Is The City’s Benefit Program In Trouble?

For the past two years, Dallas city workers have been socking away up to 20 percent of their salaries into a deferred compensation program known as 401(k), a sort of public sector IRA. At present, 4,266 ’ City of Dallas employees are pouring nearly $9 million per year into investments authorized by section 401(k> of the IRS code. Since the program was first offered in 1984, participants in the city’s plan have paid more than $10 million into tax-deferred investments that range from money-market funds to life insurance policies. The investments have been administered by Dallas-based Diversified Benefits, Inc.

But now. city workers are worried about their money. Rumors are circulating through the city’s rank-and-file that DBI is having financial problems and that the millions of dollars invested by city workers could be in trouble. In recent months officials with city police and firefighter employee organizations have been quietly asking questions about DBI, which won the contract to administer the plan without having to submit to competitive bidding. Those concerns were heightened on April 16 when the trustees of the 401(k) plan sent a memo to all plan participants informing them that the city had intended to cancel the contract with DBI due to a breach “regarding the provision of record-keeping services.”

However, the memo, signed by the five trustees of the plan, noted that “The city of Dallas controls the funds at all times. Therefore, anyone participating in the 401(k) plan should not be concerned about the safety of | their contributions. The assets in the plan will remain, based on your investment choices, stable and safe, regardless of which firm is selected to provide administrative services.”

DBI officials blame the rumors on a lawsuit filed last year by a competitor and an unnamed independent insurance agent they say is trying to steal their business. “I can assure you that the investments of the employees are not in jeopardy,” says DBI executive Billy Hulett Jr. “But because the i vestments are paper transactions, you can’t go smell, touch, or feel the money.” Hulett says the rumors have caused a decline in the total 401(k) plan dollars invested by city employees in recent months.

“We’re not making any great big fuss about it,” says J.K. Ramsey, president of the Dallas Police Association. “We’re just trying to find out why the city didn’t let the contract out for bids. As I understand it, a city ordinance requires that the contract be bid. The money’s going to be safe. I hope so, ’cause I’ve got some in it myself.”

The employee investments are safe, according to Assistant City Manager Jan Hart, a trustee for the 401(k) program. Hart claims the city’s gripes with DBI have since been smoothed over and that DBI is currently in good standing with the city. Plans to terminate the administration contract were never carried out, she says.

“They have cured their breach ” says Hart. “Diversified Benefits was having some trouble with a sub-contractor. They [DBI] were in arrears; they failed to make a payment for record-keep ing services.”

Hart won’t say why DBI didn’t pay Coopers & Lybrand, the accounting firm that performs the record-keeping services. City officials won’t comment on whether DBI was experiencing financial difficulties or whether there was merely a dispute between DBI and the accounting firm over the price. DBI owed its accountants between $50,000 and $60,000 in fees.

Hulett says there was no dispute between the city. Coopers & Lybrand, and DBI. He admits DBI was experiencing severe cash flow problems because it wasn’t being paid enough by the city to compensate for additional expenses that resulted from minor changes in the plan that the city had agreed to. At the same time, the city was trying to cut costs, according to Hulett. “What Coopers & Ly-brand did was force a decision from the city.”

City of Dallas personnel director Dr. Troy Coleman, a trustee of the plan, says the city is not legally required to submit such contracts to public bidding. When the contract was awarded in 1984, DBI was a third-party administrator in Texas of a similar deferred compensation plan, called the 457 program, for Public Employees Benefit Services Corporation (PEBSCO), one of the largest administrators of public sector deferred compensation programs in the United States. Coleman says that made DBI the logical choice for the Dallas 401(k) contract, since both City of Dallas plans could be handled by the same company. But PEBSCO disagreed and. in a lawsuit filed last fall, accused DBI of secretly gaining the contract, violating a noncompetition agreement between the two companies. At present, city employees who want to invest in the 457 plan must do so through PEB-SCO, and those interested in 401(k) through Diversified.

Coleman says he hasn’t seen any audits of DBI’s handling of the program, but that he’s “reasonably assured that the funds are not in jeopardy.” However, Coleman says that this summer the city plans to open for public bid the contract to administer both 457 and 401(k) plans, thereby eliminating competition between companies offering both plans. “I fully expect Diversified Benefits to be one of the bidders,” he says.

Eric Moye, DBFs attorney, says the decision on whom to choose to administer the plan should rest with the city manager’s office. By opening it to the bidding process, he says, the city manager’s office is passing the buck to the city council.

Meanwhile, PEBSCO and DBI remain locked in a costly legal battle, still in pre-trial discovery stages. Last Septem ber 3, a state civil judge issued a temporary restraining order for bidding Diversified from par ticipating in any business offer ing or solicitation of public employees deferred compensa tion programs in the state of Texas, with the exception of the Dallas 401(k) plan.