Current Pension Topics
Roth 457s Likely Next Year

By JOEL L. FRANK

The following comes from the Fire Department of the City of New York:

"The Fire Department is in the process of finalizing a contract with a vendor to design and develop a comprehensive Fire Department Pension System, which will record and manage pension fund activities as well as perform pension calculations for FDNY Uniformed members. The contract also provides for the development of a public web portal as well as a module that will provide self-servicing capabilities to our members."

Many of you have asked me about when the Congress will authorize a Roth feature to 457 plans. The establishment of Roth 457 plans was approved as part of an Emergency Supplemental bill on March 29. The bill is expected to pass and be signed into law by President Bush. Its effective date would be Jan. 1, 2008.

The City of New York is one of just a handful of state and local governmental employers that offer both 457 and 401(k) plans. The city has recently adopted a Roth 401(k) plan as well as an IRA. I believe it is safe to say that the city will adopt a Roth 457 Plan shortly after Dec. 31.

The state teachers union, the New York State United Teachers, has just been slapped with a lawsuit. ING, the insurance behemoth, is the co-defendant. The suit alleges lies, kickbacks, union corruption and tens of millions of dollars in ill-gotten gains.

The suit, which is seeking Class Action status, accuses ING and the New York State United Teachers of ripping off union members in a retirement savings plan through overcharges, undisclosed payments and kickbacks.

Lynn Sarko, an attorney with Keller Rohrback in Seattle, who represents the plaintiffs, says he's preparing to file three similar suits in the next month.

"Our investigation shows this was not an aberrant practice but widespread at ING and its competitors," Sarko said: "What's so insidious in the New York case is that union officials held themselves out as having investigated and approved retirement products when they were in fact conspiring with ING to hide the facts and personally benefit."

ING is reviewing the suit and declined comment. The New York State United Teachers said through a spokesman that it was not surprised by the suit and its benefits arm will "provide an appropriate legal response."

The suit, filed in United States District Court for the Southern District of New York, claims that, unbeknown to its members, the union accepted millions of dollars from ING in exchange for an exclusive endorsement of an allegedly overpriced 403(b) variable annuity labeled "Opportunity Plus."

The alleged (at the time) illicit agreement prompted an investigation by then-New York State Attorney General Eliot Spitzer. Under a settlement agreement with the Attorney General, ING will be refunding a total of $30 million to those who took the union's advice and purchased the annuity. The union gets to keep the $10-12 million it collected from ING in endorsement fees. Go figure! It will, however, reimburse the Attorney General $100,000 for costs incurred in investigating the wrongdoing. The settlement did not preclude further litigation based on ERISA claims (Employees Retirement Income Security Act, a Federal statute).

Historically, unions and public entities offering 403(b) plans have been exempt from the stringent fiduciary duties imposed by ERISA because they did not actively manage them. This suit, however, argues that because the union exclusively endorsed ING's product, received millions of dollars in compensation and actively promoted it, both the union and ING are subject to ERISA.

The suit claims "ING reimbursed NYSUT for the salaries of certain employees of NYSUT whose jobs were to promote the plan to members while appearing to be disinterested NYSUT employees."

The union received as much as $3 million annually for its endorsement and told its members "we've done all the background work so you don't have to!" In total, 53,000 union members invested over $2 billion in the 403(b) variable annuity.

Of Note: The Deferred Compensation Plan of the State of New York is available to every local public employer in New York including school districts. The employer, however, must opt in. Every public employee in this state is entitled to a low-cost, commission-free, salary-reduction retirement savings plan. City employees, including Teachers, are extremely well-covered. But, as this lawsuit reveals, tens of thousands of local employees outside of the city are being fleeced every payday by outfits like ING. If you work for a public employer outside of the city, contribute all you can to the Deferred Compensation Plan of the State of New York.

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Q.: For several years I was a cop in Baltimore, Maryland. Can I purchase this out-of-state service?

C.C. A.: No. New York law does not provide for the purchase of out-of-state service.

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Q.: I am a Teacher who has invested about $175,000 in the Variable B Annuity Fund of the Teachers' Retirement System (TRS). I want to thank you for bringing us up-to-date with the Class Action lawsuit which was filed against the TRS Board of Trustees. Is it possible to learn more about the alleged wrong-doing of these Trustees?

T.H.

A.: Yes it is. Just e-mail me with a request for more information and I will forward a copy of the Appellate Brief.

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 .