Current Pension Topics: Investment Mgr. Points Can Cost You Dearly
By JOEL FRANK
Q.: I am interested in the Teachers' Retirement System's guaranteed 8.25-percent fund you have mentioned on several occasions in your column. I am a Tier 4 member of the New York City Employees Retirement System as well as the Deferred Compensation Plan. Please elaborate on this plan and whether non-teachers are eligible to participate.

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.

I.N.

A.: The Accumulated Deductions account of members of Tiers 1-2 of the eight public-employee retirement systems in the State (3) and City of New York (5) are credited with a statutory 8.25-percent interest rate. The rate is set by the State Legislature for a 2-3 year period. The 8.25-percent rate is good through June 30, 2009, at which time it will be re-set. It may remain the same, increase or decrease but may not go below 7 percent. 8.25 percent is also the interest rate for all members of the voluntary Tax-Deferred Annuity Plan administered by the Teachers' Retirement System of the City of New York. Members of Tiers 3-4 earn a statutory 5-percent rate on their savings.

I.N.; Insofar as you are a Tier 4 member of the NYCERS, you are not eligible to receive the 8.25-percent rate. Additionally, you must be a member of the TRS in order to be eligible to participate in TRS's Tax Deferred Annuity Plan.

Ouch! — Those Basis Points

A basis point is one hundredth of one percent (0.001). This is the manner in which the fees you pay to your investment manager are expressed. The lower your basis points, the greater your investment value. The Federal Thrift Savings Plan charges 1.5 basis points, or 0.015 percent, to manage the retirement savings of Federal employees. This equates to a $1.50 fee for each $10,000 of account value (0.015 X $10,000).

Do you have any idea how high fees affect the growth of your investment? Example: For 40 years Bob and Rob contribute to the New Jersey State Employees Deferred Compensation 457(b) Plan (NJSEDCP). Their first-year salary is $30,000, with annual increases of 3 percent. Ten percent of their salary is invested in the Plan. They earn 8 percent on their investment. At the end of 40 years, Bob's account is worth $1.1 million while Rob's account is worth $700,000. Why? Bob invested his money with the four state-managed funds at a cost of 8 basis points or $8.00 per $10,000, while Rob invested his money with Prudential at a cost of 220 basis points or $220.00 per $10,000.

For the first 25 years of its existence, the NJSEDCP, by offering only de minimis cost investment funds, got it all right. This all changed about three years ago, when Prudential, armed with its commission-based investment product menu, replaced the New Jersey Division of Pensions and Benefits as Plan Administrator. Increasing the number of investment funds in this manner is severely detrimental to plan participants because Prudential Sales Reps are compensated by selling the 23 Prudential funds, not the four state-managed ones. There is no longer a level playing field as there was during the first 25 years of the plan's operation.

It is shocking that at a time when high fees paid by the employee/investor are under intense scrutiny, the NJSEDCP would add commission-based products to the de minimis cost investment line-up which served the plan's participants so well for so long. If the NJSEDCP objective was to offer more than the four state-managed investment funds, all of the 23 additional ones could have been of the de minimis cost variety, no? By adding high-cost investment alternatives, the Plan Trustees have breached their fiduciary duty.

For nearly a half-century, the New Jersey Division of Pensions and Benefits has administered, at de minimis cost, a 403(b) Plan: the Supplemental Annuity Collective Trust (SACT). All public education personnel, including those in higher education, are eligible to join. During its entire existence, the SACT has offered but one investment choice, a common stock fund. Such reckless abandonment is a clear breach of fiduciary duty on the part of the SACT Trustees and is the sole reason why the commission-based variable annuity/mutual fund industry has had a 50-year choke hold on the 403(b) K-12 public school market in New Jersey. Recommendation 1.: The NJSEDCP should, forthwith, revert back to offering only de minimis cost investment funds. Participation in the NJSEDCP should be expanded to include local governments and school districts. Just as all local governments, including school districts, must belong to the statewide Public Employees' Retirement System/Teachers' Pension and Annuity Fund, it is nonsense to have each of New Jersey's 600 local governments and 600 school districts administer their own high-cost 457(b) plan.

Recommendation 2.: The SACT investment menu should be expanded, forthwith, to include more than just a single common stock fund. Just as all of the state's school districts must belong to the statewide Teachers' Pension and Annuity Fund, it is nonsense to have each of New Jersey's 600 school districts administer their own high cost 403(b) plan.

Of Note: Public-education employees are eligible to contribute, at the same time, to a DCP (a 457(b) plan) and a 403(b) plan. The per-plan maximum contribution for 2008 is $15,500.