. Eleventh Circuit Court of Appeals came to the same conclusion. Brungart v. BellSouth Telecommunications, Inc., Case No. 99-14472 (U.S. 11th Cir., October 24, 2000). The United States Supreme Court has now denied review in the latter case, basically putting the issue to rest.
14. MOST OLDER AMERICANS FARE WELL: By and large, older Americans (defined as aged 50 and higher -- yikes!) are in better financial shape than their parents were at the same stage in life. However, the problem is that the withering of traditional pension plans adds risk to retirement years, as more people become dependent on their own investments, according to a study released by the American Association of Retired Persons. Other findings of the report: retirees were major beneficiaries of the stock market boom of the 90s. From 1980 to 1998, median family income of "younger" retirees (aged 62 to 74) rose 28%, while it rose 31% for "older" retirees (75 and older). But for pre-retirees (aged 50 to 61), median family income rose only 13%. Here's the scary part, at least to us. The number of pre-retiree households participating in defined benefits plans, but not in defined contribution plans, fell from 26% in 1989 to 12.5% in 1998. Meanwhile, the number participating in defined contribution plans, but not in defined benefits plans, rose from 13.4% to 27%. (The number covered by both types of plans fell from 16.5% to 13%.) So what? Well, the debate over Social Security becomes even more important because any move to put Social Security contributions into the stock market could reduce the level of guaranteed benefits. Because the shift to 401(k)-type plans is already putting retirement income at greater risk, it may not make sense to add that risk to the Social Security System, which is the safety net for many people. Another very disturbing finding: 60% of 401(k) participants who change jobs withdraw their moneys and spend them, rather than roll them over to an IRA or transfer them to their new employer's plan.
"Age doesn't always bring wisdom, sometimes age comes alone."
15. MINNESOTA TEACHERS LOSE PENSION CASE: The Associated Press reports that a state appeals court has upheld a county court dismissal of a lawsuit filed by eleven active and retired teachers against the Teachers Retirement Association. The lawsuit sought class-action status for thousands of plaintiffs' co-workers who, in accordance with a 1969 law, were required to make an irrevocable choice between five pension plans, including some that permitted equity investments. Previously, teachers had a single option, and those who did not affirmatively select one of the new plans were left in the old program. Later, all plans but the original one were automatically rolled into a new program -- without the teachers' consent -- that made less money over the years. Because the law was last amended in 1989, the appellate court affirmed that Minnesota's six-year statute of limitations required the suit to be filed before 1995.
16. CENSUS BUREAU RELEASES DATA: The U.S. Census Bureau has released data, on a state by state basis, showing that the population of the United States increased 13.2% between 1990 and 2000, from 249,000,000 to 281,000,000. The population continues to age, reaching all-time high average of 35.3 years, up from 32.9 years ten years ago. The data also show that the typical American household composition is continuing to undergo dramatic changes:
- Decline in Dual-Parent Households — the percentage of married couples with children under the age of 18 declined from 25.6% to 23.5%.
- Rise in Single-Mother Households — the number of single-mother households increased 25.4%. (Single mothers of children under 18 represented 7.2% of all households.)
- Dramatic Increase in Unmarried Couples — there was a 71% increase (from 3.2 million to 5.5 million) in the number of people living with an unmarried partner. (Contrariwise, the percentage of married couples fell from 55.1% to 51.7%.)
- Slight increase in Singles Living Alone — nonfamily households, in which single people lived alone, increased from 24.6% to 25.8%.
"Latest survey shows that 3 out of 4 people make up 75% of the world's population."
17. WHAT IS AN ETF?: ETF is an abbreviation for an Exchange-Traded Fund, an index fund that can be traded like a stock. Unlike a traditional mutual fund, which is priced once a day after the market closes, an ETF can be bought or sold at the market price whenever exchanges are open. As an index fund, an ETF tracks equity indexes, which means investors can capture performance of an entire index by purchasing a single security. An ETF is a passive, low-cost, tax-efficient investment, which some experts contend will beat most managed funds in the long run. However, because trading costs are high, an ETF may not be right for a short-term investor or one who uses dollar-cost averaging.
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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.