joel

Re: The NYSUT/ING case. Who is legally culpable for not offering the teachers of NY a no-load 403b alternative to the ING 403b offerings...the union, the school district or both?

Two facts have been added to my article about the NY state teachers' union sponsoring a 403(b) program. For those of you who have already read the article you will find the two additional points of fact at the end. The article can be found at: http://www.403bwise.com/features/nysut_jlf.html. Peace and Hope, Joel L. Frank

It takes millions of dollars to operate a union the size of the New York State United Teachers NYSUT that has 500,000 members. Unions are always looking for sources of revenue to augment their reliable dues flow. Recognizing that pre-tax retirement savings plans funded through convenient payroll reduction is by far the most popular fringe benefit offered to teachers by the 620 school districts in the state of New York, the NYSUT saw an opportunity in 1989 to use section 403(b) of the Internal Revenue Code as a means of raising revenue. All it had to do was find an investment provider willing to buy advertising space in the union newspaper, the "New York Teacher." Once it found a willing investment vendor it would be more than willing to "sponsor/endorse" its products. Later that year NYSUT endorsed two arrangements issued by ING Life Insurance and Annuity Company — the Opportunity Plus variable annuity and the Opportunity Independence 403(b)(7) custodial account. Union Blessing Should Equal Quality PlanAt first glance one might assume that the Opportunity Plus and Opportunity Independence plans must be outstanding programs lest it would never get the union's "endorsement." In fact the NYSUT website describes Opportunity Plus as "an innovative 403(b) tax-deferred variable annuity (TDA) designed specifically for NYSUT members and agency fee payers." Sounds good. Since school districts usually do a miserable job explaining the 403(b) to teachers it would only make sense that the union would pick up the slack and offer quality 403(b) education and/or quality 403(b) investment products. Lets go inside the numbers to see if this is the case. Opportunity Plus: Fees in Excess of 2% Nearly all of the choices in the 50-60 investment funds (sub-accounts) in the Opportunity Plus program sport expense ratios of 1-2 percent and include the notorious 12b-1 fees. All of the funds charge a sales commission on withdrawals made within 5 years of purchase (contingent deferred sales charge). In addition to the expenses charged by the individual investment funds the teacher is also charged 1 percent for insurance expense by the Separate Account maintained by ING. This means that investors are paying on average more than 2% in fees with Opportunity Plus. Why Didn't the Union Negotiate a Better Plan? It Did — for Itself!Why didn't the union "negotiate" with a superior low-cost investment provider along the likes of Fidelity, T. Rowe Price, TIAA-CREF, or Vanguard? These vendors offer a host of investments with fees well below 1%. It is my opinion that NYSUT did not seek out a low-cost provider because such firms do not have the advertising budgets that a high cost provider like ING has. So rather than endorsing a low-cost provider and communicating the endorsement through union paid mediums the union decided to endorse the high-cost provider and collect advertising revenue from ING instead. Opportunity Plus and Opportunity Independence are prime examples of 403(b) arrangements that are described as “sharks” by the American Federation of Teachers (AFT). The AFT is the national parent of NYSUT. See Special Report by Don Kuehn of the AFT following this article. I think this is a critical breach of trust on the part of NYSUT. Ironically, NYSUT did negotiate a terrific plan — for itself! Since September 1, 1984 the NYSUT has collectively bargained for three 401(k) plans with three unions that represents its own employees: The NYSUT Managerial & Legal Association, the NYSUT Professional Staff Association and the NYSUT CWA local 1141 Union. All three plans are administered by Fidelity Investments and sport fees of about 0.5%. Lets see... 2% in fees for the teachers/dues paying members of NYSUT and 0.5% in fees for the employees of NYSUT. This is a moral outrage. NYSUT Teachers Lose Tens of Thousands of DollarsIt is important to remember that all of the expenses to maintain an investment in Opportunity Plus are paid for by the teacher/investor, not the school district, and not the union. Expenses translate into smaller account balances and less retirement income. Lets do some arithmetic to knock the point home: The ING/NYSUT "endorsed" Opportunity Plus 403(b) program costs the public school teacher about 2 percent while the 401(k) Plans sponsored by the NYSUT costs the NYSUT employee about 0.50 percent. If we start with an initial investment of $30,000 (with no additional contributions), and earn an average 8 percent a year for 30 years the teacher investing in the ING/NYSUT endorsed 403(b) program sees his $30,000 grow to $172,305 while the NYSUT 401(k) Plan participant sees his $30,000 investment grow to $262,649. Apparently the NYSUT believes high costs are both good and bad. It's good if NYSUT, the union, "endorses" the high cost ING 403(b) program for teachers, and then collects some of those high fees teachers pay to ING by selling ING advertising space in the union newspaper where ING boasts that its 403(b) arrangements are blessed by the union. But its bad if NYSUT, the employer, sponsors a similar high cost 401(k) plan for its employees. NYSUT cannot have it both ways. Opportunity Independence More Than Twice as Expensive as NYSUT 401(k) PlanWhile cheaper than Opportunity Plus, investment choices in Opportunity Independence, the other NYSUT endorsed ING offering, average more than 1% in fees — twice as much as the NYSUT 401(k) plan. Many choices in this plan average 1.5% in fees. It is my opinion that an expense ratio in excess of 1.5% makes pre-tax investing inferior to after tax investing in a low-cost plan. But the real issue is why should the dues paying members of NYSUT pay more than twice as much in retirement plan fees than NYSUT employees? Why Plan Expenses VaryWhy pay 2% for a mutual fund when the same type of investment is available at 0.50 percent? There is a reason why some plans charge more than others. The 403(b), for example, is really not a plan at all but a legal arrangement between the employee and the investment provider. The employer is simply responsible for deducting a pre-determined amount from the employee's paycheck and sending it off to the investment provider for investment pursuant to the employee's instructions. The 403(b) arrangement contrasts sharply with the other two popular salary reduction plans, the 401(k) and 457(b). These savings vehicles are formal retirement plans and as such the law requires the plan sponsor (employer) to perform its due diligence and establish a Board of Trustees, prepare a written Trust instrument, write a Plan Document, appoint a Plan Administrator, and write a Summary Plan Description. The 403(b) arrangement does not require such due diligence, which is why the arrangement is generally more costly to the employee. This lack of oversight paves the way for the investment provider to sell commissioned based funds through a network of agents. It is not uncommon for these agents to be found in the workplace prospecting for customers. On the other hand, the due diligence required of employers offering 401(k)/457(b) plans results in fees being kept to a minimum (no commission, no 12b-1 fees, no surrender charges and no variable annuity). School Districts Need to Do MoreWhile not specifically required by current law to establish a Board of Trustees, prepare a written Trust instrument, write a Plan Document, appoint a Plan Administrator, and write a Summary Plan Description as required in 401(k) and 457(b) plans, school districts, especially the 620 in New York, need to begin putting their employees first when it comes to the 403(b). Their laissez faire attitude results in high cost 403(b) investment products being sold to their employees. School year after school year New York school districts continue to shirk their responsibility by allowing the high cost ING/NYSUT endorsed 403(b) programs to be sold to the tens of thousands of teachers in this State. Employees Need to Take ActionConcerned employees should arrange a meeting with their school district's benefits director. Tell him/her how outraged you are that you do not have a low-cost program. Make the same statement at a Board of Education meeting. Write a letter to the editor of your local newspaper. The employer is a fiduciary and as such has a duty to its employees to offer a low cost 403(b) program. Send a letter detailing your outrage to: Mr. Walter Dunn, Chairman of the Board of Trustees of the NYSUT Benefits Trust, Inc.800 Troy-Schenectady RoadLatham, NY 12110-24551-800-626-8101 May I also suggest that the leaders of the various local affiliates of the NYSUT call upon the NYSUT Professional Staff Association (PSA), the labor specialists employed by the NYSUT to help local affiliates negotiate collective bargaining agreements with their school districts, for help in negotiating 403(b) arrangements along the low cost lines (no commission, no 12b-1 fee, no surrender fee and no variable annuity) of the 401(k) Plan that the NYSUT PSA has negotiated for its members with NYSUT management. Mr. Jeffrey Cassidy is the President of the NYSUT PSA. He can be reached at 1-800-287-3903. The following comes from the Opportunity Plus Prospectus:"Agreement with the CompanyNYSUT Benefit Trust is a non-profit trust organized and existing under the laws of the State of New York. This Trust operates for the benefit of its members and agency fee payers of the New York State United Teachers. The Company (our, we) and NYSUT Benefit Trust agree to the following:· Sponsorship of the Opportunity Plus program by the NYSUT Benefit Trust; · Our provision, to all members and agency fee payers of educational programs focused on financial planning for retirement; and · Our employment of trained personnel to conduct these programs exclusively for members.Additionally:· We reimburse NYSUT Benefit Trust for direct out of pocket expenses up to a maximum of $40,000 per year incurred in the promotion of the Opportunity Plus program. · We will pay NYSUT Benefit Trust $338,000 per quarter during 2002. This payment will increase in subsequent years, and may include in the future, an asset-based component. NYSUT utilizes these amounts to enhance benefits to the participants in programs it sponsors. · We contribute to the cost incurred by NYSUT Benefit Trust for retaining up to six employees who assist in management of the Opportunity Plus program. · We compensate United University Professions $6,000 per month for the use of on-site campus facilities and the sponsorship of the Opportunity Plus program." ===================================================== AFT Home > Publications > On Campus May/June 2000Index Page Current Issue Previous Issues May/June 2000 by Don KuehnShark attack! Investors in 403(b) plans, beware:You are especially vulnerable to predatorsTeachers, college professors and other education workers are being threatened by sharks--but not the kind that swim in the sea! These equally dangerous predators are "land sharks" who prey on unsuspecting or uneducated investors and devour their hard-earned retirement money. It's time we put a stop to them.Under Internal Revenue Service Code section 403(b), employees of educational and charitable organizations are eligible to participate in pre-tax investment arrangements usually called tax-sheltered (or tax-deferred) annuities (TSAs or TDAs). These popular but little understood investments are used by an estimated three-fifths of public school employees and many college and university staffs to augment state or local defined-benefit retirement plans.In many ways, TSAs resemble 401(k) plans that have become widespread during the past 10 to 15 years. The TSAs allow the participant to put money aside in a variety of investment vehicles before Uncle Sam gets his hands on any of it. The invested money grows tax free--until it is withdrawn through regular (annuitized) payments after retirement--although the amounts are subject to Social Security withholdings. Sounds good. So, what's the problem?The returns that participants realize on their investments are all too often way below returns on comparable investments in the marketplace. The reason is that many companies and salespeople in the business of selling financial instruments can think of countless ways to part investors from their money. These include high front-end costs, massive surrender charges, redemption fees, inappropriate investment choices, sub-account fees, two-tier plans, big commissions and hidden charges for unneeded life insurance.Unlike a standard employer-managed pension plan, in 403(b) plans the employer keeps an arm's-length relationship with the vendor. Because the employer typically does not contribute to the plan, schools and colleges neither recommend nor make judgments about which companies have access to the pre-tax payroll deductions that make TSAs work. There is no "plan document" to govern the employer's service arrangement with vendors. That means no federal paperwork, no fiduciary relationship and low administrative costs.It also means no investor education.For workers, it means that just about any insurance agent who can round up a minimum number of subscribers can hawk annuities or mutual funds. So, in Los Angeles, for example, more than 100 vendors create a bewildering array of investments and options to sift through. Financial products are pitched with dizzying variety in school lounges, cafeterias and in home visits by the sharks. Because there are so many different products to choose from, it is nearly impossible to become an educated consumer.More than $422 billion is invested through 403(b) arrangements and, sadly, most of it sits in low-performing fixed annuity contracts, reports Spectrem Group/Access Research, a San Francisco-based consulting and research firm. Some 2 million public school teachers have more than $116 billion invested in 403(b) programs.Only 15 percent of total TSA assets are invested in mutual funds. The big fund companies that fight tooth and nail for 401(k) investors generally cede the 403(b) market to insurance companies and their annuity products.In spite of a roaring stock market that has run nearly unabated for more than five years, these TSA contracts may be netting less than the return on certificates of deposit. Over the work life of a typical participant, underperforming assets could cost hundreds of thousands of dollars in unrealized growth.Agents whose companies have a computer slot for payroll deduction for TSAs in a school district or college are expert at promoting, explaining and selling their products. And certainly there is an allure to the idea that--in addition to a state retirement system and Social Security--for those who participate and qualify, a relatively painless investment each payday (unseen and before taxes) can grow to eye-popping numbers.Once the hook is set, few participants monitor their statements or check the relative performance of their TSA against a benchmark such as the S&P 500 stock index or a corporate bond index.What the law allowsUnder the law, education employees can shelter up to $10,500 this year in a 403(b) plan with some limitations (you cannot exceed 25 percent of salary). Three broad categories of investments are allowed: annuity contracts, mutual fund custodial accounts, and life insurance contracts.An annuity contract is an insurance company's written promise that, after retirement, it will pay a monthly amount to the participant no matter how long the person lives. These can be either "fixed" or "variable."The problem with buying an annuity inside a tax-preferred investment vehicle like a 403(b) is that earnings on the annuity are already tax-sheltered. It's like buying an umbrella exclusively for indoor use.In a "fixed" annuity, the contract has a guaranteed interest rate of usually no more than 3 percent or 4 percent. A $100 investment in a fixed annuity might be guaranteed to earn $3 or $4 over the year, but could earn $5 or $6 if market interest rates go up and the issuer elects to pass those rates on to the customer.A "variable" annuity contract's cash value rises or falls depending on the performance of separate accounts that are invested in mutual funds. There is no guarantee that these "subaccounts" will meet their investment objective.Mutual fund custodial accounts allow a participant to buy into a fund held by a bank or by (some) registered securities broker/dealers. Mutual funds are pools of assets (company stocks or corporate bonds, for example) managed with specific objectives in mind. Most readers are familiar with names such as Vanguard, Fidelity and T. Rowe Price, purveyors of a broad array of funds in the commercial marketplace.A life insurance contract obligates the vendor to pay a specific sum of money when the insured person dies. There is no mystery here; life insurance is a common ingredient in nearly everyone's financial planning. Premiums are determined by the age and health of the insured. In a 403(b) plan, however, the life insurance component is called "incidental" and must meet complex rules and limits set by the IRS Code and by state insurance laws.In many cases, the vendor can offer "multiple-choice" annuities. You can have a percentage of your deduction invested in a fixed contract and the rest in a variable product. This gives the participant a chance to practice what is known as "asset allocation," a way of tempering risk by investing both in conservative (fixed) and more aggressive (variable) components. The costsA teacher who invested in variable annuities during this decade--even if it was through high-priced mutual funds or annuity contracts--might not have noticed the exorbitant fees they were charged. The roaring bull market masked the high costs. But if we have another period like 1973 to 1983, fees could easily overwhelm any growth in the value of a TSA.How costly can fees become? Here is an example borrowed from Steve Butler and cited in an article in the New York Times. A couple contributes $10,000 a year to a retirement program through equal deductions twice a month. If they earn 10 percent a year, after fees, they will have $641,000 after two decades. After three decades (through the magic of compounded interest) their portfolio will have grown to $1.9 million.But if their annual fees are just 1 percent higher, so they earn 9 percent on their investments, they will have $75,000 less after 20 years and $355,000 less after 30.Annuities, the most common vehicle for 403(b) plans, come wrapped with a layer of insurance and extra fees.Surrender fees, assessed if the annuity is sold within seven to 10 years after purchase, can be as high as 8 percent. Life insurance, covering only the amount invested (not growth on the investment) runs about 1.25 percent. Some insurers will guarantee a minimum amount of investment growth, but little more than can be realized in the most conservative investments.The average 403(b) annuity charges administrative costs of 2.11 percent of assets a year, according to Morningstar Inc., a financial research firm. By comparison, the average mutual fund has expenses of 1.36 percent. Many large mutual funds, such as those offered by the Vanguard Group, have expenses as low as 0.18 percent of assets each year. Compounded over the span of one's career, this difference in fees means serious money.Get out the shark repellentThe marketing of 403(b) products to school employees typically depends more on the one-on-one relationship between the sales agent and the prospective customer than it does on the investment's cost, expected returns or its features.Many educators will acknowledge that they are novices at investing (never having had much money to invest) and that they need any help they can get. Vanguard and Fidelity won't send someone to sit across the kitchen table and hold their hands like insurance companies do.That makes public school and college employees easy prey for the sharks who feed on these plans. Historically, it has been difficult for participants to get out of these low-performing annuities and into better mutual funds. Surrender fees are one part of the story, roadblocks put up by vendors are another. Some school systems are revamping their 403(b) offerings. In Chicago, for instance, a new program is expected to save employees more than $6 million a year in fees. Before the change, according to a school official, teachers paid 2 percent to 3 percent in fees and more than two-thirds of their money was tied up in fixed investments. Now Chicago school workers can buy no-load funds and reduced-fee annuities through three companies.The New York State United Teachers, Education Minnesota and the United Federation of Teachers (New York City) have also used their significant clout to force positive changes in the 403(b) options offered to their members and to reduce administrative expenses.Stop the bleedingSo, you do your homework and find that you have a two-tier, fixed annuity that charges a surrender fee. Although it declines over the first seven years, it's renewed each time you make an investment (kind of a Catch 22 since you make investments every month). The rate of return is guaranteed at only 4 percent, and the cost of the life insurance component is eating up more than 40 percent of the guaranteed gain.There are steps you can take to remedy a bad situation (see sidebar, "What you should know"). Employees need to act if their 403(b) options are turning them into shark bait.Because most public employers do not screen vendors, a relatively small group of workers can petition for new and better choices in their TSA accounts. These may include some of the bigger mutual fund companies mentioned in this article, or others interested in doing business with your system.The union can make this an issue in future negotiations. Contact your local, volunteer to be on a committee, investigate your options, make a presentation to the school board, write a column for the union's newsletter...raise hell. This is your money. That's not to say it will be easy. Stephen Schullo, a Los Angeles teacher, is becoming something of a celebrity on this issue. He was horrified to discover the confusing, underachieving choices he and his colleagues faced in their 403(b) program. His tale has been reported in the Los Angeles Times, the New York Times and other publications.Some insurance vendors and other providers are lowering fees or broadening investment options in the face of competition and employee complaints.If you hold an annuity contract executed more than five years ago, it is likely you are paying too much. Seek out the agent who sold you the contract to see about converting it to another, better-performing, lower-priced option offered by the same company. If conversion isn't possible, find out about surrender charges. It may be better to pay a penalty than to continue suffering with an underperforming annuity. Consider getting out before you leave any more blood in the water. Don Kuehn, a senior national representative and a trustee in the AFT employees' retirement plan, is the author of "Your Money," a regular column in this newspaper. John Abraham, AFT senior associate director of research, contributed to this article. This article is intended to increase knowledge and awareness of issues of interest to members and retirees. For specific advice relative to your personal situation, you should consult competent legal, tax or financial counsel.Related SidebarWhat you should know American Federation of Teachers, AFL•CIO - 555 New Jersey Avenue, NW - Washington, DC 20001Copyright by the American Federation of Teachers, AFL•CIO. All rights reserved. Photographsand illustrations, as well as text, cannot be used without permission from the AFT. ===================================================== PLEASE NOTE THAT THE AFT HAS RECENTLY ENDORSED/SPONSORED THE ING VARIABLE ANNUITY FOR 403(b) INVESTING. HOW'S THAT FOR A KICK IN THE HEAD. Joel L. Frank

The NYC Deferred Compensation Board (457(b) and 401(k)) has reduced its expense ratio by 40 percent. This was accomplished by switching to separate manage accounts. Its weighted average expense ratio is now 0.34 percent with 41 percent or 0.14 representing an Administrative Fee of $50.00 per year.

Kirk: Are not the morningstar averages retail? Surely a qualified plan is not going to pay retail. And a large plan is not going to pay what a small or medium size plan pays.

The Board of Education of the City of New York has made The 401(k) Plan of the City of New York (administered by the Deferred Compensation Board of the City of New York) available to its employees. How does this FACT fit into the points that have been made on this thread? Joel L. Frank

What does your lawyer say?

403(b) is for non-profits and public schools. It cannot be used for a profit-sharing plan.

Is this the same Harvey Carruth, Prof. of Mathematics at the University of Tenn?

What does she need the money for? Based on this answer she will satisfy the requirements for an in-service withdrawal on account of financial hardship.

Mike, This is a collectively bargained plan. What is the best way to obtain the SPD? Joel L. Frank

How does a non-participant go about researching the details of a specific 401(k) Plan?

What does his current carrier TIAA offer?

"But I think that annuities are usually sold to take advantage of uninformed people." ===================================================== Andy: I COULD NOT AGREE WITH YOU MORE! Does your belief extend to a DB pension plan that compels lifetime annuitizing? Afterall, such a payout scheme is nothing more than purchasing an immediate fixed annuity with the retirement reserve fund. Peace and Hope, Joel L. Frank

Salary reduction amounts have always been reported on W2s. 457 plans are now being included in this requirement. Taxation on these amounts remain tax-deferred.

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More Guest Article TSA Access Restrictions as a Bar to Rollovers -------------------------------------------------------------------------------- by Joel L. Frank Under the Internal Revenue Code prior to the Unemployment Compensation Amendments of 1992 ("UCA '92"), a distribution could be rolled over from one 403(b) tax-sheltered annuity ("TSA") to another TSA or to an individual retirement account ("IRA") only if three conditions were met: it was a total distribution or a partial distribution equal to at least 50% of the balance to the credit of the employee, the distribution occurred because of specified triggering events (death, disability, separation from service or attainment of age 59-1/2), and the distribution was rolled over in 60 days. (IRC sections 403(b)(8)(A) through (D), as in effect prior to UCA '92.) UCA '92 simplified the rollover rules for TSAs by eliminating the distinctions between total and partial distributions, eliminating the triggering events upon which a rollover was conditioned, and eliminating the requirement that distributions be made during a single taxable year of the employee. (See IRC sections 403(b)(8)© and 402(a)(5)©, prior to UCA '92.) It is true that UCA '92 did not eliminate certain triggering conditions found in the Code that by their terms specifically apply to distributions from a section 403(b) custodial account or annuity contract. (IRC sections 403(b)(7)(A)(ii) and 403(b)(11).) But TSA providers continue to improperly apply those 403(b) distribution triggering conditions to the 403(b) owner's eligibility to make a rollover to another TSA. This was clearly not the intent of UCA '92! IRC section 403(b)(7)(A)(ii), applicable to 403(b) custodial accounts, provides, in pertinent part: (7) Custodial accounts for regulated investment company stock. (A)Amounts paid treated as contributions. For purposes of this title, amounts paid by an employer ... to a custodial account ...shall be treated as amounts contributed by him for an annuity contract for his employee if -- ... (ii) under the custodial account no such amounts may be paid or made available to any distributee before the employee dies, attains age 59-1/2, separates from service, becomes disabled ... or ... encounters financial hardship. IRC section 403(b)(11) imposes similar conditions on distributions from 403(b) annuity contracts. Is it not ludicrous to require a 403(b) owner to show that he or she has met one of these "paid or made available" events (death, disability, separation from service, attainment of age 59-1/2 or hardship [footnote] when all the participant wishes to do is rollover the funds to another TSA that, by law, will be subject to those same "paid or made available" conditions? Is this not the very reason UCA '92 eliminated the specified triggering events of death, disability, separation from service or attainment of age 59-1/2, which previously were required for the making of a valid rollover? This construction of the Code by TSA providers unjustly denies rollover rights. The Senate soon will take up the Retirement Security and Savings Act of 2000. This would be an ideal place to enact a clarification that the early distribution triggering conditions of Code sections 403(b)(7)(A)(ii) and 403(b)(11) do not apply to rollover distributions. -------------------------------------------------------------------------------- Footnote: Hardship distributions are no longer eligible for rollover treatment. See Code sections 402©(4) and 403(b)(8)(B), as amended by the Internal Revenue Service Restructuring and Reform Act of 1998. -------------------------------------------------------------------------------- Joel L. Frank PO Box 148 Marlboro, New Jersey 07746-0148 (732) 536-9472 rollovertsa@dellnet.com -------------------------------------------------------------------------------- BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above. -------------------------------------------------------------------------------- URL of this page: http://www.benefitslink.com/articles/frank000921.shtml · This page last modified: Tuesday, July 1, 2003 · Webmaster: Dave Baker (click) · Copyright 2003, BenefitsLink.com, Inc. (contact the webmaster for reprint permission) · Linking: Feel free to link directly to this page, even without specifically crediting BenefitsLink ® as its source. Glad you're here! · Privacy Policy

JOEL L. FRANK PO Box 148 Marlboro, NJ 07746-0148 (732) 536-9472 Fax: (732) 536-7373 Email: rollover@optonline.net July 18, 2003 Re: Final section 403(b) Rules and Regulations William Bortz Associate Benefits Tax Counsel Office of Benefits Tax Counsel US Treasury Department 1500 Pennsylvania Avenue Washington, DC 20220 Dear Mr. Bortz: Revenue Rulings 67-361 and 67-387 (authority granted to PERS to operated a 403(b) plan) were issued at a time when section 403(b) permitted only one investment vehicle, the commercial annuity under section 403(b) 1. Under section 401(a) public employee retirement systems had been in the annuity business (fixed or variable) for many decades so the Service felt that these entities could well serve their participants in the 403(b) 1 annuity area. This was the rationale for the 1967 Rulings. The rationale ceased to exist when, as part of ERISA in 1974, the Congress added section 403(b) 7 to the Code authorizing mutual funds as an alternate funding medium making clear the Congressional intent for just two funding vehicles for 403(b) arrangements: a commercial annuity contract under section 403(b) 1 and a custodial account for investment in mutual funds under 403(b) 7. Revenue Ruling 82-102 has one fundamental flaw that the final rules should address. It does not require, that in order for a public employer to continue to offer a PERS 403(b) plan it must also offer commercial annuities and mutual funds …the two statutory 403(b) funding vehicles. This is a reasonable requirement in light of the fact that the Rulings no longer permit a PERS to first start a 403(b) plan. A case study is the Department of Education (DoE) of the City of New York. Even though the commercial annuity under 403(b) 1 was first made available to public school personnel in 1961 the DoE did not sponsor a 403(b) 1 annuity plan until 1970 when it designated its Teachers’ Retirement System of the City of New York as its sole 403(b) 1 annuity vendor. The DoE as employer, has never allowed the two statutory funding mediums: the commercial annuity and mutual funds to compete with the TRS 403(b) Plan. The TRS 403(b) Plan started in 1970 with two investment options: a fixed interest account and a variable annuity for investment in common stock. This common stock fund is now referred to as Variable A because in 1983 the legislature authorized a second variable annuity fund called Variable B. Variable B was to operate as a balanced fund. Rather than following its legislative directive and invest in “fixed income and equities securities” the Trustees for the past 20 years have managed the Variable B fund as a stable value fund. This investment policy decision has resulted in the Trustees being defendants in a multi-billion dollar class action lawsuit alleging (among other things) gross mismanagement of the assets of the Variable B fund. Investment changes for future contributions may be made on a quarterly basis. The request has to be made at least 60 days in advance. Account balances may be transferred among the three investment funds no more rapidly than in monthly installments over a year. This request also must be made at least 60 days in advance. A request for a Revenue Ruling 90-24 transfer must also be made at least 60 days in advance. Unit values are calculated monthly. One would be hard pressed to find a more abusive 403(b) plan. The plan would be in clear violation of ERISA section 404© if not for the fact that PERS are exempt from the ERISA. These plan abuses never would have evolved if Revenue Ruling 82-102 required the inclusion of commercial annuities and mutual funds in the vendor list for 403(b) investing. This is what happens when there is no competition. If not for this abusive monopoly the TRS 403(b) Plan would have far less assets under management. In my view the teachers and other public school personnel of the City of New York would be much better off if the TRS 403(b) plan was dissolved. Many have stopped contributing and have, thanks to Mayor Mike Bloomberg’s invitation, begun contributing to the Citywide Deferred Compensation Plans under sections 457(b) and 401(k). Rather than being forced to transfer their TRS 403(b) balances to a commercial annuity or mutual fund under Revenue Ruling 90-24 these teachers would much rather have the City of New York manage their retirement savings by transferring their balances to the 457(b)/401(k) plan that they currently contribute to. These transfers, however, are not allowed because Revenue Ruling 90-24 requires that a 403(b) arrangement may only be transferred to another 403(b) arrangement. It is imperative that the Final Regulations allow not only for the formal dissolution of a 403(b) plan but also to allow for transfers to 457(b)/401(k) plans under Revenue Ruling 90-24. Should you have any questions or require clarification of these issues please do not hesitate to contact me. Peace and Hope, Joel L. Frank

Revenue Ruling 90-24 permits in-service, regardless of age capital transfers from one 403b to another 403b. No triggering event is required. THIS IS A TRANSFER NOT A ROLLOVER. In order to effectuate a rollover from a 403(b) to another eligible plan a triggering event must be present: See 403(b)11 and 403(b) 7 (A)ii for these events. ------------------------------------------------------------------------------------ I am under the impression that the final 403(b) regs will be issued soon. Hopefully they will include the right, under Revenue Ruling 90-24, for a 403(b) participant to directly transfer (not rollover) his account to a 457(b)/401(k) plan maintained by the same government employer. Also look for the steps to follow in order to terminate a 403(b) Plan. We have been waiting since 1959 for these required steps.

It takes millions of dollars to operate a union the size of the New York State United Teachers with its 500,000 members. Unions are always looking for sources of revenue to augment their reliable dues flow. Recognizing that pre-tax retirement savings plans funded through convenient payroll reduction is by far the most popular fringe benefit offered to teachers by the 620 school districts in the State, the union saw an opportunity in 1989 to use section 403(b) of the Internal Revenue Code as a means of raising revenue. All it had to do was find an investment provider willing to buy advertising space in the union newspaper, the New York Teacher. Once it found a willing investment vendor it would be more than willing to “endorse” its products. At first glance one might assume that the "Opportunity Plus" and "Opportunity Independence" plans must be outstanding programs lest it would never get the union’s “endorsement”. To the contrary, the union’s “endorsement” means they are inferior programs. One just has to look at the expense ratios of the 50-60 investment funds (sub-accounts) to see how expensive the program is. Nearly all of the funds have expense ratios of 1-2 percent that include the notorious 12b-1 fees. All of the funds charge a sales commission on withdrawals made within 5 years of purchase (contingent deferred sales charge). In addition to the expenses charged by the individual investment funds the teacher is charged 1 percent for insurance expense by the Separate Account maintained by ING. With such a large number of investment options you would think pre-arranged portfolios would be readily available. They are not. Remember, all of the expenses to maintain the investment are paid for by the teacher/investor, not the school district and not the union. Expenses translate into smaller account balances and less retirement income. Why didn’t the union negotiate with a superior low cost investment provider along the likes of Vanguard, T. Rowe Price or TIAA-CREF? Low cost (direct distribution) providers cannot afford to pay for advertising along the lines of high fee vendors like ING because the fees they charge are much less. So being hell bent on using section 403(b) to enhance its revenue stream the union was fast to partner with ING who in return for a union endorsement agreed to use some of the high fees collected from teachers to pay for advertising "Opportunity Plus" and "Opportunity Independence" in the New York Teacher. It is an outrageous and immoral use of unbridled union power and arrogance. Let’s do some arithmetic to knock the point home. A low cost investment provider like the Deferred Compensation Plan of the City of New York charges its participants .34 percent or $102 a year to manage $30,000. Assuming a 2.20 percent expense ratio (1.2 percent paid to the investment fund plus 1 percent paid to the Separate Account of ING) it costs the "Opportunity Plus" participant $660 a year, or 6.5 times as much, to have $30,000 managed by ING. If we start with an initial investment of $30,000 (with no additional contributions) and earn an average 8 percent a year for 30 years the Citywide Deferred Compensation Plan participant sees his $30,000 investment grow to $274,633 while the Opportunity Plus/ING plan participant sees his $30,000 grow to $162,814. The difference of 1.86 percent in the expense ratios (2.2 percent minus .34 percent) results in a 40.7 percent smaller account balance. An expense ratio in excess of 1.5 percent makes pre tax investing inferior to after tax investing. Opportunity Plus participants would be better off to forego their high cost tax-deferred annuity investment in favor of investing after tax dollars in a tax efficient no-load mutual fund. Peace, Joel L. Frank

I recognize that Erisa does not apply to governmental plans. But if it did would the plan be in violation of 404©?

A governmental plan is a combination DB/DC. The investment accounts that fund the DC lifetime annuity are controlled by the retiree. There are only 2 investment options: A fixed or variable annutiy. Investment election changes may only be made in the month of April and are not subject to change until the following April. One may not move between the two options in a lump-sum. The fastest one may move between the two is at a rate of 1/12 of the account balance over a 12 month period. Does this rule violate section 404©?

What degree of protection do the participants of non-governmental 457s have against the claims of the employer's creditors? Peace, Joel L. Frank

mbozek, Would you please respond to my 2nd post in this thread. Thank You.

The combined total for 2003 is $12,000. If he had a 457(B) at his disposal he could defer $24,000 by contributing $12,000 to the 457(B) and a combined total of $12,000 to the 403(B)/401(k).

An in-service loan from a Governmental DB Plan is deemed to be a taxable event. Is it appropriate to require the employee to pay off the loan?