Going Against The Tide

[joel]

Prior to January 2, 2006 the New Jersey State Employees Deferred Compensation Plan (NJSEDCP) was administered by the New Jersey Division of Pensions and Benefits with the New Jersey Division of Investments and the State Investment Council responsible for investment of the funds. The Plan is funded solely with voluntary employee salary reductions with the employee responsible for paying all costs associated with the administration of the Plan. The Plan offered four investment funds (DCP Funds) each with an expense ratio of 0.08 percent (eight basis points). On a national level only the Federal Thrift Savings Plan (TSP) offers a more cost effective retirement savings/planning tool.

This all changed on January 2, 2006 when Draconian changes were introduced. The State's Deferred Compensation Board appointed Prudential Financial as the Plan’s Third Party Administrator (TPA). The new investment lineup comprises 23 investment funds with expense ratios as high as 1.45 percent (145 basis points). The lowest cost fund, the Vanguard Institutional Index Fund with an expense ratio of 0.25 percent (25 basis points), is more than three times as expensive as any one of the four DCP Funds.

On January 2, 2006 the DCP Funds were closed to future contributions. If the participant had not given Prudential Financial new investment instructions as to which new funds he or she wished to invest in Prudential Financial made the decision by default. DCP Equity Fund investors are now investing their current contributions in Large Cap Blend Enhanced Index/QM Fund with an expense ratio of 0.89 percent (89 basis points). DCP Bond Fund investors are now paying 0.80 percent (80 basis points) to invest in Core Bond Enhanced Index/PIM Fund and DCP Small Cap Equity Fund investors are now investing half their allocation in Mid Cap Blend Enhanced Index/QM Fund and half in Small Cap Value/Munder Capital Fund with expense ratios of 0.94 percent (94 basis points) and 1.35 percent (135 basis points) respectively.

Assume a participant invested equally in the three DCP Funds. On January 2, 2006 his/her expense ratio was increased nearly 12 fold to 0.94 percent (94 basis points). Assume an average investment return of 8 percent over the next 30 years. A DCP investor who starts off with $30,000 on January 2, 2006 (with no additional contributions) will have an account balance of $295,000 on January 2, 2036 while the "new investor", who also starts off with $30,000, will have an account balance of $232,000. Such are the results of paying 0.86 percent (86 basis points) in additional fees over a 30-year period. This cannot be defended!

This is a bad, really bad deal. An investor cannot control the investment markets but can control the cost of investing in those markets. Prior to January 2, 2006 the Deferred Compensation Board, Division of Pensions and Benefits, Division of Investments and the State Investment Council all keenly recognized this important principle of investing. It had served the employee very well for 25 years. Why was it suddenly abandoned? A cruel injustice has been inflicted on New Jersey State employees and must be corrected forthwith.

Joel L. Frank

[GBurns]

This sort of issue always makes me ask the same questions.

Do the employees know about this?

Do the employees even care?

It seems that employees, especially public sector, really do not pay much attention to these things and even when they do they accept it even if to their detrement.

[joel]

This sort of issue always makes me ask the same questions.

Do the employees know about this?

Do the employees even care?

It seems that employees, especially public sector, really do not pay much attention to these things and even when they do they accept it even if to their detrement.

George:

Prior to the implementation of the Plan on January 2, 2006, the Union representing State employees expressed its opposition to the Plan. Apparently unsuccessful in its attempt to negotiate a better deal for the participants, the Union filed a grievance against the State of NJ. The Arbitrator ruled in favor of the State.

Joel

[GBurns]

I hope that you do not think that there is only 1 union that represents all the employees who participate in that NJSEDCP ?

[joel]

I hope that you do not think that there is only 1 union that represents all the employees who participate in that NJSEDCP ?

But the Arbitrator's decision applies to all the participants in the Plan.

[Locust]

Is it really a bad deal, or have the state subsidies just been removed when the state finds itself in financial difficulties?

Prudential is probably picking up the administrative services that the State had previously provided, freeing up the employees of the State who administered the 457 plan to work somewhere else - perhaps on the regular Pension Plan. The State is short of funds - this would be a significant consideration. The fees that are paid from the funds are not bad compared to what employees of a private company would pay - maybe they're a little high, but the expenses of a 457 plan that essentially covers hundreds of small employers (municipalities, water commissions, agencies, etc.) will be higher than they would be for a 401(k) plan of a comparably sized private company.

Presumably, there was a public bid for the contract. It's a big plan, so I would bet that the cost the employees are paying would be competitive, and that it's probably still a good deal, just not the extraordinary deal they had before.

[GBurns]

Yes, the Arbitrator's decision applies to all participants, but that is irrelevant and not the point.

Why only 1 union? What actions did any other Bargaining Unit take, assuming that their members asked them to take any action?

If employees objected (assuming that they knew) their objections would and should be voiced long before the contract was entered into and therefore long before it got to an Arbitrator. Going to an Arbitrator is a last ditch type of stand. Where and when were the first steps in objecting taken?

Maybe there were no objections because Locust is right, it might not be such a bad deal considering possible alternatives.

[joel]

Is it really a bad deal, or have the state subsidies just been removed when the state finds itself in financial difficulties?

Prudential is probably picking up the administrative services that the State had previously provided, freeing up the employees of the State who administered the 457 plan to work somewhere else - perhaps on the regular Pension Plan. The State is short of funds - this would be a significant consideration. The fees that are paid from the funds are not bad compared to what employees of a private company would pay - maybe they're a little high, but the expenses of a 457 plan that essentially covers hundreds of small employers (municipalities, water commissions, agencies, etc.) will be higher than they would be for a 401(k) plan of a comparably sized private company.

Presumably, there was a public bid for the contract. It's a big plan, so I would bet that the cost the employees are paying would be competitive, and that it's probably still a good deal, just not the extraordinary deal they had before.

This Plan is for state employees only. Locals may not opt in. As stated previously all costs were borne by the participant. This plan was cost neutral to the state. Now that the TPA is a private company we must add on something you guys forgot...profit.

[joel]

Yes, the Arbitrator's decision applies to all participants, but that is irrelevant and not the point.

Why only 1 union? What actions did any other Bargaining Unit take, assuming that their members asked them to take any action?

If employees objected (assuming that they knew) their objections would and should be voiced long before the contract was entered into and therefore long before it got to an Arbitrator. Going to an Arbitrator is a last ditch type of stand. Where and when were the first steps in objecting taken?

Maybe there were no objections because Locust is right, it might not be such a bad deal considering possible alternatives.

George, for your review:

Prior to the implementation of the Plan on January 2, 2006, the Union representing State employees expressed its opposition to the Plan. Apparently unsuccessful in its attempt to negotiate a better deal for the participants, the Union filed a grievance against the State of NJ. The Arbitrator ruled in favor of the State.

Joel

George: So let's assume there is a baker's dozen of unions representing NJ state employees. Would not the result be the same? Other than filing a formal grievance which led to the Arbitrator's decision what else would you have suggested as first steps to all 13 unions prior to January 2, 2006?

[Locust]

I didn't pick up on the statement that all costs were incurred by employees. Probably because it seems so improbable that all costs of the old plan were only.08% - that would be $800/$1,000,000. That's significantly less than the cost of the cheapest mutual funds. Are you sure that the state didn't provide any services - such as enrollments, payments, communications, statements? If they didn't, I'll just have to ask - "who were those guys" that administered the plan so cheaply?

[joel]

Under the old Plan investment management fees were 0.02 percent with the administrative fee being 0.06 percent.

[GBurns]

Not knowing exactly what the members of any of the many unions would object to it is hard to be specific as to what steps could or should have been taken. There are more than 13 BUs involved in representing participating state employees.

The Procurement Dept (or whatever it is called) did not just get up one morning with the bright idea to change the DC program. They had to get instructions to prepare the RFP etc.

The Pensions & Benefits Dept also did not just get up one day and tell the Procurement people to prepare and send out the RFP either.

Which means that there were planning meetings etc long before the RFP was put out in December of 2003.

During the info gathering and planning there is usually an opportunity to have some input from the employees and their Bargaining Units. This is even more so if the DC program is part of the employment agreement or subject to the CBA. If it is then the BUs would have to sign off on at least a MOU before the change could be made. If not there are other hurdles that could be introduced.

To wait for more than a whole year, to start objecting and then to wait until after the bid is awarded to challenge in this manner indicates to me either a lack of attention or a lack of interest.

I notice that I have not been able to find any mention of an objection to the bid being awarded from any of the vendors who had responded to the RFP. That suggests that there was nothing to object to or a lack of interest in getting the business. Lack of such interest suggests that the competitors do not wish to match the fees etc that PRU is willing to provide the services for. Nothing to object to usually means that everything material was done in an acceptable manner.

[Guest mjb]

No one can run a fund at 8 B points without subsidies. vanguard has index funds w/billions in assets which charge .15 -.20 b points to administer. What Joel is ignoring is that NJ used to be the only state that used state employees to invest all of its pension funds. After the state run funds incurred huge losses ($20B+) after the tech bubble burst the Gov. appointed a commission which concluded that state run funds were overly concentrated in equities and that the state should hire professional investment advisors to diversify the funds into fixed income and RE. The State employees who managed investments in the pension plans also managed the 457 funds and a discounted portion of their salaries were allocated to the 457 plan. Now that the state is reducing its reliance on state employees to invest pension funds the state has hired outside managers for the 457 plan. You need to review the services such as investment allocation information, enrollment support and other ancillary services that are being provided to participants.

[joel]

No one can run a fund at 8 B points without subsidies. vanguard has index funds w/billions in assets which charge .15 -.20 b points to administer. What Joel is ignoring is that NJ used to be the only state that used state employees to invest all of its pension funds. After the state run funds incurred huge losses ($20B+) after the tech bubble burst the Gov. appointed a commission which concluded that state run funds were overly concentrated in equities and that the state should hire professional investment advisors to diversify the funds into fixed income and RE. The State employees who managed investments in the pension plans also managed the 457 funds and a discounted portion of their salaries were allocated to the 457 plan. Now that the state is reducing its reliance on state employees to invest pension funds the state has hired outside managers for the 457 plan. You need to review the services such as investment allocation information, enrollment support and other ancillary services that are being provided to participants.

To repeat there were no state subsidies in the old Plan. The participant paid 0.06 percent for administration and 0.02 percent for investment management. Other low cost plans where the employee pays all costs is the Federal TSP, Investment Plan of the Florida Retirement System and the NYC 457 Plan. These plans have one thing in common...a separate account structure with institutional pricing which is exactly what was practiced for 25 years by the NJ Deferred Compensation Board prior to January 2, 2006. Why the sudden change in policy?

[GBurns]

Sudden change in policy?

They deliberated for a long time on deciding to have Mercer review the Plan. Then they spent time deliberating the Mercer findings and recommendations. Then they deliberated on doing the RFP. Then they planned the wording etc of the RFP, then released it in November 2004 with bid submission around January 2005. Then they took time evaluating and choosing a vendor in November 2005 with the change effective January 2006.

That means from some time in 2002 until 2006. You call that "sudden"?

Any how, as time goes by, things change or need to be changed. Maybe the State could no longer afford to use the same building and computer equipment. Maybe the current staff and equipment could not handled new services, such as online accounts. So rather than incurring the new costs they took the opportunity to expand the offerings, services and whatever else by getting a new co-TPA. I really do not know and it would take too much time to look for the whys and why nots.

Since the particpants did not raise a stink, Why should anyone else? It is their plan, participation is voluntary and they do have alternatives.

[joel]

George: 25 years ago when the state established the Plan there was even less, IF ANY, union involvement in the design of the Plan yet the state adopted the separate account structure with very low fees.

[GBurns]

And in those 25 years they have had numerous opportunities to change it. Maybe they do not care.

25 years of participation and now no mass objections, makes it seem like they accepted what was there and now will accept the change. Or they just do not care. Why should it matter to anyone else if it does not matter to them?

They do not have to participate, they have alternatives.

[joel]

George: 25 years ago when the state established the Plan there was even less, IF ANY, union involvement in the design of the Plan yet the state adopted the separate account structure with very low fees.

And in those 25 years they have had numerous opportunities to change it. Maybe they do not care.

25 years of participation and now no mass objections, makes it seem like they accepted what was there and now will accept the change. Or they just do not care. Why should it matter to anyone else if it does not matter to them?

They do not have to participate, they have alternatives.

George: Your're begging the question: If the separate account structure with very low fees was in place for 25 years without a union demand for change why did the state unilaterally change it?

[Guest mjb]

The state wanted to get out of the retirement plan asset managment business because state employees investing the state retirement funds managed to lose 20B in pension assets out of about 80B which will require addtional contributions funded by NJ taxpayers. (One commission issued a report in 2006 stating that state pension plans require immediate funding of 12B. the state budgeted 1.1B in July). After appointing a commission to review the options, the Gov made a decision to hire professional investment managers and put the state's retirement funds out to bid.

[Bird]

Something's not making a lot of sense.

mjb says "The state wanted to get out of the retirement plan asset managment business because state employees investing the state retirement funds managed to lose 20B in pension assets out of about 80B..."

But this article:

NY Times July 06

says "With a new emphasis on diversified investments like hedge funds, emerging markets and commodities rather than the traditional mix of stocks and bonds, the proposal will transform New Jersey from being one of the most conservative states to one of the most aggressive, along with New York, California and Oregon."

which I find inconsistent with mjb's comment. However, the article also says " After the collapse of technology stocks in 2000, the value of the state’s fund shrank by about a third. Other state pension funds also lost money at that time, but many finance experts criticized New Jersey’s for being one of the few public retirement funds being managed by civil servants."

which is more in line with mjb's comment.

But, aren't we talking about a self-directed 457 plan which makes the funding status of the DB type plans irrelevant?

I think Joel raises good questions. I don't know enough about the plan and how it was run to pass judgment.

[Guest mjb]

Bird: The criticism of investment of NJ pension funds by state employees was that the funds were overly concentratred in equities (not properly diversified )and ignored less volitile investment classes such as RE, fixed income, hedge funds, which require professional investment managers, advisors, etc. Under the new investment policy state pension funds will hire outside investment adviosrs to invest in the classes of assets discussed in the NY times article to diversify the investment portfolio to prevent dramatic losses in the future. ( I dont know how concentration of plan investments in tech stocks could be characterised as conservative by the NYT- I think the reference to conservative was to types of investment classes in which state plans were invested in (only stock and bonds to the exclusion of other investment classes) not in the selection of the individual securities held in the plan). The state employees also managed the investment of 457 plan assets which under the new policy has been transferred to an outside provider as discussed in GBs post of 8/1. From the state's point of view, retaining the investment of 457 plan assets by state employees was not feasible/economical since other retirement plan portfolios were being transferred to outside mgrs and retaining state employees to manage this plan only would result in increased costs being allocated to the 457 plan participants. The state's new policy is to hand over investment of state pension assets to professional investment advisors instead of state employees which was stated in the NYT article.

[joel]

The state wanted to get out of the retirement plan asset managment business because state employees investing the state retirement funds managed to lose 20B in pension assets out of about 80B which will require addtional contributions funded by NJ taxpayers. (One commission issued a report in 2006 stating that state pension plans require immediate funding of 12B. the state budgeted 1.1B in July). After appointing a commission to review the options, the Gov made a decision to hire professional investment managers and put the state's retirement funds out to bid.

MJB: Your post is irrelevant to the issue at hand. Your post refers to the State's Defined Benefit pension plans not plans funded by the voluntary salary reductions of its employees which, as you know, are Defined Contribution plans.

MJB, more to the point: As you know the Alternate Benefit Program of the State of New Jersey is a Defined Contribution Plan to which the pedagogues at the public institutuions of higher education must belong. For 40 years they have been mandated into this Program in lieu of membership in the Defined Benefit system. The state contributes 8 percent of salary into the individually owned investment account while the employee contributes 5 percent. The investment provider is an organization by the name of Teachers Insurance and Annutiy Association-College Retirement Equities Fund (TIAA-CREF), a no-load investment provider.

Q.: Recognizing that the Deferred Compensation Board did not want to administer its Plan any longer why didn't it retain its low cost emphasis and contract with a low cost provider?

[Guest mjb]

Joel: If you have been following the discussion you would have noted that NJ wanted to get out of the busienss of managing all pension funds for state employees, not just DB funds which is why NJ outsourced the 457 plan.

With regard to your Q why not ask the state which low cost providers bid on the business and what their bids were priced at?

[Bird]

mjb-I've done a little more poking around, and it's pretty clear that they're trying to increase returns by going into these other investments, not reduce losses. But again, that seems to be more of an issue relating to DB plans, not the plan in question. However, there may have been some residual unhappiness with the performance of the DB investments that made this plan ripe for change simply because it's also a retirement plan.

I get the general sense that it was just time to move to a daily-val'd environment for this plan. I'm not sure I disagree with that, but I think they could have done better. Not knowing who made proposals, I don't know if this is the best one or not.

[joel]

Joel: If you have been following the discussion you would have noted that NJ wanted to get out of the busienss of managing all pension funds for state employees, not just DB funds which is why NJ outsourced the 457 plan.

With regard to your Q why not ask the state which low cost providers bid on the business and what their bids were priced at?

mjb: You could not be more wrong. The state has decided to retain the services of outside managers for just a portion of the Defined Benefit assets. Having said that, are the fees associated with this oursourcing 12 times higher than what it cost the state to manage the assets internally? Of course not! So why did the state feel its ok to outsource the 457 Plan with a fee structure 12 times higher than when the assets were managed internally?

[GBurns]

None of the competing bidders filed any objection to the RFP , the bidding process or to the award. That suggests that there either was nothing to contest or they were not interested in providing services under the conditions. But looking at the vendor's Q&A neither conditions nor required services seem to have been a problem. Of course that does not say that the RFP was not designed with the end award in mind.

I think that the NJ procurement code requires a minimum of 2 accepted bids at the final stages and a minimum of 3 at the bid opening, since this was not sole sourced. Since the RFP was very public and not restricted to any particular in-house list, if other providers were interested they could have easily submitted a bid.

So while we don't know who or how many did submit responses, we do know that there were a few and that there was no filed objections to it being awarded to Prudential. The union action was against the change not against the award.

*************

Joel: While it might beg the question, it supports my point that the employees have no interest.

[Guest mjb]

Joel: Its a portion today and more in later years when they want to squeeze out better performance.

You keep asking the same Q to the audience when you should direct it to the state pension board which made the decision to outsource the 457 plan. Maybe the state wanted to concentrate only on monitoring the performance of investments in DB plans in which it has investment risk and not devote resources to managing DC investments.

Bird increasing returns is a collary of reducing losses because the plans were not diversified (e.g plans wre were over invested in equites. Loss of 20B in assets will be made up by taxpayers and cannot be made up by increasing returns. The goal to diversify investments into classes which are not as volitiile as equities to prevent this kind of meltdown of assets in future changes in the economic cycle. The problem is that the state is still not contributing enough to the DB plans because it would require an increase in taxes.

[Guest Pensions in Paradise]

A cruel injustice has been inflicted on New Jersey State employees and must be corrected forthwith.

Joel, rather than wasting your time discussing the issue on this board, why don't you contact every major newspaper/tv/radio station in New Jersey and bring this issue to their attention. Maybe one of them will take up your cause. And while you're at it contact the New Jersey Attorney General.

[joel]

If I am annoying anyone in the "audience" may I suggest you simply refrain from participation, observe and allow the other attendees to respond.

The DC plan known as the NJ Supplemental Annuity Collective Trust (SACT) has been operated internally since its inception in 1963. The DC Alternate Benefit Program has been operated externally since its inception at about the same time. Both are and have been no-load, very low cost programs. The State's 457 Plan since its inception about 25 years ago thru December 31, 2005 had been operated internally at no-load and low cost.

The State is not new to sponsoring DC plans and when they have they always emphasized no-load and low cost. Q.: Why was the fundamental principle of no-load and low cost abandoned with the 457 Plan?

[SteveH]

I feel like Joel's question is the same as asking, "Why does the woman in the office next to me always buy Starbucks coffee when should could just drink the stuff here in the office for free?"

mjb's response: "Well it's probably because she feels that the Starbucks coffee tastes better."

Joel's retort: "No, no, that's impossible. She only buys black coffee, none of the frilly stuff that Starbucks makes. It is the same coffee that is available here in the office and at the office they only ask for donations of $.08 per cup!"

mjb's (getting a little frustrated) comes back with: "Well perhaps the coffee is better quality, maybe it is heated just to the right temperature, maybe she has the hots for the young kid behind the counter."

Joel's (getting a little indignant) fires back: "Ridiculous, she should just drink the coffee in the office, that woman makes no sense! Someone please tell me why she always drinks the Starbucks."

Pensions in Paradise, Gburns, mjb (sensing that this conversation is never going to go anywhere): "Dude, since you don't know why she drinks Starbucks, and we obviously aren't inside of her head, why don't you just go ask her?"

Joel (frustrated by the smart remark above): "Look if you don't want to have a philosophical discussion about the woman in the office next to me, then just leave me alone!"

---------------

So now that I have cleared up that we have discussions about what people think about. Why do some women shave off their eyebrows and paint new ones on? Is it because they want to always look surprised?

Discuss....

[Guest HiKidsImASrPensionAdmin]

ttott, thanks for the laugh...I needed it!

[J2D2]

ttott, I think you've got it!

[GBurns]

Or they could be looking surprised that others did not shave but plucked instead? Of course, there will be those who think that the look of surprise was because they found out that it might not have been such a good idea.

Does it improve the looks of most? I find it comical looking in many.

[SteveH]

I wonder, does it start out plucking gone awry? But that doesn't seem to be the answer because even if someone got a little over zealous with the tweasers that wouldn't explain the fact that the eyebrows, once drawn in, now have a completely new location on the forehead that is obviously not normal. Maybe it is just an attempt at individuality, and I should let it go.

[Guest HiKidsImASrPensionAdmin]

I think the misplacement is caused by the mirror that is used when the drawing is taking place. This type of event can not happen with assistance, one must do it on their own! As they get closer to the mirror the hand/eye coordination gets out of sync. It can't be an attempt at individuality...there are too many of them out there.

That is my theory at least.

[Locust]

You guys are too easily amused. It's scary. I'm scaring myself by adding this message.

[GBurns]

This is a very important issue. Just ask the next three adult females, that you see, about the importance of doing eyebrows.

And if you really want a revelation, if you are male, ask your female significant other to NOT do anything to their eyebrows for three days and see their reaction. Then if they really do nothing you will better understand the reason for amusement.

I might make fun and find some comical and even ironic, but I realize that the issue has become an important one for them, even though self inflicted and often purpose defeating.