Current Pension Topics: New Rules Bring Joy and Pain

Current Pension Topics
New Rules Bring Joy and Pain


The long-anticipated 403(b) Final Regulations were issued by the Internal Revenue Service on July 23, 2007. Under the new regulations, and for the first time since section 403(b) was added to the Internal Revenue Code in 1958, an employer may terminate its 403(b) plan and distribute its assets to the employee in cash or as a rollover to another eligible retirement plan like another 403(b), 457(b) or 401(k) plan or an IRA. Under the regulations plan, termination is a distributable event, just as it is for 401(k) plans.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net . School districts outside the city have, for nearly 50 years, saturated their employees with high-cost (fees and commissions) 403(b) annuities and mutual funds. These unwarranted costs are paid by unsuspecting employees with the result that the growth of their retirement savings is stifled, big time.

My shame finger is also pointed at the New York State United Teachers (NYSUT) which conspired with ING/Opportunity Plus to overcharge Teachers so that it could pay NYSUT Member Benefits, Inc. an endorsement fee amounting to about $12 million over the last 20 years. Then-Attorney General Eliot Spitzer declared the endorsement agreement to be illegal and no longer in effect. The Teachers' union has paid a $100,000 fine and ING is in the process of refunding $30 million to the 57,000 Teachers who have invested in the ING/Opportunity Plus Variable Annuity over the last 20 years.

Having said that, a new 403(b) era has begun, especially for the employer. If you think offering a 403(b) program to your employees is a pain-in-the neck now, you better brace yourselves. The employer is required by the new regulations to become intricately involved in the administration of its 403(b) plan. Among the employer's obligations under the new regulations are: establishment of a written plan document; moving plan assets; corrections of excess contributions; effect of plan failures; accounting for loans; accounting for defaulted loans; accounting for hardship withdrawals; accounting for normal withdrawals; and accounting for Required Minimum Distributions (RMD). It will cost a lot of money for school districts to adequately discharge their new responsibilities under these new regulations.

I say, who needs it? As Mr. Spitzer said to NYSUT, the Teacher doesn't need a high-cost savings/investment plan and I say, the local school district doesn't need the added expense and headache of administering, for the first time, a 403(b) plan. Just as the primary Defined Benefit pension plan for local school district employees is administered by the state (Teachers' Retirement System), the state should also be the sole administrator of the voluntary Defined Contribution investment plan. Being a voluntary supplemental plan does not justify 638 school districts administering 638 individual 403(b) plans. That's ridiculous! Consolidation of these 638 403(b) plans into one pre-existing statewide plan is a no-brainer. Just think of the cost savings, not only to the employee/investor, but also to the local school district.

The single voluntary plan that I have in mind has been doing business in this state for more than 20 years and is known as the New York State Deferred Compensation Plan. It can be downloaded from its Web site at: https://www.nrsservicecenter.com/iApp/ret/c ... e=1sonyLegacyV5. The NYSDCP is a 457(b) plan with a long-standing open invitation to all local public employers, including school districts, to join.

To date, only a small number of the 638 school districts in this state have offered the NYSDCP to their employees. For those that have yet to join, I ask you: is there a better way to get out of the Defined Contribution investment plan business and at the same time offer your employees a vastly superior Defined Contribution investment plan? Why offer a 403(b) plan with a dozen or more expensive product vendors, especially with the costly administrative burdens placed on you by the new 403(b) regulations, when the State of New York is willing to be your Plan Administrator? It makes no sense at all. Just as you cut one check made payable to the Teachers' Retirement System for the Defined Benefit pension plan (and forget about it), why not cut one check made payable to the NYSDCP for the voluntary Defined Contribution investment plan (and forget about it)?

I recommend that every school district in this state, as soon as it is practical after establishing its written 403(b) plan document (required by the regulations), terminate its 403(b) plan and distribute its assets to the appropriate Deferred Compensation Plan. For school districts other than the City of New York, distribute the 403(b) assets to the NYSDCP.

CUNY should terminate its inferior Metropolitan and Guardian 403(b) plan and distribute its assets to the NYSDCP. The NYC Department of Education, after terminating its inferior TRS 403(b) and Prudential 403(b) plans, should distribute its assets to the city's Deferred Compensation Plan. The city's Health and Hospitals Corporation (HHC) should also terminate its inferior Prudential 403(b) Plan and distribute its assets to the city's Deferred Compensation Plan. Going forward, no local public employer in this state should even offer its employees an inferior high-cost product for voluntary Defined Contribution plan investment. Please contact me if you are not sure if the plan you offer your employees is high- or low-cost.