Current Pension Topics: Unions Should Publicize City `Comp' Plan Pluses

Current Pension Topics
Unions Should Publicize City `Comp' Plan Pluses


The City of New York offers its employees two major pre-tax retirement investment plans. One is the Tax-Deferred Annuity/403(b) Plan (TDA) run by the Teachers' Retirement System, which is available only to members of the TRS. The other is the Deferred Compensation 457(b)/401(k) Plan run by the Deferred Compensation Board of the City of New York, which is available to all employees, including members of the TRS.

Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net.

These two plans don't operate on a level playing field inasmuch as the United Federation of Teachers controls the TRS, while no union controls the DCP. The TRS Board of Trustees consists of seven members. Three are UFT appointees (active members of the TRS) and four are public appointees. A simple majority of four is required for a board resolution to carry. One of the four, however, must be a UFT appointee; otherwise the resolution is defeated.

Having said all that, we cannot expect the UFT to encourage its members to join the DCP, a plan it does not control. It's common sense for it to strongly endorse its own plan. Over the years the UFT and the Plan Administrator, TRS, have partnered to make sure the members know about the long-term benefits of participating in the TDA Plan. Such a partnership is unique in public employment.

Should the DCP not get equal billing? Why isn't there a union willing to partner with the DCP in an effort to communicate to the city's workers (including Teachers) the advantages of joining the DCP? How many Teachers know they can contribute to both plans at the same time, or know that the DCP is exempt from the 10-percent penalty tax on withdrawals made prior to age 59-1/2?

We can't expect the UFT/TRS to tell its members these points of fact. In my view, District Council 37, as the city's largest union, should devote a couple of paragraphs in its newspaper, at least every other month, to the workings of the DCP and how long-term participation in the plan can rival the benefits of the mandatory Defined Benefit pension plan.

Unlike the Defined Benefit pension systems, where all costs of operation are borne by the taxpayer, the TRS TDA and DCP pass all of the costs of operating their plans onto the individual participant. Thus, each and every dollar of expense is a dollar less in the employee's investment account. Keeping expenses as low as possible is essential for the long-term growth of your money.

The following charts show the fees paid by the employee for each $10,000 of investment. Please note that the current rate of return on the Fixed Return Fund is 8.25 percent. The DCP does not offer a "fixed-return" fund, while the TRS TDA does not offer Target Date funds. With the TRS TDA, you may not change your investment contribution allocation more often than every 90 days and fund balances cannot be transferred to another fund within the plan more rapidly than over a 90-day period (one-third per month). There are no such restrictions or conditions with the DCP. The only thing the TRS TDA Plan has going for it is the 8.25-percent fixed return rate, guaranteed by the taxpayer. In my view, the DCP is the superior overall plan as to cost, investment options, telephone service, flexibility and Web site.

The TRS TDA Plan offers three fixed-income funds, Fixed Return, Stable Value and Inflation Protection. It is shocking that one is not a bond fund where there is an opportunity to earn capital gains/profits as well as interest. All three are no-risk funds designed to throw off only a fixed or guaranteed amount of interest. One cannot lose any money by investing in any of these funds. But, three? Once again, the TRS Trustees reveal their shortcomings as investment fiduciaries.

Recommendations: Members of the TRS who are totally risk-averse should place all their money in the Fixed Return Fund. All other members of TRS should use the Fixed Return Fund for just the fixed-interest portion of their overall investment allocation, with the balance of their contribution invested in the appropriate Target Date Fund, taking into consideration the need to be more aggressive because they are using the Fixed Return Fund for the no-risk portion of their diversified investment. Non-TRS members who are totally risk-averse should invest all their money in the Stable Income Fund. All other non-TRS members should invest all their money in the appropriate Target Date Fund (just one please).

The use of Target Date Funds eliminates the need to invest in any of the Core Funds because the Core Funds are already represented in the portfolios of the Target Date Funds. If you invest in a Core Fund and a Target Date Fund you are throwing the "pre-arranged" diversification of the Target Date Fund out of whack. Should you have any questions please contact me.

TRS TDA Fund Expenses
Fund Name:	Total Annual Expense Per $10,000
Fixed Return Fund	$ None
Diversified Equity Fund	29.00
Stable Value Fund	29.00
International Equity Fund	51.00
Inflation Protection Fund	103.50
Socially Responsive Equity Fund	109.00
DCP Fund Expenses
Fund Name	Total Annual Expense Per $10,000
Stable Income Fund	$17.00
Bond Fund	27.00
Equity Index Fund	4.00
Socially Responsible Fund	46.00
Mid-Cap Equity Fund	54.00
International Equity Fund	39.00
Small-Cap Equity Fund	37.00
Target Date Fund
2045 Fund	21.00
2040 Fund	21.00
2035 Fund	21.00
2030 Fund	21.00
2025 Fund	21.00
2020 Fund	22.00
2015 Fund	22.00
2010 Fund	23.00
2005 Fund	24.00
2000 Fund	24.00
1995 Fund	24.00
Static Allocation Fund	23.00