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Guest Sierra

Going Against The Tide

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Guest Sierra

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 change 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

 

 

 

 

 

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I looked at the NJSEDCP web site, and they appear to have been acting in response to an analysis by Mercer that is available at the web site. The recommendations by Mercer, while they are may be wrong-headed, are about what you would expect from a big consulting firm.

 

I'm on your side on fees, but my read is that if you left money in the old funds you can stay in them and move among them quarterly. Once you're out, you're out, though.

 

If they have raised expenses on the four old funds, obviously that's more problematic since people invested based on fee level expectations. I can also see real concerns if money was moved to the new funds absent directions to stay put, since the normal assumption is that money will only move around when you direct it to.

 

It looks like the expense ratios are just that, mutual fund internal expense ratios. If that's true, then you are likely getting something at least as good as the best deal available to individual investors, and NJSEDCP is subsidizing the plan administration expenses. Being in the private sector, I'd take that deal, any time.

 

The governmental plan status of your plan is a two-edged sword, and here you are seeing the second edge. Since ERISA is not a tool you can use, this is a political issue and not usefully a legal issue.

 

 

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Guest Sierra

I looked at the NJSEDCP web site, and they appear to have been acting in response to an analysis by Mercer that is available at the web site. The recommendations by Mercer, while they are may be wrong-headed, are about what you would expect from a big consulting firm.

 

I'm on your side on fees, but my read is that if you left money in the old funds you can stay in them and move among them quarterly. Once you're out, you're out, though.

 

If they have raised expenses on the four old funds, obviously that's more problematic since people invested based on fee level expectations. I can also see real concerns if money was moved to the new funds absent directions to stay put, since the normal assumption is that money will only move around when you direct it to.

 

It looks like the expense ratios are just that, mutual fund internal expense ratios. If that's true, then you are likely getting something at least as good as the best deal available to individual investors, and NJSEDCP is subsidizing the plan administration expenses. Being in the private sector, I'd take that deal, any time.

 

The governmental plan status of your plan is a two-edged sword, and here you are seeing the second edge. Since ERISA is not a tool you can use, this is a political issue and not usefully a legal issue.

 

 

Hi Tom:

 

The Plan pays none of the administrative expenses. Ex: The Vanguard Institutional Index Fund sports 0.05 percent as an expense ratio with 0.20 percent added on as an administrative fee. Prior to January 2, 2006 the Union filed a grievance to stop the implementation of the new Plan. The arbitrator rule in favor of the State. The state, with a Plan of its size, should have negotiated a much lower set of expense ratios.

 

It is interesting to note that the State of New Jersey is all over the lot when it comes to fees. Ex.: When the Supplemental Annuity Collective Trust was established in the early 1960s it mandated a ZERO expense ratio for the investors. The state also pays all expenses for the administration of the Trust.

 

Peace and hope,

Joel

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