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How to develop a more prudent approach to plan administration

All of us are facing the realities that current public pension systems are under attack. Underscoring these attacks is a consistent trend: Shifting the liability of public employee pensions from taxpayers to public employee workers.

  • Here’s what Fiduciary News Week said on February 25, 2011: “…it’s become a developing consensus the time has come for the governments of this new century to recognize the mathematical realities of pension plans realized by private companies decades ago. Of course, politics being politics, the colorful nuances of political fantasy can, as it has for generations, trump the black and white reality of mathematics.”
  • Then there’s this excerpt from the Chicago Tribune on February 23, 2011: “The scamming of unions and public employees… Most businesses long ago abandoned defined-benefit plans because they were unaffordable. The public sector has stayed with them, though — apparently to prove those private companies right.”
  • From the Star Tribune, February 18, 2011: “Minnesota lawmaker seeks to force review of public employee pensions… liabilities and financial obligations to its employees amount to ‘a ticking time bomb – and not just in Minnesota, but around the country.’”
  • The Cleveland Plain Dealer, February 20, 2011, said: “Public employees, not taxpayers, will pay for changes to the state’s five pension systems under House bill.”
  • Meanwhile the San Jose Mercury News reported on February 22, 2011: “California teachers’ pension system is headed toward insolvency.”

In this current climate, questions any prudent plan administrator should consider include:

  • “Does my district have fiduciary coverage in the event participant-investors challenge the appropriateness of the investment selections?”
  • “How do we evaluate the vendors that are currently offering 403(b) supplemental savings plans to ensure the district is receiving the best deal at the lowers cost?”
  • “Have we considered pooling the buying power of the district to get a better deal at a lower cost for our 403(b) or 457(b) plan?”
  • “What are the total delivered fees being paid daily or annually by the participants who defer their own money into these plans?”
  • “Is each separate fee really necessary to the success of the plan?”
  • “Does each fee pay for a specific benefit?”
  • “Would we get a better deal if we joined IPPFA’s Wise Choice for Educators co-op?”

A confluence of stock market losses and investor access to information is exposing high-fee plans for what they are: too expensive.

The $82,140 difference

That number represents the additional monies realized when eliminating 1.00% in fees over the course of 35 years. This hypothetical investment assumes annual contributions of $2000 a year ($166.67 per month) earning 8% a year compounded monthly. Over the course of 35 years, you would see your investment of $70,000 ($2000 x 35 years) grow to $382,321. The impact of 1% in fees over the same time period would lower your hypothetical return by $82,140.1

1Based on simple savings calculator from http://www.planningtips.com/cgi-bin/savings.pl The costs and annual fund yield are hypothetical and illustrative only. They are not representative of any actual client or of a specific investment product or strategy.