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SOCIAL SCIENCE RESEARCH NETWORK
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 7, No. 16: June 15, 2006
Editor: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Pensions
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T A B L E O F C O N T E N T S
"Should Pension Funds have Independent Fiduciaries?"
M.P. NARAYANAN
Stephen M. Ross School of Business at the University
of Michigan
HASAN NEJAT SEYHUN
University of Michigan at Ann Arbor - Finance
"Improving Pension Coverage at Small Firms"
WILLIAM E. EVEN
Miami University, Institute for the Study of Labor
(IZA)
DAVID A. MACPHERSON
Florida State University - Department of Economics,
Institute for the Study of Labor (IZA)
"Lemon Socialism and the Federal Guaranty of Private Pension
Obligations"
ERIC D. CHASON
College of William and Mary - Marshall-Wythe School
of Law
"Making the Case for Mandatory Removal of Imprudent Investment
Vehicles: Inside Information Can Make Employer Securities a Bad
401(k) Option"
ANDREW S. HARTLEY
The Law Office of Andrew Hartley, PLLC, Sigman and
Brown
"Tax Expenditures and Employee Benefits: Estimates From the FY
2007 Budget"
KENNETH J. MCDONNELL
Employee Benefit Research Institute (EBRI)
"Rousey and the New Retirement Funds Exemption"
JOHN HENNINGAN
St. John's University - School of Law
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"Should Pension Funds have Independent Fiduciaries?"
Contact: M.P. NARAYANAN
Stephen M. Ross School of Business at
the University of Michigan
Email: mpn@umich.edu
Auth-Page: http://ssrn.com/author=16755
Co-Author: HASAN NEJAT SEYHUN
University of Michigan at Ann Arbor -
Finance
Email: nseyhun@umich.edu
Auth-Page: http://ssrn.com/author=16757
Full Text: http://ssrn.com/abstract=891417
ABSTRACT: Recent concerns about the conflicts of interest faced
by firm's executives who serve as fiduciaries in their employees'
pension fund have prompted calls for independent fiduciaries.
This paper provides formal evidence that supports the case for
fiduciary independence. We find that, contrary to the
well-established result that insiders as a group earn positive
abnormal profits, pension funds that attain insider status earn
substantial negative market-adjusted returns on their trades. The
case for fiduciary independence is further strengthened by the
fact that the negative returns are confined to separate accounts
(pension funds that are created exclusively for a single
company's employees) with potentially greater conflicts of
interest, while commingled funds (funds that mingle the pension
investments of multiple companies) do not earn negative returns.
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"Improving Pension Coverage at Small Firms"
Author: WILLIAM E. EVEN
Miami University, Institute for the
Study of Labor (IZA)
Email: evenwe@muohio.edu
Auth-Page: http://ssrn.com/author=58715
Co-Author: DAVID A. MACPHERSON
Florida State University - Department
of Economics, Institute for the Study of Labor (IZA)
Email: DMACPHER@MAILER.FSU.EDU
Auth-Page: http://ssrn.com/author=56889
Full Text: http://ssrn.com/abstract=904613
ABSTRACT: This paper investigates trends in pension coverage
rates with a focus on the source of low coverage rates among
workers at small firms. An important finding is that, over the
past 15 years, pension coverage rates rose most at small firms,
primarily because the earnings of workers grew most among those
at small firms. The study also examines how firm size relates to
the changes in the type and generosity of pension plans over
time. While small firms are less likely to offer pension
coverage, particularly a defined benefit plan, the generosity of
the pensions offered compares quite favorably to those at much
larger firms.
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"Lemon Socialism and the Federal Guaranty of Private Pension
Obligations"
Contact: ERIC D. CHASON
College of William and Mary -
Marshall-Wythe School of Law
Email: edchas@wm.edu
Auth-Page: http://ssrn.com/author=391493
Full Text: http://ssrn.com/abstract=887405
ABSTRACT: For more than 30 years, the federally created Pension
Benefit Guaranty Corporation ("PBGC") has guarantied private
pension obligations. If a defined-benefit pension plan is
terminated without enough assets to pay promised benefits, the
PBGC steps in to cover most of the shortfall. Hammered in recent
years by claims arising from bankrupt airlines and steel
companies, the PBGC projected a deficit of $23.1 billion at the
end of its 2005 fiscal year. These woes reflect the fact that the
PBGC cannot charge a sufficient premium for its guaranty. The
effect of the PBGC guaranty is to subsidize underfunded pension
plans, possibly at taxpayer expense. Should the PBGC actually
fail, most observers believe the federal government (i.e.,
taxpayers) would bail it out, rather than allowing it to default
on pension payments to retirees. A taxpayer bailout would
potentially be expensive, forcing Congress to choose between
cutting other spending, raising taxes, and increasing government
debt. For many, avoiding the fiscal impact is a sufficient
imperative for putting the PBGC on stronger footing. The
contribution of this Article is to identify another reason for
reform beyond avoiding the fiscal impact. The PBGC-guaranty
subsidy directly interferes with capital-market mechanisms.
Pension plans are essentially corporate debt obligations that
allow employers to finance their labor costs. Employers who
finance these costs (or any other costs) through outside
creditors must subject their business operations to the
discipline of the capital markets. Outside creditors will attempt
to minimize default risk by demanding restrictive covenants and
security, and they will demand default premiums for any remaining
risk of default. These demands are useful, as they ensure that
scarce capital is allocated to the most worthy projects. In
contrast, pension creditors (i.e., employees) are plagued by a
moral-hazard problem. They have no incentive to make these
demands, as the PBGC guaranties payment of their pensions. The
moral hazard of employees suggests the true problem with the PBGC
guaranty: it insulates employers from the discipline of capital
markets when they borrow from their employees through pension
plans. Since the tax code encourages financially strong employers
to contribute to their pension plans and secure their pension
obligations, financially strong firms do not benefit from the
PBGC-guaranty subsidy. Financially weak firms are the primary
beneficiaries. Because the PBGC-guaranty subsidy undermines
capital-market discipline, it allows these weak firms to pursue
risky, wasteful projects. Thus, the PBGC-guaranty subsidy can be
seen as a form of "lemon socialism," whereby economically weaker
firms are systematically aided by a federal loan guaranty at the
expense of stronger firms and possibly the taxpayers.
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"Making the Case for Mandatory Removal of Imprudent Investment
Vehicles: Inside Information Can Make Employer Securities a Bad
401(k) Option"
Appalachian Journal of Law, Vol. 5, No. 1, p. 99, 2006
Contact: ANDREW S. HARTLEY
The Law Office of Andrew Hartley,
PLLC, Sigman and Brown
Email: andrew@hartleyerisalaw.com
Auth-Page: http://ssrn.com/author=612708
Full Text: http://ssrn.com/abstract=902792
ABSTRACT: This article examines, in the context of the Enron
stock-drop debacle, the conflicts faced by fiduciaries of
employee benefit plans investing in company stock. In particular,
such fiduciaries may be unfairly trapped by overlapping standards
of duty in federal securities laws and ERISA. The article first
discusses the 2003 holding of the 5th Circuit in In re Enron
Corp. Secs., Derivative & ERISA Litig., 284 F. Supp. 2d 511 (S.D.
Tex. 2003), written by Judge Melinda Harmon. I defend the court's
rationale and next suggest that the fiduciary standard outlined
by the court and the Department of Labor is appropriate in all
situations where a fiduciary faces a conflict between so-called
"inside-information" and the best interests of the plan
participants. When a plan fiduciary is faced with damaging inside
information concerning a security in which the plan has invested
its assets, the standard calls for the mandatory removal of the
investment option in question from the plan's "menu." The balance
of my article examines the interplay between the two conflicting
federal schemes and suggests ways that the two can peacefully
coexist. Finally, this article illustrates how this standard
serves the important purpose of separating those losses properly
remedied under an ERISA breach of fiduciary duty suit from those
properly remedied in a securities action.
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"Tax Expenditures and Employee Benefits: Estimates From the FY
2007 Budget"
EBRI Notes, Vol. 27, No. 4, April 2006
Contact: KENNETH J. MCDONNELL
Employee Benefit Research Institute
(EBRI)
Email: MCDONNELL@EBRI.ORG
Auth-Page: http://ssrn.com/author=297121
Full Text: http://ssrn.com/abstract=897756
ABSTRACT: The federal government supports the provision of
employee benefits through preferential tax treatment in the
Internal Revenue Code. There are three types of tax treatments
for employee benefits: tax exemption, tax deferral, and other
preferential treatment. The Congressional Budget Act of 1974
(P.L. 93-344) requires that a list of tax expenditures (federal
tax revenue forgone due to preferential provisions) be included
in the budget. This paper includes a listing of the employee
benefits tax expenditures, as published in President Bush's
Fiscal Year 2007 budget, prepared by the White House Office of
Management and Budget, using a methodology that is flawed but
mandated by Congress.
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"Rousey and the New Retirement Funds Exemption"
St. John's Legal Studies Research Paper No. 06-0036
American Bankruptcy Institute Law Review, Vol. 13, p. 777,
2005
Contact: JOHN HENNINGAN
St. John's University - School of Law
Email: HennigaJ@stjohns.edu
Auth-Page: http://ssrn.com/author=437142
Full Text: http://ssrn.com/abstract=876978
ABSTRACT: This article describes, analyzes and evaluates two
recent developments affecting the treatment of the retirement
savings of debtors who file bankruptcy. On April 4, Rousey v.
Jacoway, 125 S. Ct. 1561 (2005), interpreted problematic language
in section 522(d)(10)(E) of the Bankruptcy Code to exempt from
creditors such debtors' traditional (that is non-Roth) Individual
Retirement Accounts. On April 20, that result was ratified and
extended by provisions of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 codified in various other
subparagraphs of section 522(b) of the Code.