Current Pension Topics
City TRS's Edge Over State

By JOEL L. FRANK

Q.: As you know, Internal Revenue Code Section 403(b) Investment Plans are very popular with public school personnel. In New York we have two publicly-administered Teachers' Retirement Systems (TRS). One is for the public school personnel of the City of New York and the other is for the rest of the state. Why is it that the State TRS has never offered a 403(b) Investment Plan, while the City TRS has done so since 1970?

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 .

P.G.

A.: I believe it had to do with the fact that there are hundreds of school districts in New York and only one - the city - is large enough to command its own TRS. While Section 403(b) was first added to the Internal Revenue Code in 1959, as late as 1969 there was no 403(b) Investment Plan available to city Teachers. In the late 1960s, the United Federation of Teachers, representing the city's school personnel, proposed that the TRS establish a 403(b) Investment Plan and the Board of Education (now the Department of Education) agreed. Enabling legislation was introduced in Albany with the enthusiastic support of both the union and the city. The TRS 403(b) Investment Plan started its operation in 1970.

Any proposal to do the same on the state level was a non-starter, because the State TRS had to negotiate with hundreds of unions/associations representing public school personnel throughout the state and their employing school districts, a monumental task to say the least. Moreover, by the late 1960s, the majority of school districts outside of the city were well on their way to selling out their Teachers to the insurance industry by allowing them to sell their high-priced variable annuities to their employees.

Having said that, the UFT/Department of Education should be quite proud of the fact that they have never allowed the high-priced commercial variable annuity products to be sold to the city's educators. But sadly, that fact did not lead to a TRS 403(b) Investment Plan that Teachers can be proud of.

While the TRS Board of Trustees was always free to design a plan along the lines of the city's Deferred Compensation 457(b)/401(k) Plan or the state's Deferred Compensation Plan, it has not. In 37 years of its existence, the TRS 403(b) Investment Plan has only two investment options: A fixed-interest account and a common-stock fund.

After 37 years, Teachers are still waiting to be able to change their investments in the two options in a single lump-sum transaction. But the trustees are stubbornly sticking to their rule that you may not change your investment allocation between the two options more rapidly than 1/12 of the account balance over a 12-month period.

Outside the city, the 403(b) has been a super profit center for the financial services industry. The collection of high and unnecessary fees from the accounts of Teachers makes these 403(b) sharks richer and the Teachers poorer. See: Spitzer Vs. NYSUT.

I am a firm believer that the voluntary salary-reduction Investment Plan should be run on a non-profit basis. The cost to the Teacher should be de minimis. This means the profit-making insurance and mutual funds companies should not be allowed to sell their retail products to public school personnel in this state or any other state for that matter.

In my view, the Section 457(b) Investment Plan is the plan of choice for school personnel because it is exempt from the 10-percent Federal excise tax on plan withdrawals made prior to age 59-1/2. I strongly urge all city school personnel to participate in the Deferred Compensation 457(b)/401(k) Plan of the City of New York. Outside of the city, it is somewhat problematic due to the fact that each local school district must opt into the state's Deferred Compensation 457(b) Plan. If your school district has not done so, ask them to do so as soon as possible, so that you may gain the advantages of de minimis investing.