Current Pension Topics: 403(b) Plan Deters Gambling

Current Pension Topics
403(b) Plan Deters Gambling


Q.: I am a city Teacher enjoying that guaranteed 8.25-percent fixed interest on my Teachers' Retirement System 403(b) account. I do agree with you, however, that because the 403(b) plan is voluntary, the 8.25 percent is not protected by the "impairment" clause of the New York Constitution, as the United Federation of Teachers has told us over the years. The city is free to reduce the interest rate to be more in line with current rates; i.e.; 5 percent.

Mr. Frank is a fee-only Retirement Financial Planner and a retired NYC High School Teacher of Accounting. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net . But so long as I can get 8.25 percent guaranteed, I will never again invest in the Variable A common stock fund. It makes no sense. I just finished transferring my $675,000 from Variable A to the fixed account. Why should I invest in the stock market when over the last 15 years, the Variable A Fund outperformed the fixed by only 2.2 percent (10.45 vs. 8.25)? The 8.25-percent guarantee is a disincentive to invest in Variable A. What say you?

M.A.

A.: I am in full agreement with you. Have you said this publicly at a UFT meeting? It has been this way for almost 20 years. In fact, since 1926 the stock market as measured by the Standard and Poors 500 Index returned, on average, 10.3 percent per year. This is proof positive that you have done the prudent thing. So long as the taxpayer is foolish enough to guarantee 8.25 percent on the fixed account, no one should invest a dime in Variable A, especially when it takes you 12 months to transfer to the fixed.

While most City University of New York (CUNY) employees cannot afford to make the maximum voluntary salary reduction contribution to just one investment plan, there are some who are able and wish to contribute to a second plan. The opportunity to contribute the maximum to two supplementary investment plans, at the same time, was first authorized by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA effective Jan. 1, 2002). Currently the instructional and administrative staff at CUNY has a terrific 403(b) plan with the TIAA-CREF organization.

Having said that, effective Sept. 1, 2007, all CUNY employees (including the skilled trades) will be permitted for the first time to take advantage of a second salary-reduction investment plan by accepting an invitation to participate in the New York State Deferred Compensation Plan (NYSDCP); a 457(b) plan. Notwithstanding the fact that it took CUNY Trustees 68 months to adopt a second plan, I say: better late than never.

Now that you finally have two premier investment plans, a 457(b) and a 403(b), you need to decide on the order of their use. In my judgment, the investment plan of choice is the NYSDCP, if only for the fact that the 10-percent Federal excise tax does not apply to 457(b) plans as it does to 403(b). For those of you who can afford to max out on each plan, there is no problem. Just do it. For those who can afford to contribute no more than the per plan maximum of $15,500 for 2007, stop your contributions to your TIAA-CREF/403(b) now and contribute the remaining amount for 2007 to the NYSDCP/457(b). The combined account totals should equal $15,500 as of Dec. 31, 2007. For 2008, contribute all you can to the NYSDCP/457(b) plan. If you can afford to contribute more than the per-plan maximum of $15,500 (adjusted for inflation) to your 457(b) account, contribute the balance to your TIAA-CREF/403(b).

By offering the NYSDCP to its employees, CUNY puts them on a par with the employees of the State University of New York (SUNY). Both public institutions of higher education now offer a no-load, low-cost 403(b) plan through TIAA-CREF and a no-load, low-cost 457(b) plan through the NYSDCP. While this is a giant step in the right direction, we are far from our stated goal of having each and every local public employer in this state join the NYSDCP as the plan of choice when it comes to a pre-tax retirement investment plan.

We must now focus on the k-12 crowd. I implore the local school districts of New York to join the NYSDCP forthwith. It is the height of arrogance to prevent a k-12 staff member from joining the NYSDCP, while permitting commissioned-based salespeople to sit in the Teachers' cafeteria hawking high-priced 403(b) variable annuities/mutual funds. See: Eliot Spitzer vs. NYSUT/ING. Only no-load investment companies should be approved product providers in the 636 school districts of New York. The newly issued 403(b) Regulations (July 23. 2007) require the employer to adopt a written 403(b) Plan Document. Among other things, this plan document is to include a list of approved investment products. Only no-load investment funds should be on this list. School districts should already be working on their plan document. Objective: The same as SUNY-CUNY - a no-load, low-cost 457(b) through the NYSDCP plan, and a no-load, low-cost 403(b) plan through TIAA-CREF or Vanguard or Fidelity or T. Rowe Price.

Local public employers, other than school districts, also continue to cheat their employees by offering high-cost 457(b) plans, while refusing to join the NYSDCP. This stupidity and arrogance must stop. As soon as administratively feasible, these high-cost 457(b) plans should be terminated and the assets distributed to the NYSDCP. The affected employees will then be able to continue their salary reduction contributions with the NYSDCP. Note: Local public employers, other than school districts, are not permitted to offer a 403(b) plan.

Of Note: Insofar as the NYSDCP does not offer a 401(k) plan, while the city's Deferred Compensation Plan does, I urge CUNY to join the city's Deferred Compensation 401(k) plan.