Unfair to state workers

July 21, 1993

When it comes to a deferred compensation plan for its state workers, Maryland is in the horse-and-buggy era. There is little individual counseling, little effort to spread the word to the state's 60,000 eligible workers and exorbitant fees on participants -- especially among lower-paid employees working for the government.

In other states, the situation is far different. As reporter C. Fraser Smith pointed out, nine other states offer similar deferred compensation plans at far lower cost to workers and with more success in signing up members, especially for the best plan around for retirement years -- the 401(k) plan. The fees paid by Maryland plan participants are also twice as much as in the private sector.

All of this stems from the failure of the plan's nine trustees -- appointed by the governor -- to ensure true competitive bids in seeking a company to run the deferred compensation program.

Six years ago, the trustees made the mistake of signing a 10-year, no-bid contract with Public Employees Benefit Services Corp. (PEBSCO) that includes a termination penalty clause that is so harsh there's no way the trustees will break the contract. This means that plan participants are stuck with PEBSCO's exorbitant fees (it earns $2.4 million a year) and its meager service efforts.

The company has only seven salesmen to explain the program to 22,000 participants and the other 38,000 eligible state workers. It also has kept the program's 401(k) plan a well-guarded secret. Less than 5 percent of participants have invested in the 401(k) plan, even though this option is the most flexible for public employees and offers the most potential for future savings.

Now that the trustees are locked into the PEBSCO contract until 1997, they need to make the best of a bad situation. They should take a tough stance to force a reduction of the company's fees, especially the high charges on lower-paid state workers in the plan. And the trustees should take the lead in doing what PEBSCO refuses to do: offer individual counseling and promote heavily the 401(k) plan to all eligible state employees.

As for the future, the trustees should not continue this sweetheart arrangement beyond 1997. They ought to run the program themselves (several states have had great success) or open the contract up to competitive bids that guarantee a level playing field for all interested companies. State workers deserve a break on their deferred compensation plan. They aren't getting it now.

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