Retirement Plan Blog

05 | 11 | 2008 Posted By Jerry Kalish

Indiana State Treasurer Richard Mourdock announced last Thursday a new state program to encourage the formation of Employee Stock Ownership Plans (ESOPs) in the state. The new program, called Indiana's ESOP Initiative (ICI), will invest up to $50 million in state money in Indiana banks that specifically lower their interest rates in loans made to employee-owned businesses.

Here is the text of the Indiana State Treasurer's May 8, 2008 press release:

State Treasurer Richard Mourdock announced the designation of $50 million and the launch of IEI for the purpose of assisting Indiana businesses to become ESOP companies, which will preserve Hoosier jobs.

It's not only critical that the state continues to bring new jobs to Indiana, but it's absolutely essential that Indiana keeps the jobs it currently has, asserted Treasurer Mourdock. IEI's mission is to encourage Indiana businesses to become ESOP companies and preserve Hoosier jobs.

Treasurer Mourdock has placed the IEI within the Treasurer of States Office and has created an ESOP toolbox of information regarding current Hoosier ESOP companies, organizations that provide professional services to ESOP companies, and educational materials about ESOP governance.

The $50 million designated for IEI and its mission is set up as a linked-deposit program through the Treasurer of State's Office. In the ESOP Linked-Deposit Program, the Treasurer of State will purchase certificates of deposit from local financial institutions at reduced rates of interest, and in turn the financial institutions will provide loans at reduced rates of interest to Indiana businesses becoming Hoosier ESOP companies.

The initial rate financial institutions will be charging to Indiana businesses through the ESOP Linked-Deposit Program will be 4.25%. The State of Indiana will not be a guarantor or man any of the risk of default on loans made under this program.

ESOP companies have a track record of creating wealth, encouraging the entrepreneurial spirit, and increasing productivity, explained Treasurer Mourdock. Furthermore, no group of employee-owners has ever, ever, ever, ever moved their company to Mexico or China!.

Treasure Muourdock says that there are slightly more than  200 employee owned businesses in Indiana, and he is hoping to have 20 additional businesses each year become employee owned.

Nothing but net!

Here is the link to the IEI and ESOP Linked-Deposit Program.

05 | 11 | 2008 Posted By Jerry Kalish

It was 1982, and many of today’s baby boomers were listening to the song, “Should I Stay or Should I Go” that was on The Clash’s album, Combat Rock. According to NME, Mick Jones, the lead guitar on the song, wrote it about singer Ellen Foley, who sang the backing vocals on Meatloaf's Bat Out Of Hell LP. The lyrics seemed to reflect the ups and downs of their relationship and whether to stick with it or end it.

Now let’s fast forward some 25 years later. Many of those boomers are asking the same question, “Should I stay or should I go?” But the relationship in question is with their employers. Should they continue to work or should they retire?

Watson Wyatt, the international consulting firm, provides insight on this important matter affecting not only employees but also their employers in the firm’s recently published Technical and Policy Paper, Predictive Factors for Retirement Timing. Here are the key findings:

• Increases in all categories of wealth accumulation (e.g., retirement plan, housing equity and other financial wealth) increase the probability of retiring while good earnings prospects, implying high opportunity cost for retirement, induce continued employment.

• The type of retirement plan available to workers has a significant impact on when they retire. Workers entitled to traditional DB plan benefits are more likely to retire than those who are not, while workers with significant assets from DC plans tend to significantly delay their retirement.

• New evidence supports the hypothesis that business cycles (stock market booms and busts) increase the probability - and thus timing - of retirement for DC plan participants.

• Health insurance (HI) has a large effect on the retirement decision. HI, if conditional on employment, strongly discourages retirement, while alternative sources of health insurance, such as employer-sponsored retiree HI, spouse’s HI or public HI, facilitate or encourage labor force exit.

• The retirement behavior of older workers is significantly linked to Social Security policy. The ongoing increase in the normal retirement age for Social Security and the cohort-specific actuarial adjustment of SS benefits, as defined by the law, will encourage younger cohorts to work longer.

Here is a link to the page to download Watson Wyatt’s Paper (PDF, free registration required).

05 | 7 | 2008 Posted By Jerry Kalish

How many times have we all “seen” the invisible dog being walked? Maybe too many times. But you probably haven’t seen this situation very often. The case of what I call "The Employee Who Never Was". It seems that a plaintiff filed suit against the plan administrator after being denied the plan’s $2,500 monthly benefit. Problem was, he was never an employee of the plan sponsor. Michael K. Wilson writes about this case in his post, Claimant Denied Benefits From ERISA Plan Sponsored By Company He Never Worked For on The Laconic Law Blog.

Mr. Wilson writes

In a rather strange ERISA case, a plaintiff filed suit after the ERISA plan administrator denied his claim that sought retirement benefits pursuant to a Plan titled Kroger 30-And-Out even though he was never an employee of Kroger.

The case is Beckner v. American Benefit Corp., et. al. (4th Cir. April 10, 2008). The 4th Circuit affirmed the denial of benefits. Here is a link (pdf) to the case courtesy of Mr. Wilson.

This case may seem strange to you perhaps. But not if you’re from the Land of Lincoln. The great State of Illinois and its various political subdivisions has a long history of paying salaries and benefits to people who don’t do any work. Unlike the case discussed above, these folks are, in fact, employees. They just have so much clout they don't have to bother showing up for work. They even have a name. We call them “ghost payrollers” as for example “The Ghost with a Tan” whose move to Florida didn’t stop his city paychecks.

But if you want to get a job like this, don’t try myspace jobs$. Here’s what you get

No search results found. We couldn't find any jobs for Ghost payroller. Please check the keyword terms you entered. You can also try using some other keywords, or enter fewer words to expand your search.

It's the old adage. It's not what you know. It's who you know.

Note: Here's a link to The Laconic Law Blog referenced above with the great tagline, Pithy Commentary On Employment Law In Virginia And Beyond. It's published by Eric A. Welter, an employment lawyer and litigator with the Welter Law Firm, P.C. in Herndon, Virginia.

Another hat tip to BenefitsLink.

05 | 4 | 2008 Posted By Jerry Kalish

No, advisers themselves aren’t getting smaller, it's just that their numbers are. More of them are leaving the financial planning industry as reported by Plan Adviser citing a new report by Cerulli Associates, a research firm specializing in the financial service industry.  Cerulli's Edge Advisor Recruiting Edition says that the number of financial advisers in the U.S. declined from 256,569 in 2005 to 245,831 last year.

And those entering the industry are getting older – quickly. According to Cerulli more than 62% of advisers were under age 30 when they entered the industry in the 1980s. By 2007, only 3% of financial advisers were under the age of 30. The reason, Cerulli notes, is that the job of financial adviser is increasingly becoming a haven for second-career professionals.

So where are the new advisers coming from then? According to Investment News, from other investment firms who recruit for advisers from each other. In other words, it’s a zero-sum game. In practical terms, it means that the boomers have a declining universe of experienced financial advisers to help them manage their retirement assets. 

My friend, Dr. Susan Mangiero asked the question the other day on her blog,  Pension Risk Matters, Do You Have Your Own Fiduciary? If not, why not? Maybe part of the answer to Susan's question is that the good ones are just harder to find.

Picture credit: Grant Williams (August 18, 1930 - July 25, 1985) shown in his role of Scott Carey in the science fiction classic film The Incredible Shrinking Man. The film has become an existential cult classic. Released in 1957, and re-released in 1964, it was written by Richard Matheson. Here is a link to the trailer (ad preceeds) on videodetective.com.

04 | 29 | 2008 Posted By Jerry Kalish

The phrase,"What we've got here is (a) failure to communicate" is, of course, the famous line from the 1967 film Cool Hand Luke starring Paul Newman. The quote is attributed to "Captain, Road Prison 36," who was played by the late, great American character actor Strother Martin. It's become so much a part of the culture that it's #11 on the American Film Institute's list of the top 100 movie quotations in American cinema.

And that quote came to mind the other day after reading Rollover Systems' article in their Weekly Exchange, Terminated Employees Can Be Toxic to the Health of Your Plan, by way of BenefitsLink. The LaRue decision, they say, demonstrates again why plan sponsors should distribute benefits to terminated employees. They go on to explain that

The necessity of communicating with ex-employees results in increases workload, plan costs, and your liability. (Ted) Benna says some former employees who harbor grudges against their ex-employers have used the non-receipt of plan information as a reason to file suit.

But the "What we have here is failure to communicate" situation goes beyond the non-receipt of documents. The grudge part that Mr. Benna alludes to has to do with the plan sponsor's integrity - or lack thereof as perceived by the terminated employee.

It's what Daniel P. Skarlicki, Laurie J. Barclay, and S. Douglas Pugh write about in their article, When explanations for layoffs are not enough: Employer's integrity as a moderator of the relationship between informational justice and retaliation, in the March 2008 issue of the Journal of Occupational and Organizational Psychology published by the British Psychological Society. They say in the Abstract:

Victims of downsizing often perceive their layoff as being unfair, which can lead to various forms of retaliation. Informational justice, defined as providing employees with adequate explanations in a timely manner, has been prescribed as a way to mitigate the retaliation tendencies associated with unfairness perceptions. Few studies, however, have examined contexts in which informational justice might be more vs. less effective in this regard. In the present research, we explored whether employees' perception of the employer's integrity moderates the relationship between informational justice and retaliation among layoff victims. Results from a field and laboratory study suggest that informational justice helps manage retaliation only when layoff victims perceived that their employer had high (vs. low) integrity prior to the layoff. In Study 2, we found that perceived sincerity mediated the impact of informational justice by integrity interaction on retaliation.

So if we translate their academic research into practical retirement plan communication practices, the origins of retaliation, i.e., lawsuits, don't begin with the employee's termination but in the context of the employer's past behavior. Effective, consistent communication and investment education can be good risk management.

Hat tip to our friend, Dr. Christian Jarrett, the Writer and Editor of the British Psychological Society's Research Digest Blog,

04 | 27 | 2008 Posted By Jerry Kalish

Back in the day - before ERISA - retirement plans had 'bad boy" clauses. These were plan provisions under which a participant would forfeit his vested account balance if the participant was a "bad boy" for such actions as violating a non-compete clause or committing a criminal act. But ERISA did away with "bad boy" clauses. (See Susan Wynn's post in her Pension Protection Act Blog, Bad Boy Clauses in Plan Documents).

ERISA's prohibition against bad boy clauses generally precluded a court being able to order the retirement plan to pay out a participant’s benefits to a third party as restitution, even for a crime committed against the employer. But what if a crime was committed against the plan? Under these circumstances the Department of Labor or a Federal court could order the Plan Administrator to offset the plan's losses against the participant's account.

And now a recent case decided by the U.S. District Court for the Northern District of Alabama extended the circumstances under which a participant in an ERISA retirement plan could forfeit benefits because of his conduct. The case is Pension and Employee Stock Ownership Plan Administrative Committee of Community Bancshares Inc. v. Patterson, N.D. Ala., No. CV-04-BE-00531-S, 3/31/08. The Court allowed a bank ESOP committee to offset a participant’s account balance to repay damages to the ESOP.

The Court held that Kennon Patterson, former President and Chief Executive Officer of Community Bancshares, Inc. and Community Bank, breached his fiduciary duty to the bank’s ESOP by not disclosing his criminal acts against the bank to the ESOP committee of which he was a member  before the purchase of more company stock for the plan. Mr. Patterson used bank money to pay for building a 17,000 square foot home. The court said that Patterson not only committed fraudulent acts but also

knowing the Plan’s investment had been impaired by [his] own fraudulent acts, . . . failed to take any steps to protect the Plan’s assets. . . .

The case was reported by PlanSponsor (free registration required) by way of BenefitsLink.

Note: For an excellent discussion of qualified plan protection from creditors, see McKay Hochman's commentary on the subject with a click through to an update for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

04 | 21 | 2008 Posted By Jerry Kalish

View larger image.

Lost in the mass media focus on the Baby Boomers retiring is Generation X, the generation that follows. Depending on how they are defined, it's the people born between 1965 and 1985 (age 23 to 43). I've written about them before, Not my generation that nobody seems to want. The "nobody" referred to are financial advisers who don't seem to want them as clients.

And like the Boomers, Gen Xers also worry about their retirement prospects. But a new survey suggests Generation X is even more pessimistic. According to the survey published by Scottrade and BetterInvesting, over two-thirds of Americans aged aged 27 to 42 don't think they will ever be able to stop working. This is in contrast to more than the 64% of respondents aged 55 to 64 who said they could retire and not worry, even though this group is much closer to retirement age.

Michael Rubin, a CPA and CFP, comments upon this survey on his blog, Beyond Paycheck to Paycheck, in his post, Retirement for Gen X: Black Hole or Perfect Storm?   The analogies are those of Chris X. Moloney, Scottrade’s chief marketing officer, who commented upon the study when he said

Gen X is in the middle of a 'retirement perfect storm' of very high expectations, low retirement savings and massive concern about the future of Social Security. It's a black hole to them.

Mr. Rubin is an optimist. He says

I like the black hole analogy. But I’m glad we know about it now, when we can still do something about it.

Rachel is another optimist. She describes herself as "27 and working towards extremely early retirement".  Writing on her blog, Working for Rachel, she discusses the differences in the workplace causing The Financial Generation Gap. She writes

I've painted a grim picture here, but I'm not complaining--I think I've accepted all of the facts above without resentment. I haven't ever known the world to be any other way. I'm still a cockeyed optimist. I believe that younger people still have a good chance of getting out of debt, buying real estate, retiring comfortably, and even retiring early. But for our generation, financial security requires total independence and total responsibility. We are the only ones we can count on when it comes to our financial futures.

Youth isn't wasted on the young.

Picture credit: Generation X, acrylic on linen, 30"x40" from Temple's TangleWave Art Gallery.

04 | 18 | 2008 Posted By Jerry Kalish

Fran Hawthorne is an accomplished journalist who over the last 20 years has specialized in finding and writing about the intersection of corporate America and timely and sometimes contentious social issues. She’s written articles for publications such as Fortune, Business Week, and Institutional Investor and has authored books on such issues as the dangers of obesity drugs, the trade-off between campaign contributions and state bond underwriting, and Medicaid manipulation.

Now Ms. Hawthorne has turned her attention to an important issue that in today’s economy isn’t going away anytime soon, pension plan terminations. In her new book, Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street, Ms. Hawthorne takes an in-depth look on what happens when financially troubled companies terminate their defined benefit pension plans through bankruptcy.

I had the opportunity to interview Ms. Hawthorne who has, no doubt, a point of view starting with the title of her book. She builds a case about why pension dumping (her term) has become an increasingly common practice in the wake of bankruptcy and how investors are profiting off the wreckage.

Agree or disagree with her, her well researched book which includes case studies and interviews provides analysis and insight on the complicated and competing dynamics involved with the termination of a defined benefit pension plan:

• Competing interests in bankruptcy court
• The choices that unions have to make
• The financial burdens assumed by the Pension Benefit Guaranty Corporation
• The risks that investors take and the returns they look for
• The issues that companies must deal with as they restructure

Ms. Hawthorne’s book should appeal to anyone involved with pension plans, e.g., CEOs, CFOs, HR professionals, union leaders, professional advisors, and policy makers. And if so, here is a link to Amazon.

04 | 16 | 2008 Posted By Jerry Kalish

If you're familiar with Chicago and Boston, then you'll know that the CTA is the Chicago Transit Authority and the MBTA (also known as the "T") is the Massachusetts Bay Transportation Authority. But I never really thought about whose retirement plan was the richest in America until I saw this story carried by the BostonHerald.com, Critics blast MBTA's costly pension plan.

So being a proud Chicagoan, my competitive nature kicked in when the story quoted Michael Widmer, president of the Massachusetts Taxpayer Foundation, as saying

It appears to be the richest retirement program in America. There's no way we can afford the pension and health care benefits.

It seems that T employees can retire after only 23 years of service, with full health insurance. And then work for the state with no restrictions. Most state employees, said the article, can't retire until they are 65 and are limited to where they can work afterwards.

But with all due respect to Mr. Widmer, let me invoke some civic pride here. Our CTA pension plan offers retirees premium-free health insurance, and allows some employees to retire at full pension in their 40s, after 25 years of service. The agency has tightened the requirements for those hired in 2002 and later, who must be 55 to retire.

Can these benefits be afforded? In 1993 the CTA pension plan was 99% funded, meaning it had funds available to pay nearly all of its projected expenses, according to the agency's annual pension plan reports. Now the CTA's pension funding ratio is the 34%, the lowest for any agency in the state.

And the fix? A tax increase, of course. As the result of protracted and contentious negotiations between the state legislators and the Governor, a funding package was passed earlier this year which included an increase in the sales tax that prevented massive service cuts. Part of the deal included a separate real estate transfer tax that will be used to help the CTA bail out its pension liabilities.

The tax, which used to be paid by buyers and now by sellers, will increase from $7.50 to $10.50 per $1,000 of sales price. Doesn't sound like much? Let me do the math. Someone selling a home in a Chicago neighborhood with an average price of $262, 268 would pay $2,360 under the current tax rate. After the increase, they would pay $3,147 -  a 40% increase in a recessionary economy seeing falling real estate prices.

And so while we can match Boston's costly transit retirement plan, I'll concede that Boston does have it over Chicago in at least one respect. Boston's transit system (which used to be called the MTA) - not Chicago's - has a man named Charlie. Take a look.

04 | 13 | 2008 Posted By Jerry Kalish

Last week Steve Rosenberg on his insightful Boston ERISA Law Blog tells us that Legal Rights That Are Protected In Courts, May Well Be Lost In An Arbitration. Steve comments on a recent Supreme Court case that parties may not contract among themselves for judicial oversight of an arbitration award under the Federal Arbitration Act. He says that

Probably the biggest barrier to arbitration serving as a forum for complicated commercial disputes is that the Federal Arbitration Act effectively provides no substantive oversight of an arbitration ruling, making the arbitrator's ruling the final decision, and only allows judicial review for the purpose of addressing any serious procedural errors during the course of an arbitration.

But while arbitration is a choice for most parties to a commercial transaction, investors don’t have that option. Virtually all securities firms require investors dealing with them to resolve disputes by mandatory arbitration.

And since the 1987 Supreme Court case (Shearson/American Express v. McMahon) that held mandatory arbitration to be enforceable, the debate as to whether the investor gets a fair shake has raged on. And predictably, the industry says mandatory arbitration is fair while investor advocates claim the process is biased. A process that requires that one of the three arbitrators is affiliated with the securities industry, and the process itself is administered by the NASD rather an entity unaffiliated with the industry.

So how exactly has that worked out for investors? Not well according to a study, Mandatory Arbitration of Securities Disputes A Statistical Analysis of How Claimants Fare, released in June, 2007 by Edward S. O’Neal, Ph.D. and Daniel R. Solin. Their study was a statistical analysis of the results of the mandatory arbitration process during the 1995 - 2004 period.

They assessed almost 14,000 NASD and NYSE arbitration cases and found that claimant win rates and recovery amounts had declined significantly over time, and that claimants fared more poorly in large cases and in cases against larger brokerage firms. They estimated that that the expected recovery before legal fees and expenses in a large case against a top brokerage firm is only 12% of the amount claimed.

They concluded that

There may well be innocent explanations for fact that the chances of an investor recovering significant damages from a major brokerage firm are statistically small in mandatory arbitration. However, our data clearly indicates a decline in both the overall “win” rate and the expected recovery percentage against major brokerage firms, at a time when the misconduct of these firms reached its apex with the analyst fraud scandal.

The study was funded by the authors. Edward S. O’Neal, Ph.D, is a principal with Securities Litigation and Consulting Group, Inc. (SLCG) who completed the work while he was on the faculty at the Babcock Graduate School of Management at Wake Forest University. Daniel R. Solin is a securities arbitration attorney representing investors. He is also a Registered Investment Advisor and Senior Vice President of Index Funds Advisors, Inc..

You can download the complete report here (22 pages, PDF).

Hat tip to James J. Eccleston who publishes the FinancialCounsel blog. Jim heads heads the securities group at Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C. (SNSFE), a Chicago-based business law firm.