County schools may limit savings plans

Albemarle County public school employees could soon have far less choice in how to invest money for retirement.

In response to new federal regulations, the county could reduce the number of vendors providing 403(b) savings plans from 29 to as little as one by the end of the year.

More than 460 teachers and other public school employees in Albemarle, or 20 percent of the school system’s staff, have 403(b) accounts. If the county picks just one vendor, many employees could be left with 403(b) accounts that are no longer tax-sheltered.

Life Insurance Company of the Southwest, Albemarle County’s second-biggest vendor, did not return a completed Request for Proposal, meaning it is unlikely the firm will participate as a 403(b) vendor after this year. “We do not believe a one-vendor approach is the right solution,” company Vice President Keith Young wrote in a letter to Albemarle County purchasing agent Hugh Gravitt.

“Many single-vendor proposals try to force your teachers to move out of their investments and into mutual funds and variable annuities in a time when the market is very volatile. If schools take this action, we believe they may have fiduciary liability and open themselves up for lawsuits from unhappy investors,” Young wrote in the letter, which he said the county did not respond to.

Steve Gissendanner, a public school teacher and president of the Albemarle Education Association, thinks there should be five to 10 vendors and employees should have a say in which vendors are picked. About 700 teachers are members of the AEA.

Whether Albemarle County retains a single vendor or multiple vendors is still undecided. Lorna Gerome, assistant director of the county’s human resources department, said a selection committee of administrators and teachers would be formed in August to make that decision.

“We want to offer the same funds if not similar funds to meet [employees’] needs,” Gerome said. “We certainly would want to design it so employees would have the most flexibility.”

Gerome said the county would be able to negotiate lower fees with a single vendor while still offering employees a variety of choices. She said the enrollment process would be simpler, encouraging higher employee participation.

Sharon McKenzie, a sales director with the retirement education company ValuTeachers, said finding a single vendor to meet everyone’s needs could prove difficult. McKenzie is also an agent with Life Insurance Company of the Southwest.

“Typically, you’re not going to find the variety and quality of products when there’s no competition, when one vendor offers a variety of different funds instead of a variety of vendors offering a variety of different funds,” she said.

Currently, public school employees pick and administer their own 403(b) savings plans, in which they can save and invest money tax-free. Last year, the IRS rewrote the rules, making counties, cities and their school systems responsible for administering and accounting for all 403(b) plans by Jan. 1, 2009.

Non-school employees of Albemarle County are able to participate in a different type of savings plan, a 457(b), which uses a single vendor. That vendor could change if the county elects to use a new provider for both school and county employees.

Charlottesville city schools reduced their 403(b) vendors to seven in 2003 to ensure compliance with the 403(b) regulations of the time. Edward Gillaspie, finance director for the city schools, said one vendor dropped out this year but the school system would include the other six in the written plan it will submit in response to the latest rule changes.

In addition to Albemarle, numerous other counties, including Greene, Orange and Fluvanna, are planning to cut vendors, according to county officials. Employees would have several alternatives:

- Those who are already enrolled with a vendor chosen by their county would not have to do anything;

- Employees who aren’t could move their savings to a chosen vendor, possibly incurring fees if they have to close an annuity early;

- If employees don’t move their savings to an approved vendor they won’t be considered as having a 403(b). The IRS would then charge income tax on their savings, and for employees under age 59 1/2, there is a 10 percent penalty for leaving a 403(b) prematurely.

Albemarle County hired a consulting firm, Bolton Partners, to find a vendor or vendors to fit employees’ needs. Bolton prepared a 51-page Request for Proposal that was published on the county’s Web site in late April.

According to Gravitt, only eight vendors responded to the RFP by the due date of June 4: AIG, Nationwide, Prudential, The Hartford, Lincoln Financial Group, Security Benefit Group, Great American Financial Resources and ICMA Retirement Corp.

Gerome said the selection committee would review the recommendations of Bolton Partners and pick one or more vendors by late August or early September.

She said teachers would have the chance to speak with members of the selection committee during the review process. “I think employee input is critical to the success of this,” she said.