Of Concern: SFERS’ Annual Report Publishes Two Grossly Different Values for City Employees’ Total 401k Assets

This $1,500 per city employee disparity just doesn’t happen in the real world

San Francisco city employees have the option to invest in a supplemental retirement plan that has characteristics similar to the 401k plans offered in the private sector.  The city employees’ plan technically comes under section 457 of the Internal Revenue Code, not section 401, and is commonly referred to as “deferred comp.”  Over 34,000 city employees have voluntarily invested approximately $5 billion in the San Francisco Employees Retirement System’s (SFERS) deferred comp plan.  The deferred comp plan should not be confused with the city employees’ and taxpayer-funded $30 billion pension.  

Wall Street adage:  Before you worry about the returns on your investment, worry that you can receive a return of your investment.

In 2022, SFERS Retirement Board Commissioner Joe Driscoll inquired what costs Voya Financial imposes on the $5 billion city employees’ deferred comp plan.  However, before SFERS can convey the fees Voya is charging city employees, SFERS first needs an accounting on the value of city employees’ assets.  Otherwise, until SFERS can produce an accurate accounting, city employees should worry about the return of their investments.

On April 19, 2024, SFERS released their 2023 Annual Report.  The annual report covers both the $30+ billion public employees’ pension and the $5 billion voluntary deferred comp plan.  Unlike annual reports in the private sector, no CPA firm opines on the validity of the SFERS’ financial statements or to the extent public employees’ assets actually exist.

On page 86 of the annual report, the June 30, 2023 total value of city employees assets in deferred comp is listed at $4,745,525,662 (screenshot below):

On the subsequent page (page 87) in the annual report, a second financial statement presents city employees’ total assets in the same deferred comp plan:

Notice a difference?  Like a $49 million difference in deferred comp assets as of the same date?  ($48,780,669 to be specific.)  For those of you keeping score at home, this unexplained disparity equates to a $1,500 deficiency for each of the 34,000+ city employees’ deferred comp accounts.  And this is not the first year that SFERS has posted two different totals.^[1]

Here is a screenshot of SFERS’ footnote associated with the second presentation (above):

 “Outstanding loans” composes the bulk of the $49 million disparity.  If a deferred comp investor takes out a loan against their account, a matching dollar amount of the investor’s assets must be sold—a wash.^[2]  Therefore, “outstanding loans” cannot explain the difference in the total assets amounts.  I’m a CPA and I have had a financial license for decades, and I have no idea what “miscellaneous transactions” or “net appreciation” are.  

City employees have online access to their daily deferred comp account balances.  So why is it so difficult for SFERS to produce an aggregate asset value that matches the city employees’ total online account values?   It’s not like SFERS had to rush this annual report out the morning after their fiscal year closed.  It took nine months for SFERS to publish this annual report, and that wasn’t enough time to reconcile the deferred comp assets on page 86 and page 87?  My recommendation to all 34,000+ city employees is to take a June 30th screenshot of your online Voya balance and email it to SFERS so they can tally an accurate total of what you own.

SFERS’ shoddy accounting flourishes in an environment where City employees’ have few of the oversight safeguards 401k participants get

The inability of SFERS to arrive at a concrete value for city employees’ deferred comp assets is very concerning because city deferred comp investors do not receive the same oversight protections 401k participants receive. 

In the private sector, the Department of Labor and the Employee Retirement Income Security Act (ERISA) imposes strict fiduciary standards that 401k investors must receive.  Public employees are excluded from ERISA, which means that SFERS and the Retirement Board have no obligation to act as fiduciaries over SF public employees’ assets.^[3]  Unlike 401k’s, the way city employees’ deferred comp is structured, their investments are also excluded the Investment Company Act of 1940, so the SEC does not provide oversight or safeguards.  Regulatory-wise, it’s like the Wild West for SF city employees.

Ironically, while city employees’ deferred comp plans escape the most zealous oversight and fiduciary care, the Department of Labor is increasing the fiduciary responsibilities for independent financial advisors.  Effective September 23, 2024, the Department of Labor will require all financial advisors managing clients’ funds in IRA’s to act as a fiduciaries.(4) To provide context, this means a deferred comp investor can pick any random financial advisor off the street and the Department of Labor mandates that investor shall receive a higher standard of fiduciary care than SFERS and the Retirement Board deliver to their fellow brother and sister coworkers.

A grossly low interest rate for SF deferred comp investors in the un-Stable Value fund

SFERS and the Retirement Board’s lack of fiduciary care is no more conspicuous than in the deferred comp’s stable value fund.  City employees currently park about $1 billion in Voya’s Stable Value fund, which provides stability away from the fluctuations of the investment markets.  City employees earn a little over 3% on this fund.

In the world outside of SFERS’ deferred comp, short-term Treasury Bills are currently paying 5%.  Treasuries are issued and backed by the full faith and credit of the United States and are considered the safest investment in the world.  A sister to Treasuries are Treasury money market funds that are also paying over 5%.  Treasury money market funds are as liquid as stable value funds, and by default are safer than Voya’s Stable Value fund.^[5]  So why is Voya gypping city employees out of so much interest?

The low yield on Voya’s Stable Value fund has caused many city retirees to depart Voya through tax-free transfers to an IRA.  In an IRA, a retired city employee can almost double the stable value fund’s yield, and the employee upgrades to receiving fiduciary care.  And those retirees also escape Voya’s sketchy history.

In 2009, Barron’s analyzed that when ING Insurance managed city employees’ stable value fund, over $100 million—or 15%-- of the fund evaporated.  The loss was attributable to ING’s allocation of city employees’ investments to extremely risky underlying investments.  (Other cities lost millions too.^[6])  What did SFERS do?  SFERS replaced ING with Great West Insurance, who loaned the missing $100+ million to city employees, and then paid a lower interest rate to those city employees until Great West recouped their $100+ million loan.

Meanwhile, ING changed their name to Voya Financial and SFERS rehired them despite the $100+ million debacle on their résumé. Only in the public sector could ING/Voya lose $100+ million of city employees’ funds, get rehired by the non-fiduciaries at SFERS, and then pay customers half the rate of safer Treasury Bills. You can’t make this stuff up!

Should the answer to Joe Driscoll’s question on fees raise red flags?

On March 22, 2022, SFERS Deferred Compensation Manager Diane Chui-Justin provided Driscoll with the following cost structure imposed on city employees.  The greater the fees, the lower the corresponding return to city employees.

Per Chui-Justin, Voya Financial earns only $1,626,804 in direct fees on their contract with the city.^[7]   I disagree.  Chui-Justin’s answer to Driscoll only covered only the direct fees that Voya earns off city employees’ backs; not the indirect fees they also reap.  This consistent lack of transparency should concern city employees.

Here is why I disagree with Chui-Justin:

1)        Voya’s “Total Asset Based Fees” are unrealistically low.

From just $1.6 million in direct fees, we are to believe Voya can pay for recordkeeping, structure their own investment products, compensate their personnel, and still make a profit?    $1.6 million is peanuts for a $5 billion asset base.   A few weeks ago, the city gifted that amount to the Bicycle Coalition for a three-year contact.

2)        How about the indirect fees that Voya can potentially earn from the stable value fund?

Voya is perfectly positioned to collect indirect fees from city employees’ accounts.  For instance, the $1 billion city employees have parked in the Voya Stable Value Fund is only earning 3%.  Voya and the stable value fund managers can reinvest those funds in safer Treasuries paying 5% and pocket the 2-percentage point difference.   That 2-percentage point spread on $1 billion in Stable Value assets equates to $19 million per year in revenue.^[8]   And we are to believe none of that $19 million profit is going to Voya?   Do you think that SFERS, who can’t even properly account for the total value city employees’ deferred comp assets, has any clue?

3)         How about the indirect fees that Voya can potentially earn from the other investment options?

Voya Financial has structured their investment options into collective investment trusts (aka: CIT’s”).  Financial commentators describe these collective trusts as more akin to hedge funds than mutual funds.  The indirect fees SF city employees must pay for the underlying investment options that Voya uniquely structured total $12 million per year.^[9]  Voya Financial can pocket, through “sharing arrangements,” some of these fees from the collective investment trusts they helped manufacture.  

4)        The content of public employees’ deferred comp accounts is a black hole.  Thus, mathematically, SFERS can’t possibly know what the expenses are.

Your credit card has an account number.  Your cellphone bill, your property tax bill, your PG&E bill, all have account numbers.  Yet, uniquely, city employees that invest in deferred comp do not have account numbers.   Instead, Voya and SFERS rely on city employees’ social security numbers to reference their accounts, which effectively removes the account-number-barrier to identity thieves.  This convoluted arrangement means city employees don’t own specific shares in the underlying Voya investment options,^[10] and consequently, SFERS doesn’t know what the total value of city employees’ accounts are.

 Joe, I’m sorry.  In this environment, how could SFERS or Chui-Justin possibly know what Voya’s fees are if they don’t even know the value of the assets at Voya.

Let’s review:

If you are an active city employee, don’t interpret this article as a reason to stop investing in deferred comp.  If millions disappear again on Voya’s watch, the city will probably just ding taxpayers to replenish the loses.

If you’re a retired city employee: caveat emptor.  Consider:

·      SFERS has no accurate accounting of how much their employees have invested.

·      The SFERS deferred comp financial statements (and probably the plan) are not audited.

·      SFERS offers no fiduciary care, so city employees’ accounts are unprotected from SFERS’ conflicts of interests.  

·      Voya previously destroyed $100+ million in city employees’ assets.

·      Safer money markets pay approximately 66% more than the Voya Stable Value Fund.

Be smart and only work with a fiduciary who is required to put your interests first.

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^[1]

^[2]  SFERS will probably paint the $49 million disparity with a broad brush stroke.  SFERS will claim the $49 is attributable to deferred comp loans to city employees.  However, that doesn’t match with the logistics.  There are two ways to get funds to an SF employee that is trying to borrow against their deferred comp account.  One, Voya can lend the SF employee the funds--a margin loan-- secured by employee’s deferred comp account.  This untypical transaction would most likely cause the IRS to trigger an unrelated business tax.  Two, and more typical, the deferred comp plan can sell a matching amount of the employee’s deferred account to fund the loan.  This would have the effect of equally reducing both the employee’s account balance and the total SFERS deferred comp balance—which apparently SFERS did not do.  Instead, it appears SFESR implemented some strange accounting mechanism to arrive at the two different total account values.

^[3] SFERS and the Retirement Board are only required to act prudently—a lower standard of care than the fiduciary attention ERISA-protected 401k participants receive. 

4. Wall Street Journal April 23, 2024: Advisers on Trillions in IRA’s Must Now Put your Interest First.

^[5] If Treasuries are the safest investment in the world, and the Voya Stable Value fund is not composed of 100% Treasuries, then by definition, it is a riskier option and only paying 60% of what Treasuries pay.

^[6] San Jose employees also lost about $40 million from ING Insurance’s Stable Value fund.

^[7] Chui-Justin is not clear who keeps the Net Revenue, which means Voya could have taken $2.6 million in fees: ($1,626,804.42 + net revenue $1,061,071.39).

^[8] $946,691,148 Stable Value value at March 31, 2024 multiplied by 2%

^[9

^[10] Voya commingles all their cities’ billion-dollar deferred accounts into a single pool of assets.   SF deferred comp investors receive a nominal percentage in that pool.  Then, Voya manufactures a “unit price” for each investor’s account to create the appearance of direct ownership.  If you think the “unit price” is real, try and find it in the Wall Street Journal or Yahoo Finance.  Better yet, ask Voya for the investment option’s ticker symbol.  It’s all fugazi!