Raw Deal for State Workers

July 21, 1993

Under a "sweetheart" contract with a company that runs Maryland's $650 million deferred compensation program, state workers are paying extremely high fees and getting very poor investment guidance for their money.

Sun reporter C. Fraser Smith's account ought to alarm 22,000 state workers in the plan. Trustees overseeing the deferred compensation program struck a bad bargain with Public Employees Benefit Services Corp. (PEBSCO). They are getting meager service, though members are charged double what private-sector workers pay. It's a raw deal.

PEBSCO has handled paperwork for Maryland's program since it began 18 years ago. When officials tried to seek bids in 1984, they discovered PEBSCO's new owner, Nationwide, charged such high exit penalties on withdrawing funds from its annuities that other bidders couldn't compete.

Then in 1987, state officials made the mistake of signing a 10-year contract with PEBSCO that ended the sale of the Nationwide annuities in the plan but imposed punitive termination fees. So the trustees are stuck with PEBSCO, unless plan participants fork over a huge penalty.

Reporter Smith looked at similar plans in 10 states. Fees here were far higher, and the number of participants in the most advantageous option -- a 401(k) plan -- was the lowest. PEBSCO, it seems, is content to collect its $2.4 million in fees while the plan's participants let their money sit in easy-to-manage low-yield savings accounts.

The company has only seven sales representatives to handle the 22,000 state workers in the plan, leaving little time to explain valuable retirement options to the state's other 38,000 eligible workers. That's clearly inadequate.

When PEBSCO's contract runs out in 1997, the trustees should consider running the program themselves -- or they should ensure a true competitive bidding process. No more sweetheart deals.

For now, trustees have an obligation to press PEBSCO to cut its fees, especially the high charges imposed on low-paid workers. That's unacceptable. The trustees also should press PEBSCO to hire more service help and to promote the 401(k) option. If necessary, the trustees themselves should spread the word, perhaps employing informational brochures in state pay envelopes.

State workers are being put at a disadvantage, and it is costing them money. The trustees have a responsibility to fight for what's best for plan participants. So far, they haven't fought very hard.

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