Pension Time Bomb Explodes

Mish, the prolific blogger at GlobalEconomicAnalysis is reporting:

"Pension Time Bomb Explodes In US and Canada

The ticking time bomb of overpromised, underfunded public pension plans has finally exploded. Here are a few headlines to consider. My comments appear at the end starting with the bold heading “Future Expectations Too High”

I recommend reading the whole thing - it is a great survey of what's happening to pension plans around the country. Mish is known for his blunt and incisive commentary. He writes:

The above is just a random sampling of hundreds of articles about pension plan woes. 40% of pension plans are underfunded and that assumes future returns of 8% annually. Good luck with that.

...

Taxpayer Backlash Brewing

A huge taxpayer backlash against overly generous public pension plans is brewing. Boomers with destroyed stock funds and IRAs are not going to want to have taxes increased so that public workers can get 90% of their salaries for the rest of their lives during retirement.

Vallejo California went bankrupt over benefits earlier this year. Expect to see more cities and counties take that action if the stock market continues to decline from these levels.

These are some dire warnings coming from a insightful market observer...

Weekend DOL Update - 10/26/2008

The DOL announced actions against four different plan sponsors last week. In sequence they are:

"U.S. Labor Department files complaint against fiduciary of defunct cardiology clinic in Memphis, Tennessee to recover 401(k) asset"

MEMPHIS, The Labor Department’s lawsuit seeks to recover delinquent employer matching contributions and Safe Harbor Non-elective Contributions from the 2004 through 2006 plan years. The employer remitted the contributions made by employees into the 401(k) plan but did not contribute the required employer contributions, and did not contribute the required safe harbor contributions to the account of each eligible participant.

The suit seeks to recover lost earnings on the contributions, remove Martin as the plan fiduciary, and appoint an independent fiduciary to terminate the plan and distribute its assets. The suit also asks the court to permanently bar Martin from serving as a fiduciary to any ERISA-covered employee benefits plan in the future.

The cardiology clinic that operated the retirement plan ceased operations in July 2006.
The case is:
Chao v. Cardiovascular Specialties P.C.
Civil Action Number 2:08-cv-02700-JPM-tmp

The second case involves a massive $8.6 million settlement out of New York:

"U.S. Labor Department recovers $8.6 million for workers in settlement involving Agway 401(k) plan in New York"

New York – The U.S. Department of Labor has obtained a settlement restoring $8,590,000 to participants of the Agway Inc. 401(k) plan in DeWitt, New York, and barring plan officials and the board of directors from service to employee benefit plans for one to two years unless they complete fiduciary training. The defendants also agreed to pay a civil penalty of $859,000 plus interest to the Labor Department.
“This $8.6 million recovery is a victory for the workers whose retirement savings were grossly mismanaged,” said Secretary of Labor Elaine L. Chao.

The department’s lawsuit resolved by this settlement alleged that 47 members of the investment committee, administration committee and the Agway board of directors violated the Employee Retirement Income Security Act (ERISA) by allowing the 401(k) plan and its participants to invest in overpriced securities of Agway. The investment committee allegedly failed to investigate the prudence of investing in Agway securities, to determine the fair market value of securities acquired by the plan (which was set by Agway), and to monitor and divest the plan’s holdings in the securities.

In addition, the administration committee allegedly allowed Agway and the plan to give false and misleading information to participants about the investments in Agway securities, while the board of directors failed to oversee the activities of plan fiduciaries. Some of the defendants included a company attorney, the director of trust investments and the chief executive officer of Agway.

Agway Inc. filed for Chapter 11 bankruptcy in October 2002. The 401(k) plan covered 4,080 participants as of June 30, 2002. The plan held approximately $48 million in Agway securities and $2 million in cash reserves. An independent fiduciary, Fiduciary Counselors Inc., was appointed in 2004 to manage the plan and brought its own separate lawsuit.

The settlement, entered in the U.S. District Court for the Northern District of New York, was investigated by the Boston Regional Office of the Labor Department’s Employee Benefits Security Administration (EBSA).

The case is:
Chao v. Agway Inc. Employees’ 401(k) Thrift Plan ERISA Litigation - formerly Chao v. Magnuson
Civil Action Number 5:06-CV-1199

The last one is an interesting lawsuit filed by the EBSA against a California-based RIA, Zenith Captal:

"U.S. Labor Department sues California investment advisor and executives to recover losses and hidden fees charged to employee benefit plans"

San Francisco – The U.S. Department of Labor has sued Zenith Capital LLC of Santa Rosa, California, and its executives for allegedly investing the assets of 13 retirement plan clients in the hedge fund Global Money Management LP while receiving undisclosed incentive fees from the hedge fund’s sponsor and manager.

The lawsuit alleges that Zenith Capital and executives Rick Lane Tasker, Michael Gregory Smith and Martel Jed Cooper violated their fiduciary obligations under the Employee Retirement Income Security Act (ERISA). The defendants allegedly made investment decisions for their ERISA plan clients. From April 1999 to September 2003, the defendants caused the plans to invest in Global Money Management and received undisclosed incentive fees from LF Global Investments LLC, the general partner and manager of Global Money Management.

In 2004, Zenith Capital LLC was a registered investment advisor with 1,214 clients and approximately $538 million in assets under management. In addition to paying Zenith incentive fees not disclosed to the 13 ERISA plan clients, LF Global held an ownership interest in Zenith. The U.S. Securities and Exchange Commission has frozen the remaining assets of Global Money Management and secured the appointment of a receiver.

The Labor Department’s suit seeks a court order requiring the defendants to restore all losses owed to the plans, requiring them to undo any transactions prohibited by law and permanently barring them from serving in a fiduciary or service provider capacity to any employee benefit plan governed by ERISA. The suit was filed in the U.S. District Court for the Northern District of California.

“We will vigorously pursue investment advisors who try to line their own pockets by illegally steering pension investments. Fiduciaries must invest solely in the interests of the workers to whom these funds ultimately belong,” said Bradford P. Campbell, assistant secretary for the Labor Department’s Employee Benefits Security Administration (EBSA).

The suit resulted from an investigation conducted by the San Francisco Regional Office of EBSA as part of EBSA’s Consultant Adviser Project. Employers and workers may contact EBSA’s San Francisco office at 415.625.2481 or toll-free at 866.444.3272 for help with problems relating to private sector pension and health plans. In fiscal year 2007, EBSA achieved monetary results of $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families.

Zenith Capital LLC, Civil Action Number C-08-4854 (EMC)

Credit Crisis Affecting 401(k) Plans

The Financial Advisor Magazine is reporting, "Credit Crisis is Affecting 401(k) Plans".

More 401(k) plan participants are using their own plans as a source of income—either by requesting a hardship withdrawal, taking a loan, or just lowering or eliminating their contributions, according to a new study by Anne Lester, managing director and senior portfolio manager of JPMorgan Funds.

There are some sobering thoughts presented here. The impact of loans and hardship withdrawals is taking on a special significance:

Nearly 20% of companies across the country have reported increases in loans and hardship withdrawals from their 401(k) accounts in the past quarter; 43% of these companies noted these loans and withdrawals were used to make mortgage payments, she notes. Other reasons cited included the need to cover personal bankruptcy, supplement normal spending or cover a family emergency. The correlation between market volatility and erratic savings behavior is most compelling in areas with high foreclosure rates, she adds.

As home sales plummeted in 2006 and particularly during the last half of 2007, these locations—particularly the South Atlantic, Midwest, and Southwest—not only experienced double the number of foreclosures since 2006, but 50% to 60% of plans in these areas also saw an increase in loans and withdrawals. As foreclosure rates rose to more than 2.5% in the state of Georgia, for example, one plan observed a 15% increase in loans. That same plan reported that 29% of participants had outstanding loans in the second half of 2007.

But the impact of loans and withdrawals on retirement plans was not limited to just those areas with high foreclosure rates. “During the height of the housing boom, all plans in our sample reported a 15% decline in outstanding loans. But when real estate values plummeted and the mortgage crisis began in 2007, these plans reported a 6% increase in the number of participants taking loans and a 6% increase in hardship withdrawals, with 74% of plans reporting an increase in the number of loans and/or withdrawals,” she says.

The perils of buying high and selling low are revisited:

The impact of participants’ loans and withdrawals during this period of market volatility is expected to become even more significant over time, she says. “For example, participants now borrowing from plans during the current market downturn are selling assets at depressed values to fund the withdrawals. As a result, when the markets begin to rally at some point, participants are likely to be partially out of the market during the most crucial years for building capital, and will be forced to save more than they removed to get back to where they started in the first place,” she says.

Some pointers for advisors on how to deal with clients:

Lester offers several steps to help clients address negative behavioral patterns affected by the current market volatility. For the short term, she suggests selecting highly diversified target-date funds that are well positioned to overcome negative behavioral influences and deliver downside protection. For the long term, she says, advisors need to educate and communicate with clients on an ongoing basis.

[Emphasis added]

Defined Contribution Plan Distribution Choices at Retirement

The Investment Company Institute has a new survey report out on "Defined Contribution Plan Distribution Choices at Retirement." [Hat tip to Benefitslink for posting the link]

This exhaustive 92 page survey looks at plan distribution choices made by participants who retired between 2002 - 2007.

In depth review and comments to follow...

I need one of these... to help write this blog

(Video via Yahoo! News)

"Potted Plan in Japan Automatically Writes Daily Blog Entries"

Weekend DOL Blotter - 10/19/08

It was yet another eventful week at the DOL last week, as they announced, "U.S. Labor Department obtains consent judgment against president of Control Pak International over misuse of $19,000 in 401(k) assets."

Fenton, Michigan – The U.S. Department of Labor has obtained a consent judgment against the president of Control Pak International in Fenton, providing restoration of $19,165 to the company’s 401(k) savings plan as restitution for misuse of 401(k) assets in violation of the Employee Retirement Income Security Act (ERISA).

The department’s lawsuit resolved by this judgment alleged that, from January through November 2001, Timothy Glinke, president and owner of Control Pak International, failed to timely remit employee contributions to their 401(k) plan. From December 2001 through July 2003, Glinke also failed to remit the employee contributions, instead using those contributions for the company’s general operating expenses.

Chao v. Timothy Glinke
Civil Action Number: 2:08-cv-11528

Weekend DOL Blotter - 10/12/2008

Staffing company in trouble in North Carolina: "U.S. Labor Department sues defunct Charlotte, North Carolina employee staffing company to protect participants of 401(k) plan"

Atlanta – The U.S. Department of Labor has sued People Unlimited Consulting Inc. and two executives of the Charlotte, North Carolina, employee staffing company for violating the Employee Retirement Income Security Act (ERISA) when they failed to distribute $115,589 in 401(k) assets to eligible plan participants.

The lawsuit against defunct People Unlimited was filed in the U.S. District Court for the Western District of North Carolina. As a result of the violation, plan participants were unable to gain access to their 401(k) funds and were harmed when the company abandoned the plan.

“These workers and their families are counting on their 401(k) plan to help fund their retirement. Our legal action will ensure that these employees regain control over their funds,” said Bradford P. Campbell, assistant secretary for the department’s Employee Benefits Security Administration (EBSA).

In addition to the company, the suit seeks to remove Janice Love, the company’s owner, and Linda Marler, a senior administrator, as plan fiduciaries. The suit asks the court to bar the defendants from serving as fiduciaries of any ERISA-covered plan and to appoint a successor fiduciary to terminate the plan and distribute the proceeds to five plan participants.
People Unlimited Consulting Inc. was an employee staffing firm specializing in the health care industry.

This case was investigated by EBSA’s Atlanta Regional Office. Employers and workers can reach the office at 404.302.3900 or toll-free at 866.444.3272 for help with problems relating to private sector retirement and health plans. In fiscal year 2007, EBSA achieved monetary results of $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families.

Chao v. People Unlimited Consulting Inc.Civil Action File Number: 3.08-cv-0043-MR