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© St. Petersburg Times, published September 26, 1999
Pinellas County Sheriff's Deputy Adrian Nenu is on a mission that so far has brought him nothing but frustration.
He's on a one-man crusade to cut the cost of saving for his retirement, but he has not been able to cut through the bureaucracy that stands between him and his goal.
"Exposing the situation is easy," said Nenu, 34, who works nights guarding prisoners at the Pinellas County Jail. "Getting it changed is a whole different ballgame."
The source of Nenu's discontent is the tax-deferred retirement savings plan the Sheriff's Office offers its employees. Expenses are much higher than they are in the low-cost alternatives available to state employees and to many workers in private industry.
It matters to Nenu because, over many years, even tiny differences in expenses add up to big dollars.
Here is an example: Both State of Florida employees and Pinellas County Sheriff's Office employees can invest in a T. Rowe Price stock fund. The state employee can buy it directly from T. Rowe Price, but the Sheriff's Office employee has to buy it through Aetna Financial Services and pay higher fees to do so. If both workers save $200 a month and both funds earn 10 percent a year, the state worker's account will be worth an extra $24,000 after 20 years, thanks solely to the fee advantage.
Nenu and his Sheriff's Office co-workers are not the only ones getting hit with high fees. Across the country, many of the retirement savings plans offered to government workers and schoolteachers are laden with fees that cut into investment returns and may even discourage participation.
Most public sector employees do not take advantage of the tax-sheltered savings plans available to them -- and only rarely do their employers match contributions to encourage them. Employee participation rates range from about 25 percent to 40 percent in public-sector plans, compared with the 80 percent norm for private industry 401(k) plans.
In the corporate world, mutual funds have become the primary providers of 401(k) plans, and competition has pushed fees down. Fees also are starting to come down in the public sector, but change has been much slower.
Insurance company annuities, which are investments inside an insurance wrapper, remain the most common option for government workers and public elementary and secondary school teachers. Together, those groups have about $200-billion in tax-deferred savings plans nationwide.
Most of these annuities contain a wide variety of investment choices, often including accounts that are clones of popular mutual funds. But the investments come with a mandatory layer of insurance and accompanying fees, usually assessed annually as a percentage of the value of the account.
For example, Aetna lists its basic fees as a 1.25 percent "mortality and expense risk charge," a 0.25 percent "administrative expense charge" and a $20 annual "maintenance fee." Add in investment management fees, which range from 0.34 percent to 1.29 percent, depending on the type of account. Then if employees want their money, Aetna may apply an "early withdrawal charge" of up to 5 percent that applies for as long as 10 years.
In Nenu's case, the extra fees buy an annuity death benefit he does not need, personal service he does not want and tax deferral that is superfluous because retirement accounts already are tax-deferred. (See story, page 12, on annuities in retirement plans.)
When public employees are given the option of buying mutual funds without an annuity attached, it is often through broker-sold funds. These funds typically have a front-end commission, a redemption charge or an annual fee to compensate the brokers who sell them.
What's the least common option offered? Low-cost mutual funds available directly from the fund company such as those common in the private sector.
Employees of Pinellas County schools have one such option -- Boston-based Fidelity Investments -- among their 15 choices. Pinellas County Sheriff's Office employees have none; all four of their plan choices are annuities.
In the Tampa Bay area, the typical retirement savings plan for county workers has four choices, while the typical plan for schoolteachers has more than a dozen. For both groups, most of the options are annuities. Ironically, plan providers say the competition contributes to the high fees because they spend more money on marketing to attract a smaller share of business.
"When an employer goes through the bid process and chooses one vendor, you get a lower price" for administrative costs, said Donald Salama, vice president and director of retirement plan solutions for Hartford Life Insurance Co., one of the Sheriff's Office's providers. "But when you split assets among four or five vendors, they all have smaller pieces and higher fees. Our fees are tiered based on how big the relationship is."
In corporate 401(k) plans, the employer typically takes a hands-on role, contributing to employee accounts, subsidizing administrative expenses and encouraging employee participation. The employer chooses the plan its managers think offers the best combination of cost, services and investment results.
By contrast, public employers often treat retirement savings programs as their employees' private business. They rarely contribute to employee accounts or subsidize administrative expenses. Some take such a hands-off approach that they will approve any provider meeting minimal criteria. Hillsborough County school employees have had as many as 50 provider options and still have about half that many.
Any provider that could line up 25 employees would be added to the list for payroll deductions, said Gwen Wamsley, director of employee benefits and risk management. "We can't provide any comfort level to our employees that they're getting good products."
The good news for public employees is that things are starting to change -- even if slowly. Employees like Nenu are asking for better options and some government employers are working to provide them.
The Pinellas County School Board set higher requirements and reduced the number of its plan providers last year, while the Hillsborough County School Board has similar reforms in progress. The state of Florida revamped its program last year, capping fees and forcing insurance companies to drop withdrawal penalties.
"What you're seeing is a more educated investor in the public sector than you had before," said Thomas Hughes, senior vice president of marketing for Fidelity Investments, the Boston-based mutual fund company. He said government employees have become more aware of the need for savings to supplement their traditional pension plans.
"They are understanding they may not have enough for retirement when they get there," he said.
Making a dent
The Sheriff's Office plan, which has more than $16-million in assets, is partly under the county's supervision and partly under the sheriff's. Nenu has had little success enlisting co-workers to help with his cause, although more than 850 of them participate in the plan
"Most people think that what I'm doing makes absolutely no difference," he said. "Quite a few people say, "Yes, do something,' but they're family people and they're concerned they might lose their jobs or be penalized. I'm single and have no fear."
The first hint that his efforts might be making a dent came this summer when Dave Libby, the county's director of personnel, promised to review the situation in November.
"I've got two floppy disks and a couple of letters from him," Libby said. "He's the only one who's ever told me there was a problem and I've got 100 other things coming in my direction too. But he's got enough of my attention that I figure I ought to go find out what the truth is."
Sheriff Everett Rice declined to comment.
Nenu, who takes finance classes at the University of South Florida, stopped making new contributions to the department's savings plan and invests directly in stocks instead. He calculated that the plan's fees would outweigh the tax benefits he would get for participating, assuming he stayed in the same tax bracket at retirement. But he said most employees never stop to look at the fees they are paying.
"Most people are simply ignorant and sometimes refuse to believe how much they are being charged," he said.
Nenu says he isn't getting his hopes up that things will change -- but he hasn't given up either. For inspiration, he looks to the plan the state of Florida offers its employees.
Although the majority of its providers are insurance companies offering annuities, the state plan includes two low-cost providers of mutual funds that are not tethered to annuities. One of them, the Baltimore-based mutual fund company T. Rowe Price Associates, charges participants a flat $51 annual fee for record-keeping and administration. When added to the individual funds' money management charges, fees are less than 1 percent a year for most accounts.
The state plan also took a tough stance on limiting annuity fees. With a $1.3-billion plan, the state had plenty of bargaining power and only a couple of companies dropped out rather than comply, said Kandi Hicks Winters, the plan's administrator.
"The companies are not making the money they used to make," she said, "but they're making plenty."
Winters said state officials are willing to help local governments negotiate with plan providers.
"Sometimes it's hard for them to know the best way to deal with these companies," she said. "But if they ever want some help, we always give it to them."
But Winters said advocates of low fees have to realize that fees and services are connected. She said the state's low-cost providers do not spend money on sales and marketing and do not have local representatives to provide in-person service. While that approach appeals to employees who know what they want, she said others want the extra service that higher fees buy.
"With T. Rowe Price you have to feel comfortable doing it over the phone or through the mail," she said. "A lot of our government employees like handholding. They want somebody to come talk to them at their home or their office."
Fighting over fees, investment choices
Employees saving for retirement are far more likely to gripe about lack of investment choices than about high fees, said William Doyle, a St. Petersburg financial planner and accountant.
"The most common complaint is, "I don't have any choices and the choices I have are lousy,' " he said. "Expenses are hidden. It takes an astute investor to figure it out."
The government officials who select fund providers are not always sensitive to fees either.
"A lot of times service and administrative ease is most important and cost is a secondary issue," said Robert Barkin, spokesman for ICMA Retirement Corp. in Washington. The spinoff of the International City/County Management Association provides mutual fund investments to government employees, including many in the Tampa Bay area. Its fees tend to be lower than those for annuities, but higher than some mutual fund competitors.
Barkin said he sees more attention being paid to fees as finance departments become more involved in plan supervision instead of leaving everything in the hands of human resources departments.
"When chief financial officers come in, they start looking under the hood a little bit," he said. "That's become a phenomenon throughout the industry."
But existing plan providers remain well-entrenched -- and well-connected. Many plan providers work at maintaining close relationships with local officials, contributing to groups such as the National Association of Counties and hiring former government officials as agents or consultants.
Pinellas County Commissioner Barbara Sheen Todd worked as a consultant for retirement plan provider VALIC, a unit of Houston-based American General Corp., between terms. While she was in that role, her former colleagues on the commission made VALIC one of the savings plan options for county employees. She kept the VALIC job when she returned to the commission in 1996, but Todd said her contract has expired and she has not done any work for the company in more than a year.
For the record, Todd said she favors providing low-cost options to employees.
Scrutiny of retirement savings plans could increase thanks to a potential trend in the making. Public employers are just starting to follow the private sector in replacing traditional defined benefit pension plans with defined contribution plans in which retirement benefits depend on employees' savings and investment returns.
"We're seeing a very gradual change take place just like we did 12 years ago when most corporations were offering a defined benefit plan and the 401(k) was just starting out," said Hughes of Fidelity Investments. "The public sector just hasn't been as quick to react."
Nenu, the sheriff's deputy, says he is not looking for such drastic changes.
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