Over the last two decades, Maryland state workers have built a $650 million retirement nest egg, taking advantage of tax laws and expert investment advice.
But for much of that time, critics say, their savings program has taken advantage of them. It has offered too little individual counseling, a lax sales effort and a fee structure that hits the little guy while giving breaks to those with the biggest accounts.
Maryland's administrative fees appear to be the highest in a 10-state survey conducted by The Sun. For the low-maintenance accounts, the fee is about double what typically might be charged in the private sector.
Over time, those fees can have considerable impact. An interviewer at the Department of Employment and Economic Development, for example, paid about $480 last year -- as much as $200 more than she might have in the marketplace. During her 18 years in the program, her account had grown to more than $60,000. If invested every year, an additional $200 might have amounted to thousands of dollars more.
Last year, 22,000 state workers paid a total of $2.4 million in fees to PEBSCO, short for Public Employees Benefit Services Corp. For this money, the company keeps records of individual accounts, shifts money into new investments when requested and recruits new savers. A separate panel of paid experts, independent of PEBSCO, analyzes and selects investment options.
Legislators, state auditors, program officials and would-be competitors say that participants might be getting a better deal if PEBSCO did not have a "sweetheart" contract and the program were offered for competitive bidding.
The company has a 10-year contract which, if broken, would entitle it to heavy cash penalties, all of which would be paid by the savers.
Meanwhile, as PEBSCO earns millions in fees, critics say, it fails to adequately market the deferred compensation program -- particularly the 401(k) plan, regarded by many investment planners as the most advantageous of the three available programs.
Only 1,000 Maryland workers have signed up for 401(k) which has been extremely popular among public employees in other states.
These criticisms are dismissed by Arthur N. Caple Jr., who heads a state agency providing day-to-day supervision of the program. He says they are sour grapes from "prima donnas" who would love to pick off a successful program like Maryland's so they can avoid the capital risk that PEBSCO took when the program started in 1975. But he agrees that some program fees should be lower and negotiations to that end are under way with PEBSCO.
"There ought to be a way to get the fees down for the little person," he says.
Lapides calls fees 'obscene'
Sen. Julian L. Lapides, D-Baltimore, a cheerleader for the concept of deferred compensation but a critic of the Maryland program, characterizes the fees as "obscene."
And Senate President Thomas V. Mike Miller Jr., D-Prince George's, wants the program to fine a new administrator as soon as possible.
"Without competitive bidding," he says, "it will be difficult if not impossible to demonstrate to the public and to plan participants that these services have been contracted for at the lowest cost consistent with the desired quantity and quality of service," he said in a letter to the program's nine-member board of trustees.
Blank defends PEBSCO
But Howard Blank, PEBSCO's Maryland vice president, says his company provides state of the art service and adequate marketing.
The fees are competitive with those levied by other companies in other states, according to Mark Koogler, a lawyer for Nationwide Insurance Co., which owns PEBSCO.
Mr. Koogler declines to offer comparisons that would support his claim, however, saying that stated fees are not always an accurate reflection of costs because some states help service their programs as an employee benefit. Maryland provides no subsidy.
Mr. Blank says his company offers frequent seminars on deferred compensation programs, but even to state employees who participate in the program deferred compensation remains something of a mystery.
Alice Ike, a 38-year-old lawyer in the state attorney general's office, offers this assessment of the program's pluses and minuses.
"I'm amazed that I have something in deferred compensation," she says. "I can't hold onto a nickel -- and I would be very interested in buying whatever comes along."
At the same time, she is unhappy with the level of service she gets from PEBSCO.
"The people who administer the program have given me no help," she says. She was unclear about her investment options, she said, so she guessed.
"I'd be better off going door to door in my office. I have not found them helpful. I have not found their attitudes helpful. They're not accessible."
Maryland was one of the first states to offer deferred compensation programs to public employees. Participants can reduce taxes by setting aside a portion of income until retirement. Then, with income lower, the tax bite is lower as well. In the meantime, the money is invested.
Financial experts doubted such a scheme would work for low-paid workers who could typically afford to set aside only a few dollars a week.
But Maryland's program was an instant success, drawing 16,000 participants within two years after it opened in 1975. Nationally, deferred compensation programs now handle $18 billion in public employe savings.
"The pension isn't that good," says Fred Jones, a vault supervisor at the Department of Vital Records, observes, stating the program's basic rationale: "I knew we'd need more."
Mr. Jones and most of the other participants pay .8 percent of the money in their accounts each year. Of that, 0.67 percent goes to PEBSCO, the rest to the trustees. In addition participants pay a $20 reporting fee annually.
Mr. Jones, the father of two, scrimps to set aside $15 from each bimonthly paycheck.
If he was in private industry, half the $48 fee he paid last year could have gone toward the further growth of a fund that now totals about $6,000 after 10 years.
Mr. Jones and Ms. Ike appear typical of savers in this plan: they have relied on the most conservative and easiest to administer investment options available.
Unaware of the 401(k)
Although many have grown more daring over the years -- diversifying their investments to include stocks, for example -- many still have their money in low-risk, low-return guaranteed investment contracts. Mr. Jones said he was unaware of the 401 (k) and its advantages.
These savers are paying more for administrative services than ,, they would if they were investing in a private sector plan, according to Lyle Benson, an accountant and personal financial adviser with the Towson accounting firm of Coyne & McClean.
Mr. Benson, who is president of a national association of financial advisers, says a fee of 0.8 percent on low-risk, guaranteed investment contract accounts and money market accounts is twice as high as it would be in the private sector. There, he says, the charge would fall between 0.2 percent and 0.4 percent.
Participants in the program can elect to have their funds deployed in products that are considered conservative, moderately risky or risky. Mr. Benson compared the performances in those categories with the performances of other investment companies as gauged by the Morningstar service. He said that the program's conservative and moderately risky accounts were either average or above average, while the risky accoaunts were below average.
Mr. Caple says the program has done its best to devise an equitable fee system. "We have tried to spread out the expenses across the plan. If we were charging the small investor for the actual services they are getting, we might have to charge $100 or $125 a year, which would make it unattractive.
That sort of charge would eat up all their investments," he says.
Those with $50,000 or more in their accounts, meanwhile, do get a reduction. The fees Senator Lapides pays on his account are about 0.3 percent as a result of the discounts. Eighty-eight percent of the savers, though, get no discount and fewer than 1 percent qualify for the maximum as Senator Lapides does.
'Grab your wallet'
Mr. Caple says he is suspicious of companies that say they can do the work now handled by PEBSCO for less, or for nothing, or that say administrators like PEBSCO aren't needed.
"When people say they can give you a service for nothing," he says, "grab your wallet and get the hell out of the room." He says the trustees believe they are offering the program they want at the lowest possible cost.
PEBSCO, which has handled the paperwork for Maryland's program since it opened 18 years ago, got its start in Maryland and a few other states. It is now the nation's largest administrator of deferred compensation programs for public employees, handling 4,000 accounts. Besides the state employees, its Maryland clients include Baltimore, Baltimore County, Howard County and a dozen other government entities.
Seven years after it opened Maryland's program, PEBSCO was sold to Nationwide, creating what the state attorney general said was a potential conflict of interest: PEBSCO might steer customers to the annuities sold by its new owner.
In 1984, bids were requested and PEBSCO was at first barred from the competition. But prospective bidders said they would have to charge high fees to cover the cost of exit penalties in the Nationwide annuities already held by many of the Maryland plan's participants. The bid process was essentially abandoned because the bids, pushed up by the penalties, were startlingly high.
For both Senator Lapides and the employment interviewer with the $60,000 account, the penalties would have amounted to thousands of dollars.
Contract signed in 1987
Finally, in 1987, Nationwide dropped the penalty charges and a 10-year contract was signed. The company also agreed not to sell its annuities to participants in the plan. In exchange, termination penalties of up to 4 percent of assets were transferred to its subsidiary, PEBSCO.
Asked if the program should have accepted these penalties, Mr. Caple says he thinks they were "borderline." Termination penalties are typically provided when programs are new and encountering high start-up costs, he said, but this one was 12 years old, had a wide base of participants and more than $200 million in assets when the current contract was signed.
"We traded one set of penalties for another," says Dr. H. Louis Stettler, chairman of the program's trustees before leaving state government.
Critics are even more critical of the program's record in &r; marketing the 401(k). That failure, they say, is more lamentable because Maryland is one of the few states with authority to offer this more flexible plan for public employees. It permits a higher percentage of deferred pay, it provides for mortgage or tuition loans and it can be converted to retirement accounts more easily if a worker leaves state service.
"It is clearly the best plan," Mr. Stettler says.
Though authorized as early as 1985, the trustees of Maryland's program did not offer it until 1990. When they did, PEBSCO got the contract -- without bids.
Two years later, bids were solicited. But only PEBSCO responded. The Copeland Companies, a PEBSCO competitor, said in a letter to the program's trustees that Maryland's program is arranged so that only PEBSCO could run it profitably. The fees PEBSCO was collecting on the existing program
allowed it to cover the high start-up costs of the 401(k), Copeland officials say.
Mr. Caple and Mr. Stettler agree that PEBSCO has had a competitive edge when new contracts are offered. But he says that advantage was inevitable and has allowed the Maryland program to offer quality services to all participants at an affordable charge. Fees for the program's 401(k) plan might be higher if it weren't for PEBSCO's size and expertise, they say.
Whether the administrator is actually spending what is needed to market the 401(k), however, is open to question. Despite its advantages, the 401(k) has grown slowly. State employees at the highest levels are unaware of it.
"If they sent me anything," says House Speaker R. Clayton Mitchell Jr., D-Kent, "it was so innocuous it didn't register." After the inauguration of a quarterly newsletter -- by Mr. Caple's shop, 0M=not by PEBSCO -- there was a surge of inquiries about the 401 (k).
Though he says as many as 600 informational seminars are held each year, Mr. Caple concedes that there are information gaps. Basic literature on the regular state pension program, for example, does not mention deferred compensation. Though he is not directly critical of PEBSCO, Mr. Caple has taken over much of the administrator's educational chores.
The legislature, meanwhile, is growing impatient with the absence of competitive bidding and with the program's service to participants.
Led by Senators Miller and Lapides, the General Assembly sent an official directive to the trustees during the recent legislative session: "[We] are concerned with the level and types of services received by members of the plans." It asked the board to prepare by January of next year a detailed plan for encouraging competitive bidding.
But the program's trustees have been asked to consider competitive bidding before -- and have rejected the suggestion. At one point, in fact, they seemed to be moving in the opposite direction.
At the same time the legislature was asking for a move toward competitive bidding, Mr. Caple and the Board of Trustees were asking for more latitude to avoid it. A bill was submitted that would have removed the supplemental retirement program from various forms of state scrutiny -- relieving it of budget review, procurement rules and competitive bidding requirements. The bill died in the Appropriations Committee.
Mr. Caple says the program's trustees are unlikely to seek bids until the current PEBSCO contract and the last of the penalties expire in 1997.
By then, PEBSCO will have taken in another $8 million.