Current Pension Topics
'No-Brainer' Raises a Question

By JOEL L. FRANK

The proposal to dissolve the city Board of Education Retirement System (BERS) in favor of having its assets and liabilities transferred to either the City Teachers' Retirement System (TRS for pedagogical employees) or the New York City Employees Retirement System (NYCERS for non-pedagogues) is a no-brainer.

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.

The proposal brings up the question: Why is it that, in the last 40 years, out of eight public-sector retirement systems in this state, only two have allowed their members to invest their mandatory pension contributions in the stock market? What makes the city TRS and the city BERS so special? A little history will be instructive. Section 403(b) was added to the Internal Revenue Code (IRC) in 1958. In the mid 1960s, the United Federation of Teachers (UFT) was hard at work helping the unions, representing the higher education crowd at SUNY-CUNY, establish an "Optional Retirement Program" (ORP) for their members, as an alternative to the state and city TRS. The uniqueness of the ORP is the opportunity for the employee to invest not only his or her own mandatory pension contributions in the stock market, but those of the employer (SUNY-CUNY) as well. The employee selects the investment from a variable annuity investment platform designed by the Teachers' Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), one of the largest and most respected financial services firms in the world.

In 1966, Section 403(b) of the IRC was seven years old and the largest public school district in the nation was still not offering a 403(b) plan to its employees. The UFT, like its counterparts at SUNY-CUNY, wanted its members to have the right to invest at least their own mandatory pension contributions in the stock market. The union, however, wasn't about to give the business over to the insurance industry which, at the time, was the only business authorized to sell 403(b) annuities. Inasmuch at it controlled the TRS Board of Trustees, the UFT saw the TRS as the vehicle by which its members could reap the benefits of pre-tax investing under Section 403(b). Its strategy was to first get the State Legislature to authorize the TRS and BERS to operate a Variable Annuity Program for the investment of mandatory employee pension contributions and then get the Internal Revenue Service (IRS) to grant permission to the two retirement systems to use the same Variable Annuity Program for the investment of voluntary pre-tax contributions under Section 403(b). With all the legal necessities in place, the Variable Annuity Programs for investment of mandatory employee contributions began in 1968. In 1970 the programs were extended to include voluntary pre-tax investing under Section 403(b).

While voluntary pre-tax investing is now universally available throughout the state via Sections 403(b), 457(b) and 401(k) of the IRC, Tiers 1-2 members of city TRS and BERS remain the only public-sector employees in the state to have the option of investing their own mandatory pension contributions in the stock market. In my view, every member of a public-sector retirement system should have the right to invest their own mandatory contributions in the investment market place, not just Tiers 1 and 2 members of the TRS and BERS. For city employees, I nominate the Deferred Compensation Plan of the City of New York to be the Investment Provider for the investment of these mandatory pension contributions with the Deferred Compensation Plan of the State of New York being the Investment Provider for the investment of these mandatory pension contributions for all the other public-sector employees in the State of New York.

The investment markets should be made available to all those tens of thousands of public employees who cannot afford to take full advantage of voluntary pre-tax investing under Sections 403(b), 457(b) and 401(k). Parity with Tiers 1-2 members of city TRS and BERS is 40 years overdue.

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.