Current Pension Topics:
DOE Plans: Thanks for Nothing

By JOEL L. FRANK

Did you know that the Department of Education of the City of New York (DOE) sponsors three voluntary salary reduction investment plans under Section 403(b) of the Internal Revenue Code? This is ridiculous. The specific 403(b) Program an employee is eligible to join depends on whether or not he/she is required to join a public retirement system. If you are required to be a member of the Teachers' Retirement System (TRS), you may join the TRS 403(b) Program. If you are required to be a member of the Board of Education Retirement System (BERS), you may join the BERS 403(b) Program. If you are not required to join either retirement system, you may join the Board of Education of the City of New York Employees' 403(b) Program administered by Prudential Financial (Prudential 403(b) Program).

Both the TRS and BERS administer low-cost 403(b) Programs, but their low cost loses its attractiveness when you have just two investment options and cannot move your money from one to the other more rapidly than in equal monthly installments over a year. Clearly not a smart way to manage money! The Prudential 403(b) Program has a dozen investment options but this wide range of investment alternatives also loses its attractiveness because of the high fund operating costs, ranging from a low of 0.40 percent to a high of 1.66 percent. I urge all DOE employees to eliminate these three inferior 403(b) Programs from their financial lives. There is absolutely no reason to invest in an inferior 403(b) program when the DOE sponsors a fourth plan, which is not only open to all employees regardless of retirement system membership, but is by far the best plan on the block. The Deferred Compensation Plan of the City of New York (DCP) is really two plans in one: A 457(b) Plan and a 401(k) Plan. A participant may contribute the maximum amount to each. Both plans offer the same seven core investment funds with operating costs ranging from a low of 0.04 percent to a high of 0.57 percent. Additionally, both plans offer nine Pre-Arranged Portfolios (Target Date Retirement Funds) with operating costs ranging from a low of 0.21 percent to a high of 0.24 percent.

Review: Bob and his friend Rich are 30 years of age and 30 years from retirement. At age 30 they each invest $30,000 in a lump sum in the same type of fund (no other additions are made). At age 60, Bob has $398,000 while Rich has only $302,000. Even though they had the same type of investment, Bob earned 9 percent while Rich earned 8 percent. The $96,000 difference in balances is due to the fact that Bob paid 1 percent less than Rich in fund operating costs.

Recommendation: There is no legitimate reason for the DOE to sponsor four voluntary salary reduction savings programs when one clearly stands out as superior to the others. I call on the DOE to do us all a big favor and dissolve these three 403(b) Programs. All employees should contribute as much as they can to the Deferred Compensation Plan.

Q.: Is the 8.25-percent guaranteed rate of return option of the TRS 403(b) Program simply a way of having TRS retain money under management? In other words, if the taxpayer was not guaranteeing this greater-than-market rate of fixed interest, would not these members re-direct their investment dollars to the Deferred Compensation Plan's Stable Income Fund?

I.R.

A.: They sure would, especially with the six other core investment funds and the nine Pre-Arranged Portfolios (Target Date Retirement Funds). The only advantage the TRS 403b Program has over the DCP is the higher guaranteed interest rate option. See last month's Current Pension Topics of Jan. 12, 19 and 26. Eliminate this grossly unfair and illegal taxpayer subsidy and you have a level playing field. Absent this 8.25-percent taxpayer supported guaranteed return and you have the TRS 403(b) Program competing directly with the DCP for stable income fund dollars. Is this not what we, as a free-enterprise capitalistic society, teach our children? So, if it is taught in our public schools, why is it not practiced when it comes to the supplemental TRS 403(b) Program?

No one who is looking for a risk-free investment would invest in a stable income fund with a 5-percent return when the New York taxpayer is guaranteeing 8.25 percent. Eliminate the 8.25-percent illegal taxpayer guarantee and you have a TRS 403(b) menu consisting of two investment funds: a common stock fund (Variable A) and a stable income fund (Variable B) along with the restrictive/hurtful rule that does not allow the investor to move his/her money from one investment fund to the other more rapidly than in equal monthly installments over a year. It would be impossible for the TRS 403(b) Program to compete with the DCP. Is there anyone out there who is not of the opinion that the TRS 403(b) Program would go out of business if not for the taxpayer subsidy of the 8.25-percent fixed interest rate option?

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 .