Current Pension Topics: Lesson From NYSUT Scandal

Current Pension Topics

Lesson From NYSUT Scandal

By JOEL L. FRANK

In 1989 the New York State United Teachers Benefits Trust, a unit of the New York State Teachers union, signed an agreement with the Aetna Life Insurance Company that required Aetna to pay the Benefits Trust a fee in return for the Benefits Trust's endorsement of an Aetna 403(b) variable annuity product called "Opportunity Plus."

This endorsement agreement continued after Aetna sold its annuity business to ING in 2001. The union's Benefits Trust unit has received in excess of $18 million in aggregate fees from Aetna/ING since it endorsed "Opportunity Plus" in 1989.

A union is a fiduciary to its members. This is a very special relationship. It means that union members trust their union to act in their best interests. When a union has not acted in the best interests of its members, it is guilty of breaching its fiduciary duties.

On June 13, 2006, Eliot Spitzer, the Attorney General of the State of New York, decided that the 17 year-old endorsement agreement entered into by the NYSUT Benefits Trust and Aetna/ING has not been in the best interests of the members of NYSUT and that NYSUT, through its Benefits Trust, has been guilty for the past 17 years of breaching its fiduciary duties to its members.

A press release issued by Mr. Spitzer stated that while NYSUT was receiving up to $3 million a year from Aetna and ING, its Member Benefits unit "did not disclose this arrangement and, instead, took steps to conceal it." It stated that both companies "charged investors fees and expenses as high as 2.85 percent per year while delivering only limited benefits."

The Attorney General has officially determined that the NYSUT Benefits Trust has violated the law as follows: "The foregoing acts and practices of the NYSUT Benefits Trust violated the Martin Act, Article 23-A of the General Business Law, which makes it illegal to employ any deception or concealment in the purchase, sale, or promotion of securities. The foregoing acts and practices of the NYSUT Benefits Trust violated section 63(12) of the Executive Law, because they demonstrate a persistent fraud or illegality in the conduct of business."

In light of the Attorney General's findings, I strongly urge all investors in "Opportunity Plus" to immediately stop contributions and effectuate a Revenue Ruling 90-24 tax-free capital transfer (not rollover) of their "Opportunity Plus" account balance to a no-load mutual fund family like the Vanguard Group or TIAA-CREF, and use the same no-load family of funds for all future contributions.

Moreover, the New York State School Boards Association needs to step up to the plate and help design a single 403(b) plan along the lines of the Deferred Compensation 457(b)/401(k) Plans of the City of New York. I'm sure the executive staff of the city plans would be more than willing to help out.

Just as there is a single Defined Benefit, Teachers' Retirement System for all Teachers outside of the city, there needs to be a single 403(b) Plan. There is absolutely no reason to have securities salespeople hanging out in teacher lounges marketing their high-cost 403(b) products. This is a no-brainer!

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, by fax at (732) 536-7373, or via e-mail at rollover@optonline.net.