Current Pension Topics
'457(b)' Right Choice at CUNY

By JOEL L. FRANK

Now that the 403(b) investor-friendly Revenue Ruling 90-24 is no more, employees will need to communicate with their employers their demand for no-load and low-cost investment alternatives. The blue-collar workers at the City University of New York are in need of such an alternative. Every CUNY employee who still has the high-priced 403(b) Variable Annuity underwritten by Metropolitan Life should write a letter to the CUNY Chancellor demanding a no-load and low-cost mutual funds option. This should be in place by the first of the year.

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 .

Having said that, all CUNY employees should use the New York State Deferred Compensation 457(b) Plan as their voluntary pre-tax investment plan of choice. This means all of you should first contribute the per-plan maximum of $15,500 to the Deferred Comp plan before you make contributions to the 403(b), even if you have a no-load and low-cost 403(b) investment menu; i.e., TIAA-CREF, Fidelity or Vanguard. I say this because the 10-percent penalty tax that applies to pre-age 59-1/2 403(b) withdrawals does not apply to pre-age 59-1/2 457(b) withdrawals.

The 403(b) Investment Plan of the Teachers' Retirement System of the City of New York should only be used for the conservative portion of your pre-tax investment portfolio. If you are 100-percent risk-averse, then your entire contribution (and accumulation) should be invested in the legislatively set 8.25-percent guaranteed rate. If you are not 100-percent risk-averse, then only that portion (i.e.; 20 percent) of your investment portfolio that is conservative should be invested in the 8.25 percent option with the balance (i.e.; 80 percent) going into the appropriate Pre-Arranged Portfolio offered by the Deferred Compensation 457(b) Plan of the City of New York.

The Pre-Arranged Portfolio chosen should be more aggressive than it otherwise would be, because you already have the conservative portion of your portfolio in the 8.25-percent option of the TRS 403(b) Investment Plan. If you can afford to defer more than the per-plan maximum ($15,500 for 2007), invest in the appropriate Pre-Arranged Portfolio offered by the Deferred Comp's 401(k) Plan.

If you use all three plans, the combined contribution for 2007 may not exceed $31,000, with the combined contribution made to the TRS 403(b) Investment Plan and the Deferred Comp's 401(k) Plan not in excess of $15,500.

No one, I repeat, no one should use the TRS 403(b) Investment Plan for common stock investment until the Trustees rescind that very harmful 12-month rule for exchanging investments between the common stock account (Variable A) and the Fixed Income Account. This rule, peculiar to the TRS 403(b) Investment Plan and the Variable Annuity Program of the TRS Qualified Pension Plan, violates the state's fiduciary responsibility laws.

All employees of the Health and Hospitals Corporation should stop contributing to the HHC TDA Plan because on average it charges about 3-4 times as much as the Deferred Compensation 457(b) and 401(k) Plan of the City of New York and being a 403(b) plan is subject to the 10-percent penalty tax on pre-age 59-1/2 withdrawals.

Of note: The HHC TDA 2045 Fund charges 0.82 percent, or $82 per $10,000 invested, while the 2045 Fund of the Deferred Comp Plan charges 0.21 percent or $21.00 per $10,000 invested.

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Q.: What is the definition of "Final Salary" when calculating Tier 1 benefits?

B.S.

A.: "Final Salary" is the salary earned during the 12 months prior to retirement, or the average of any three-year calendar years, if greater. Example: Tom earned $70,000 in 2003, $80,000 in 2004 and $90,000 in 2005. In 2006 he earned $74,000 and in 2007 he earned $78,000. He retires on Jan. 1, 2008. His salary for the 12 months prior to retirement is $78,000, but his average annual calendar-year salary from 2003 to 2005 is $80,000 ($70,000 + 80,000 + 90,000 = $240,000 divided by 3 = $80,000), so $80,000 is his "Final Salary" for Tier 1 benefit calculation purposes. < /p > < /p >