OPINION: Alaska’s state government stands up — against its own employees

This March, the Alaska Retirement Management (ARM) Board voted to begin the process of righting an old wrong. The ARM Board required Empower, a Colorado record-keeping contractor, to stop selling an expensive, poorly performing account service in Alaska-defined contribution retirement and other supplemental accounts. Thousands of Alaska government employees were enrolled in it, many without knowing it because the state had put them in it by default.

In a 2009 ARM Board meeting, Patrick Shier, then the director of the Division of Retirement and Benefits, explained that beginning in 2006, as the state abandoned the previous defined benefit system, “New DCR (Defined Contribution Retirement) participants would be defaulting into Great-West’s product called Managed Accounts, which had a significantly higher fee schedule, allowing Great-West to recover its costs over five years.” This policy automatically enrolling all participants in the high-fee service started so long ago that a number of names have changed. Great West is now called Empower, and Managed Accounts is now called My Total Retirement. But, as of this year, more than 10,000 accounts with $1.6 billion in assets still were being charged roughly 0.04% by Empower for this service.

Recently, enough Alaska workers asked about the purpose and value of the high fees that the Retirement Management Board commissioned a leading institutional investment consulting firm, Callan, to analyze it.

Mining the data of actual accounts, Callan determined the My Total Retirement service not only charged higher fees but earned substantially worse returns than a passively managed, much lower fee target date fund also available to account holders.

In addition, hardly anyone paying for the service had even entered the basic information for the management algorithm to work properly. Many of the account owners did not even know they had the service, which explains the lack of required interaction. Yet Empower collected approximately $1.3 million per year for these accounts.

And so, in 2024, the ARM Board did its fiduciary duty and stood up for the best interests of account holders, requiring Empower to end the high-fee/low-return service.

However, for workers hired since 2006 who intend to rely upon those accounts and their returns — minus management fees — in retirement, the damage from the reduced returns and higher fees is real and ongoing. They missed out on nearly two decades of compound interest. And Alaska teachers are particularly vulnerable, since they earn neither Social Security nor any of the other supplemental accounts that many other state employees have.

It should be noted that the fee on a defined-contribution account is shockingly high. Now, Empower charges an annual administrative fee of 0.11% of assets, plus $35. For comparison, I have a modest balance in an IRA account with a major retail brokerage that charges $0 to maintain an account.

So, Empower is paid way more than a retail price for a wholesale service. And 0.11% might not sound like a lot, but 0.11% of the many billions of dollars saved for retirement by all Alaska workers over decades makes Empower’s niche a very good business to be in. Empower recently became the second-largest asset manager in the country.

These fees are negotiated and set by the Alaska Department of Administration, but automatically deducted from the monthly balances of all defined contribution account holders. Every firefighter, plow truck driver, police officer, teacher or any other Alaska government worker hired since 2006 pays them.

So, it was particularly shocking when a letter recently arrived from the Department of Administration. I could not believe my eyes: The letter announced the department had renegotiated the contract. The fees levied on all defined contribution and supplemental accounts will increase roughly 18% so that Empower could recover from the loss of fees from My Total Retirement.

Who does the state represent? Empower, a Colorado corporation, or the people who live here and work here and make this state function?

Dan Maclean has been a science teacher in the Anchorage School District since 2007.

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