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Guest Joel L. Frank

Retirement Heist In New Jersey

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Guest Joel L. Frank

RETIREMENT HEIST IN NEW JERSEY

 

The cost of operating an investment fund is expressed in “basis points”(bp) with one bp

equal to one hundredth of one percent (0.0001). For the fiscal year ended June 30, 2010 it cost the State of New Jersey eight bp to operate its Defined Benefit Pension System. This equates to $80.00 for each $100,000 under management. It’s important to keep the costs of operating the System to a minimum so that more money will be available for other government programs. Eight bp is de minimis cost. The same logic applies to our Defined Contribution Pension System where the operating cost is paid, not by the public sector employer but, by the public sector worker-investor. It’s extremely important to keep the costs of operating this personal investment portfolio to a minimum so that more money will be available during retirement.

 

NEW JERSEY STATE EMPLOYEES DEFERRED COMPENSATION 457(b) PLAN

 

This voluntary/supplemental Defined Contribution pension plan is for State employees. During its first 25 years the Plan’s investment lineup consisted of four investment funds managed by the Division of Investment. The Division charges the worker the same eight bp it pays to operate the State’s multi-billion dollar Defined Benefit Pension System. This protective shell, encasing the worker-investor’s 457(b) account, was purposefully destroyed on January 2, 2006 when each of the four State-managed funds were summarily closed to future contributions and replaced with 23 commission-based Prudential funds. Moreover, Prudential was hired to handle two key Plan functions: Plan Administration and Plan Investment Provider which, heretofore, were handled by the New Jersey Division of Pensions and Benefits and the New Jersey Division of Investment, respectively. Both agencies are divisions of the New Jersey Department of the Treasury. Prudential is just one of 12 providers listed on the website of the Department of Community Affairs--Division of Local Government Services at: http://www.state.nj.us/dca/lgs/defcomp/dc_approved_providers.pdf.

ICMA-RC is the only one of the 12 providers that is not commission based.

 

Do you have any idea how the costs associated with investing impacts the growth of your 457(b)/403(b) retirement-investment account? Example: For 40 years Bob and Rob contribute to the State’s 457(b) Plan. Their first year salary is $30,000 with annual increases of 3 percent. 10 percent of their salary is invested in the Plan each year. They each earn an 8 percent return, before costs. At the end of 40 years Bob has an account balance of $1.1 million while Rob’s account balance is $700,000. Why the massive difference? Bob invested his money in the four State-managed funds at a cost of eight bp or $80.00 per $100,000 of account value while Rob was forced to invest his money with Prudential at a cost of 220 bp or $2200.00 per $100,000 of account value. In other words, after paying his costs, Bob’s net investment return was reduced to 7.92 percent (800 bp minus 8 bp) while, after paying his costs, Rob’s net investment return was reduced to 5.80 percent

(800 bp minus 220 bp).

 

The sole intent of these fundamental changes was to compel the worker-investor to buy

commission-based Prudential funds. Recognizing that it’s the worker-investor, not the State (taxpayer), that makes the investment, pays all associated costs of acquiring and maintaining the investment and assumes all investment risk, it is the height of arrogance and wrongdoing for the State to sanction the sale of commission-based investments to its employees. Why, after 25 years of operating the Plan at de minimis cost, did the State see fit to place Prudential’s profit goals ahead of the financial security goals of its workers? Why, after 25 years of operating the Plan at de minimis cost, did the State decide to contribute to Prudential’s profit margin on the backs of its workers? It is just stunning that at a time when fees paid by the worker-investor are under intense scrutiny the Trustees would have the unmitigated gall to replace the four de minimis cost funds with 23 commission-based ones. If the Trustees’ objective was to expand the investment lineup all additional funds should have been of the de minimis cost variety. Why is the State’s contempt for its workers exhibited with such gusto? Such bedrock changes represent a colossal breach of fiduciary responsibility on the part of the State and must be rejected.

 

COUNTY, MUNICIPAL, SCHOOL DISTRICT AND PUBLIC AUTHORITY DEFERRED COMPENSATION 457(b) PLANS

 

While investment in commissionbased funds is comparatively new to State workers, it has flourished on the county, municipal, school district and public authority level for more than 30 years. For more than 30 years “Rob” has been severely mauled by the commission-based 457(b) sales shark.

 

For nearly 50 years New Jersey has been the national poster-child for the sale of

high pressured, commission-based investment funds to its public workers.

 

RECOMMENDATIONS

 

1. The same high fiduciary standards that apply to the operation of the Defined Benefit Pension System must also apply, with equal vigor, to the Defined Contribution Pension System to which employees of state, county, municipal governments, public authorities and school districts invest in. To that end the Defined Contribution Pension System should also be administered by the New Jersey Division of Pensions and Benefits with the New Jersey Division of Investment being the System’s Investment Provider. This includes mandatory Defined Contribution pension plans funded by both employer (taxpayer) and employee contributions; i.e., the Alternate Benefit Program and the Defined Contribution Retirement Program as well as supplemental Defined Contribution pension plans funded solely by the voluntary salary reductions of workers under sections 457(b) and 403(b) of the Internal Revenue Code. The State (taxpayer) should charge the worker-investor the same amount it pays to operate the State’s Defined Benefit Pension System, currently eight basis points.

 

2. If it is sound public policy for all public employees (state, county, municipal, public authority and school district) to belong to a single, State-administered, Defined Benefit Pension Plan, why do we have 21 counties, 565 municipalities and 565 school districts farming out their own high pressured, commission-based 457(b) plan to insurance companies and mutual funds? 1151 high pressured, commission-based 457(b) plans when a State-administered 457(b) Plan has been available for more than 30 years. A colossal breach of fiduciary duty. Additionally, why do we also have 565 school districts farming out their own high pressured, commission-based 403(b) plan to insurance companies and mutual funds? (School districts and public institutions of higher education may sponsor 457(b) plans and 403(b) plans). 565 high pressured, commission-based 403(b) plans when a State administered 403(b) plan has beenavailable for nearly 50 years.

Another colossal breach of fiduciary duty.

 

3. As soon as possible the administration and investment management functions of the New Jersey State Employees Deferred Compensation Plan shall revert back to the Division of Pensions and Benefits and the Division of Investment, respectively. Plan participation should be expanded to include the entire public employee universe (county, municipal, public authority, school district and public institutions of higher education). See: New York State Deferred Compensation Plan at: https://www.nrsservicecenter.com/iApp/ret/landing.do?Site=nysdcp

 

The Plan’s four State-managed investment funds represent just a beginning to a well diversified

investment lineup. Improvements are urgently needed. See: Deferred Compensation Plan

of the City of New York at: http://www.nyc.gov/html/olr/html/deferred/dcphome.shtml

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