Current Pension Topics: Big Fees Can Cut Account By Hundreds of Thousands
By JOEL FRANK
What impact do fees have on the growth of your pre-tax retirement savings account?

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.

A tremendous impact and one that you must understand.

Just as there is one statewide Defined Benefit pension plan for state and local governments and their employees, there should be a single, statewide 457(b) plan. In fact, there is one and it has been operational for many years but, unlike the pension plan, local governments are not compelled to make it available to their employees. That has made this superb plan an extremely underutilized employee benefit. I am referring to the New York State Deferred Compensation Plan, one of the finest 457(b) plans in the nation.

Assume two investors with identical pre-tax savings histories as follows: First-year salary of $30,000 increasing by 3 percent annually. Ten percent of their salary is saved each year. Both earn 8 percent annually on their investment. Bob's account balance after 40 years is $1,101,000 while Rob's balance is $693,000. Why? Bob paid annual fees of 0.2 percent to the New York State Deferred Compensation Plan, while Rob paid fees of 2.2 percent to the commission-based New York State United Teachers (NYSUT)/ING Opportunity Plus Variable Annuity.

The lack of a single, de minimis cost, voluntary salary-reduction retirement savings plan, administered by the State of New York, opened up this huge and lucrative market to high-priced vendors of mutual funds and variable annuities. For decades, public-sector employers, including school districts, have victimized their employees by allowing commission-based investment products to be sold to their workers under voluntary 457(b)/403(b) plans.

While keenly aware of the availability of the de minimis cost NYSDCP the NYSUT, motivated by raw greed, decided to partner with ING in the marketing and sale to its own members of its commission-based 403(b) variable annuity labeled "Opportunity Plus". This lucrative 20-year partnership came to an abrupt end on June 13, 2006 when then-State Attorney General Eliot Spitzer decided it was illegal, but not before ING kicked back to NYSUT some of those high fees paid by the tens of thousands of Teachers who trusted the union's endorsement by investing in Opportunity Plus. During this 20-year business venture NYSUT collected in excess of $11 million dollars in illegal kickbacks from ING. As part of the settlement with the New York Attorney General, NYSUT paid a $100,000 fine and ING refunded $30 million to Opportunity Plus investors. To add insult to injury, while it was selling a commission-based variable annuity to its dues-paying members, NYSUT, as employer, sponsored, as it still does, a 401(k) plan for the pre-tax retirement savings of its own employees. NYSUT, the employer, has never sold commission-based variable annuities/mutual funds to its own workforce. The NYSUT 401(k) plan, like the NYSDCP, sells only de minimis cost investment products to NYSUT staff.

Currently NYSUT, the union, does not endorse or sponsor any pre-tax retirement savings plan for its dues-paying membership. Notwithstanding the fact that NYSUT is no longer in the 403(b) business, Opportunity Plus is but one, among many, commission-based variable annuities/mutual funds still being sold to NYSUT members. How tragic! NYSUT must come clean in a proactive way and admit its wrongdoing by assuring that, going forward, only the best available retirement plan will be offered to New York's public workforce, the NYSDCP. To make up for lost time, NYSUT needs to start spending those illegal fees by partnering with the public employers of New York in the sponsoring of financial education workshops with the goal of doubling the number of NYSDCP participants within a year. Public-sector employers and unions of this state have a fiduciary duty to assure that only de minimis cost investment products are sold to New York's civil servants. See: https://www.nrsservicecenter.com/iApp/ret/content/landing.do?Role=None&Site= nysdc.

Of Note: Since 1968, the City of New York and the United Federation of Teachers have been steadfast in never allowing commission-based variable annuities/mutual funds to be sold to city workers. During this entire time, only city-administered pre-tax retirement savings plans, with de minimis cost investment products, have been sold to city employees. No other local government and union in this nation can make this claim.

The Deferred Compensation Plan of the City of New York, along with the New York State Deferred Compensation Plan, represent the gold standard on how public employees should be treated when it comes to their voluntary, yet extremely vital, pre-tax retirement savings accounts.