November 21, 2008

TRS Board of Trustees Vote No to Changes in COLA

On Wednesday, the TRS Board voted unanimously to REJECT a proposal to change the semi annual Cost Of Living Adjustment (COLA) for retired Georgia educators.

The proposal was to allow a Board vote annually on the amount of the COLA for the following year. The 40 year history of the current guideline has a 1.5% increase in January and an additional 1.5% increase in July every year as long as the CPI for the previous year was positive.

Additionally, a letter from the Georgia attorney general's office said that Georgia could potentially be held in breach of contract if the proposal was approved. Assistant Attorney General Christopher McGraw wrote that the state would probably have a tough legal battle if the long-standing policy was changed.


403(b) Plans in 2009

I have written often about the problems associated with 403(b) accounts. I am definitely for having a retirement vehicle, but many times the educator is the one that gets taken advantage of by paying large fees that are usually hidden.

On Wednesday, Robert Powell of MarketWatch wrote an article that I would like to share. This is not to scare anyone into NOT opening account, but depending on the county and the custodians available, PLEASE be careful with your choices.

While I do not agree with all of the information below, I definitely agree that you should know and understand what you are signing up for. I want everyone to prosper rather than just be steamrolled into a 403(b) account that hits the employee with huge fees.

Happy New Year? Not for some
403(b) plans will have fewer investment options, more restrictions in 2009

By Robert Powell, MarketWatch
Last update: 7:07 p.m. EST Nov. 19, 2008

BOSTON (MarketWatch) -- Come Jan. 1, more than 10 million American workers who save for retirement in 403(b) plans may not be so eager to hear the phrase "Happy New Year."

As a result of a government regulation that becomes effective next year, many employers who sponsor 403(b) plans will likely reduce the number of providers and investment choices in their plans, as well as put in place restrictions on loans and hardship withdrawals.

That could be a headache for the workers at many hospitals, schools and nonprofit organizations affected by the new Internal Revenue Service regulation.

To be fair, the new IRS rule, the first of its kind in 40 years, is designed to make 403(b) plans look more like 401(k) plans. Up until now, 403(b) plan participants had in some ways much better deals than those with 401(k) plans: They could invest their money with many different vendors and they could take out loans and withdrawals without having to go through their employer. It was, to some observers, a Wild West atmosphere, with some employees essentially managing their own plans.

But now the Wild West is getting tamed. To be in compliance with the new IRS regulations, 403(b) plan sponsors need to have several documents and agreements in place just like employers who sponsor 401(k) plans. Employers will need a written document that provides a summary of its 403(b) plan and identifies the approved list of vendors, eligibility rules, contribution limits, loan rules and limits, and distribution and withdrawal rules, among other things.

Some financial advisers say employers may not have the expertise in place to create such documents. Still, many existing 403(b) providers, including TIAA-CREF, the nation's largest 403(b) plan provider, are giving employers model plan documents to use.

Employers also need recordkeeping and information-sharing agreements in place with their 403(b) vendors. As part of their new fiduciary responsibilities, employers must keep track of their workers' money inside the 403(b) plan. With the information-sharing agreement, employers will be assured that vendors are sharing information among themselves about participants' hardship withdrawals, loans, and transfers.

But some 403(b) firms are not able or willing to meet the terms of the information-sharing agreements that employers plan to use, said Aaron Skloff, chief executive officer of Skloff Financial Group. And that could result in some 403(b) providers exiting the business or reducing their presence, leaving workers to re-arrange their contributions into different funds and products. "Thousands will lose their choices," Skloff said.

Fewer low-cost options?

To be fair, not all 403(b) plan participants will be scurrying. "The changes will be transparent," said Angie Kyle, a vice president at TIAA-CREF.

But Skloff and other advisers foresee big disruptions in the 403(b) world.

"These new regulations do not benefit anyone, at least in the short term," said Scott Dauenhauer, co-author of "The 403(b) Wise Guide" and owner of Meridian Wealth Management. "They hurt employers, employees and vendors."

Dauenhauer said employers don't have the time, expertise or money to implement the new regulations, employees face the possibility of losing low-cost and no-load investment options in their plans, and the vendors are spending "a lot of money trying to interface with district and third-party administration's information-sharing systems."

Given all the turmoil and confusion, employers and associations are pelting the government with requests to delay the effective date. The IRS may announce its plan early next month and many are hopeful they will get relief. But no matter whether the new regulation goes into effect Jan. 1 or some later date, many 403(b) plan participants will ultimately have to make some decisions about their retirement plan.

What should 403(b) plan participants do when the time comes?

1. Pay attention

Participants should read closely the summary plan document, Skloff said. Participants should "pay close attention to the new 'approved vendor' list and look for a low-cost vendor," Dauenhauer said. "In all likelihood there will not be one," he said. "If there is not, sometimes the high-cost vendors have a [low-cost] product that they don't like to talk about, but will offer if asked."

For instance, he suggested that participants in the National Education Association's endorsed 403(b) plans should ask for the Valuebuilder Direct from Security Benefit or the similar low-cost product from AIG, two of the approved vendors.

For her part, Kyle noted that many plan sponsors are attempting to choose low-cost vendors, but that it's important for employee and employer to look at the "whole picture" and compare the breadth of services to the cost.

2. Switch only if necessary

Though many third-party administrators (TPAs) will suggest otherwise, 403(b) plan participants don't have to transfer their existing balances to a new provider. "There is no requirement to do this," said Dauenhauer. "Agents that work for TPAs that are really product sales organizations may attempt this ploy. If, however, a plan participant does decide to move their assets [for the right reasons], it has to be to a newly approved vendor."

3. Be wary of high-pressure sales tactics

Those TPAs that are just "product sales organizations in disguise," Dauenhauer said, may give compliance services for free to employers in exchange for access to the employees to sell their high-cost, high-commissioned products. "These TPA's should be avoided by (school) districts."

4. Make your voice heard

Plan participants should be active in helping the employer make the right decision, but should be careful that they don't end up promoting a union product that is expensive, Dauenhauer said.

5. Do your research

Source: MarketWatch

November 12, 2008

AIG Announcements

In the wake of the announcements by AIG of a restructuring of its loans from the U.S., I did quite a bit of research to actually see if there are any negatives to the changes. From independent analysts and company spokesmen, I could find none.

According to an interview of Mr. Liddy I saw on CNBC on Monday, the restructuring allows AIG the ability to repay the loans over 5 years instead of 2 years, and it gives it much more flexibility in the pursuit of liquidating some assets (including the VALIC arm). There is no material change to the company or its issues, thus the changes are not anything a consumer would necessarily ever see.

Additionally, I did receive an e-mail from AIG on Monday morning with two press releases. I am posting the first regarding the restructuring of the loans. The second press release pertained to the earnings of AIG and is not necessarily relevant.



Designed to Create Durable Capital Structure, Resolve Liquidity Issues From Credit Default Swaps and U.S. Securities Lending, Facilitate Orderly Asset Sales, and Enable Repayment of Loan Plus Interest

NEW YORK, November 10, 2008 - American International Group, Inc. (AIG) today announced agreements with the U.S. Treasury and the Federal Reserve to establish a durable capital structure for AIG, and facilities designed to resolve the liquidity issues AIG has experienced in its credit default swap portfolio and its U.S. securities lending program.

Edward M. Liddy, AIG Chairman and CEO, said these agreements are a dramatic step forward for AIG and all of its stakeholders: "Today's actions send a strong signal to our policyholders, business partners and counterparties that AIG is on the road to recovery. Our comprehensive plan addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our restructuring process successfully for the benefit of all of our constituencies."

Liddy continued, "The $85 billion emergency bridge loan was essential to prevent an AIG bankruptcy, which would have caused incalculable damage to AIG, our economy and the global financial system. Thanks to decisive action by Congress, Treasury and the Federal Reserve, there are now additional tools available to create a durable capital structure that will make possible an orderly disposition of certain of AIG's assets and a successful future for the company. Our goal is to repay taxpayers in full with interest, and emerge as a focused global insurer that will create meaningful value for taxpayers and other stakeholders."

The actions announced today include both ongoing financing facilities and one-time transactions designed to address AIG's liquidity issues. The ongoing financing facilities include:

  • Preferred Equity Investment: The U.S. Treasury will purchase, through TARP, $40 billion of newly issued AIG perpetual preferred shares and warrants to purchase a number of shares of common stock of AIG equal to 2% of the issued and outstanding shares as of the purchase date. All of the proceeds will be used to pay down a portion of the Federal Reserve Bank of New York (FRBNY) credit facility. The perpetual preferred shares will carry a 10% coupon with cumulative dividends.
  • Revised Credit Facility: The existing FRBNY credit facility will be revised to reflect, among other things, the following: (a) the total commitment following the issuance of the perpetual preferred shares will be $60 billion; (b) the interest rate will be reduced to LIBOR plus 3.0% per annum from the current rate of LIBOR plus 8.5% per annum; (c) the fee on undrawn commitments will be reduced to 0.75% from the current fee of 8.5%; and (d) the term of the loan will be extended from two to five years. The extension of the term of the loan will give AIG time to complete its planned asset sales in an orderly manner. Proceeds from these asset sales will be used to repay the credit facility. In connection with the amendment to the FRBNY credit facility, the equity interest that taxpayers will hold in AIG, coupled with the warrants described above, will total 79.9%.
The one-time transactions involve the creation of two financing entities capitalized with loans from AIG and the FRBNY. These entities will purchase assets related to AIG's U.S. securities lending program and Multi-Sector Collateralized Debt Obligations (CDOs) on which AIG has written credit default swap (CDS) contracts. The entities will collect cash flows from the assets and pay interest on the debt. FRBNY and AIG will share in any recoveries in the market prices of the assets.
  • Resolution of U.S. Securities Lending Program: AIG will transfer residential mortgage-backed securities (RMBS) from its securities lending collateral portfolio to a newly-created financing entity that will be capitalized with $1 billion in subordinated funding from AIG, and senior funding from the FRBNY up to $22.5 billion. After both amounts have been repaid in full by the financing entity, the parties will participate in any further returns on RMBS. As a result of this transaction, AIG's remaining exposure to losses from its U.S. securities lending program will be limited to declines in market value prior to closing and its $1 billion of funding.

    This financing entity, together with other AIG funds, will eliminate the need for the U.S. securities lending liquidity facility established by AIG and FRBNY in October, which had $19.9 billion outstanding as of November 5th. Upon repayment to all participants, AIG will terminate its U.S. securities lending program.
  • Reduction of Exposure to Multi-Sector Credit Default Swaps: AIG and FRBNY will create a second financing entity that will purchase up to approximately $70 billion of Multi-Sector CDO exposure on which AIG has written CDS contracts. Approximately 95% of the write-downs AIG Financial Products has taken to date in its CDS portfolio were related to Multi-Sector CDOs.

    In connection with this transaction, CDS contracts on purchased Multi-Sector CDOs will be terminated. AIG will provide up to $5 billion in subordinated funding and FRBNY will provide up to $30 billion in senior funding to the financing entity. As a result of this transaction, AIG's remaining exposure to losses on the Multi-Sector CDOs underlying the terminated CDS's will be limited to declines in market value prior to closing and its up to $5 billion funding to the financing entity. As with the securities lending program, FRBNY and AIG will share in any recoveries in the market prices of assets.

    AIG will continue to have exposure to CDS contracts on Multi-Sector CDOs that are not terminated. As AIG winds down its Financial Products division, it will also have exposure to other types of remaining CDS contracts, which have generated substantially smaller total collateral demands than the CDS contracts on Multi-Sector CDOs.
Taxpayers will benefit from the transactions with AIG as follows: fees, interest and repayment of the FRBNY loan in full, payment of a 10% coupon on the newly issued preferred shares, cash payments from the assets purchased by the two financing entities and potential asset appreciation in the underlying securities held by those entities. Taxpayers will own 77.9% of the equity of AIG and will hold warrants to purchase an additional 2% equity interest, and so will benefit from any future appreciation in AIG shares.

AIG will also continue to participate in the recent government program being utilized by many companies for the sale of commercial paper. The Commercial Paper Funding Facility (CPFF) has allowed AIG to reenter the commercial paper market. AIG is authorized to issue up to $20.9 billion to the CPFF and has currently issued approximately $15.3 billion as of November 5.

Mr. Liddy continued, "All of these steps, which would not have been possible in September, will benefit AIG, its stakeholders and the American taxpayers. This plan contributes to stabilizing the financial system and provides the opportunity for the public to realize gains on its AIG investment in the future. These measures will also put AIG on track to emerge as a nimble competitor with good long-term growth prospects."

"This innovative solution enhances AIG's liquidity position. At the same time, American taxpayers will be fairly compensated for funds lent to AIG, and they will capture the majority of any appreciation in the value of the securities involved in the program in the years ahead."

Liddy added, "Today's announcement would not have been possible without the vision and extraordinary hard work, dedication and cooperation of officials from the U.S. Treasury, the Federal Reserve Bank of New York, the Federal Reserve Board and the state insurance departments. On behalf of AIG, I would like to extend sincere thanks to all of those involved in crafting this mutually beneficial solution."

Source: AIG