September 24, 2011

A Suggestion for Employers of (Georgia's) Educators

I have been thinking about this post for months (since December actually), and after talking to various educators, administrators, and colleagues over a number of months and years, there are a great many things that always seem to come up.
  • Most educators don't think about or discuss their retirements with anyone until the last few years before retirement.
  • While most educators seem to have at least a basic understanding of their pension benefits,
    • they have little or no comprehension of their Social Security benefits (or lack there of)
    • they do not realize the opportunity they are missing by not contributing to a retirement plan/account
  • Employers hold employee orientations that cover retirement benefits, but (based on my conversations with educators) there is so much information giving in the 1-2 day orientation that most educators ignore the retirement section (usually part of the new employee orientation).
There are many things that I could say here to employers (school systems), but the bottom line is simple - Educate the Educators. That's it.

Essentially, employers should set aside time to educate their employees on the various retirement benefits that they have and that they could receive as well as those they will not. If the employer withholds Social Security or does not, they should explain what it means to the employees. They should make sure to stress the need for 403(b) accounts, discussions on TRS benefits, and more - throughout their employment and not just before the last few years of service.

I had one administrator tell me that if they told their employees about (not paying in to) Social Security it would scare them. Well, maybe it should. 

In the private sector, employers and other employees stress the need to contribute to retirement accounts - 401(k), IRAs, etc. In the public sector, I have failed to see a similar push. I believe that most people see their pensions as enough, and when you toss in Social Security, they are quite sure they are set... BUT, what if they receive little or no Social Security - ever? Does the employer have a responsibility to explain this to the employee?

Granted, I have not compiled a list (or know of one) of which counties have opted out of Social Security in Georgia, but in those counties especially, the need to educate your educators is immense. They could be completely and literally blindsided by the effects of not contributing to Social Security (yes, I mean the WEP and GPO).

In some counties, employees are forced to contribute to mandatory 403(b) accounts usually with employers contributing as well. I have heard many educators complain about this and think that it is "unfair" for the county to force them to contribute. When I have discussed and explained the issue with them, the vast majority usually change their tune. It's not that they are against it, but that they do not understand why it is being done. That to me is the problem... educators may not understand it, and if employers only discuss it with them on a few occasions, educators could miss an opportunity to help themselves.

One final note is that employers do not need to get the same people selling the 403(b) accounts to the educators to give the information about the benefits of investing in the 403(b) accounts.  They need to find an unbiased voice that will explain the issues of the WEP and GPO to the educators, and from there, show that investing in 403(b) accounts is the best way to safeguard their retirements.  Just my humble opinion.

March 19, 2011

Japan Earthquake and Market Volatility

One of my colleagues, Eddie Wilcox, wrote a post for our blog, The Rollins Financial Blog, yesterday, and I thought he did a very good job of discussing the current issues involving Japan. It is always important to remember that the long term effects can be vastly different than the short term.

Japan Earthquake and Market Volatility

The world equity markets have been rattled lately by the devastating earthquake in northeastern Japan. It’s not the earthquake itself that caused such an enormous disturbance. Rather, it was the tsunami that followed and its ensuing damage to the nuclear power facilities of the affected area. Headlines of possible meltdowns at those nuclear facilities have clearly spooked investors and some of the Japanese over the past week.

While the human impact on those in the region is permanently devastating for the families involved, the economic impact is probably less permanent. We have been closely monitoring the affected investments, especially those located in Asia and Japan. The uncertainty of the event is, in our view, causing the most impact on the markets. While the nuclear situation still does not appear to be completely under control, it does appear that the Japanese and the international community are devoting every possible resource to gaining control of the problem.

Natural disasters have been and will always be one of the risks to the economy. In almost every example, however, those risks are concentrated in the near term following the event. The economic disruption is definitely felt in the immediate aftermath, but in the long term, the rebuilding process can make up for – or even eclipse – much of the initial loss of economic activity. This seems likely this time also, as Japan has unleashed nearly unlimited resources to battle the situation.

Clearly, the near term impact will be felt by many Japanese and U.S. companies with a presence in Asia and Japan. Depending on how you look at the numbers, you could argue that the event may or may not have much of an impact on the world economy. Japan remains the third largest world economy at about $5 trillion in GDP and accounts for over 8% of the world economic activity, which is very significant. However, the affected area accounts for a rather small portion of Japan’s economy. Furthermore, Japan does not contribute to global economic growth as the Japanese economy has been stuck in the doldrums for over a decade.

Without a doubt, the financial markets have reflected the uncertainty in Japan. Social unrest in Libya and elsewhere in the Middle East have only added to the volatility as the Dow Industrial Average has frequently traded higher or lower by triple-digit margins on a daily basis. The major averages, including the S&P 500 Index, are currently trading just slightly positive for the year after starting out the year with gains of nearly 7% through late February. The markets would rather have quantifiable data to trade on; oftentimes the uncertainty causes more commotion than if there was a known negative impact.

The fundamentals of the U.S. economy continue to strengthen through all of these geo-political situations. Even the slow to recover job market is showing signs that some strengthening may be on the horizon. It’s our position that the global recovery remains intact. But, of course, that does not mean that occasionally the markets or world events will not cause us to question that thesis.

While we are mindful that the human tragedy is the greatest concern, we will continue to closely monitor the affected investments and our portfolios under management. As always, we are available to discuss our strategy during this time if you have any questions or concerns.

Eddie Wilcox

March 13, 2011

What People Are Saying...

I have received a number of emails over the past few weeks asking me to weigh in on the issues in Wisconsin because I "seem to be level-headed when it comes to politics..." Thank you for the compliment, and I certainly try to be open to all viewpoints (something I wish more people would be). The current issue is tough, but I do see the arguments from both sides.

Honestly, I am pro-worker but not always pro-union. This does not mean I am against the benefits that unions have fought for (quite the contrary), but when the union takes on a life of its own and vows simply to just protect itself and not the workers it is supposed to advocate for... I think that is a big problem. I am trying to skip the politics of unions altogether.

To let you see what others have said, I have gathered articles and editorials from various newspapers, and the first one is written by Wisconsin Governor Scott Walker.

March 11, 2011

How Well is Georgia's TRS Plan Funded?

“How safe are my retirement assets?”

This is a question that everyone ponders, but as an active or retired member of the Teachers Retirement System of Georgia, you should know that your future pension distributions are secure. Is that one line answer really enough though? Today’s post looks at how well the TRS plan is funded.

Honestly, I have been thinking about this one subject since the end of December. I had a few potential educator retirees that asked to meet with me individually around the end of 2010/beginning of 2011. In preparing for my meetings, I decided to review the latest financial report and actuarial report for the TRS plan. While not many items had changed, I had no idea of the coming issues in Wisconsin that would cause even more frequent questions on the subject.

First, all of the information that I reviewed came directly from the TRS website (, and other than my comments regarding the information, anyone can easily find and review the information themselves in the Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2010. This is a “short” 62 page PDF that really can be informative if you want to get down to the details of the plan. The plan itself is audited annually (year end is June 30) by KPMG LLP with actuarial reviews by Cavanaugh Macdonald Consulting LLC that lag by one fiscal year (FY). Thus the report above covers the June 30, 2010 audit and the actuarial review of June 30, 2009.

In short, the plan is very strong with $45.989 billion in assets as of June 30, 2010 and an actuarial funding ratio of 87.2% through June 30, 2009. This is down from the June 30, 2008 actuarial ratio of 91.4%, but the decline in the equity markets through March 2009 was expected to hurt the ratio. Comparatively speaking, Georgia’s ERS and TRS plans are near the top of the nationwide averages of actuarial funding as of June 30, 2008 coming in at #9 overall with the average plan being funded at 80.5% (Standard & Poor’s - Pension Funding And Policy Challenges Loom For U.S. States – July 8, 2010). Performance wise, the TRS fund grew +11.1% in FY2010 versus losses of -13.1% and -3.4% respectively in FY2009 and FY2008, and over the past five years, the annualized return of the fund was +2.6%. Now that you have the basics, let’s start examining the details of the plan.

“How is the fund invested?” For the most part, the TRS fund follows a traditional 60/40 model. This means that 60% of the assets are in equities and 40% are in fixed income. This “balanced” approach tries to allow for capital appreciation in the stock market as equities grow, but with the safety of fixed income investments during tougher economic times. The fund will never keep pace with the S&P 500 as it moves up, but it should also not be as hurt as it drops. This 60/40 ratio is the “target” allocation, so since FY2005, equities have ranged from 55.2-61.8% and fixed income from 32.1-41.9% (there is also an “other” category that includes cash and receivables that will be the difference) of the total assets.

One of the questions that I am frequently asked is what stocks does the fund own. As of June 30, 2010, the fund’s top twenty holdings (ranked by allocation) were: Apple, Exxon Mobil, Microsoft, Johnson & Johnson, IBM, Procter & Gamble, JP Morgan Chase, Bank of America, Hewlett-Packard, Chevron, General Electric, Wells Fargo, Google, AT&T, Wal-Mart, Cisco Systems, Pfizer, Coca-Cola, Berkshire Hathaway, and PepsiCo. Obviously, these are all very large companies with some paying dividends, so the fund has tried to balance the growth stocks (Apple, Google, Cisco, etc.) with the value stocks (Johnson & Johnson, Procter & Gamble, Coca-Cola, etc.).

Contribution Rates - A piece of the puzzle that has been frequently overlooked until recently is the contribution rates of the employees and employers. This is a very important part of the puzzle as these contributions fund the plan for the current retirees and build a foundation for your own pension. Your TRS statement will never show the employer’s portion of contributions made for you, but this does not mean that it is not there.

Currently in Georgia, the employees (educators) contribute 5.53% for FY2011. Employers in Georgia currently contribute 10.28% for FY2011. (Note: The preceding contribution rates were corrected from the original post of 5.25% and 9.74% respectively). These figures are calculated based on actuarial tables, and they are reflective of the assumptions made by the actuaries for growth in the plan, salary changes, COLAs, retirees, etc.

The way I view the contributions are simple… if you want to receive your pension benefits later, it is better to make the small contributions now that will supply those. Comparatively speaking, my own 401k (not a pension) contributions are made by my employer and me, but are vastly different from the TRS contributions. I contribute 10% of my salary, and my employer “matches” the first 8% at a rate of 50% (4% max), so my total contribution is 14% with the lion’s share coming from me. Granted I have control of my 401k if I leave, but there is no defined benefit waiting for me when I retire…

In the end, what I hope you to take from this post is that the TRS plan is on good financial ground with annual audits to insure the plan is continuing on its current path. The employees and employers are continuing to make contributions to make up for the current unfunded actuarial liabilities (spreading the burden over years and years not at any one time). The fund invests in a good mix of equities and fixed income securities, and it is not simply doing nothing or gambling. None of this means that everything is perfect, but the overall fundamentals of the plan are a good guide for a long prosperous future.

February 12, 2011

Pension Options - The PLOP Discussed

Starting in July 2004, when educators in Georgia were retiring and deciding on the various pension options, they were also given an additional option at the time of retirement - "you may also elect to receive a one time lump-sum distribution (cash payment) in addition to your monthly retirement benefit." This became known as a Partial Lump-Sum Option Plan or "PLOP" to most educators.

First, let me point out that the TRS's website does a very good job of describing the various options and gives an example. To go to the TRS site and "Educate Yourself" on the PLOP, please click here. This link takes you to the first of many pages detailing the option. Also, "TRS encourages you to seek assistance from a financial advisor and/or a tax professional. A PLOP used to enhance retirement income or savings may merit consideration. A PLOP used to purchase depreciable assets or used for leisure should be given careful consideration as these purchases may compromise long-term retirement income."

Now, let's back up to understand why I am discussing this subject. Essentially, I have received a number emails over the last few years questioning using a PLOP for various reasons. Unfortunately, there is not one simple answer that I can give to everyone because age, health, reason for the distribution, tax brackets, beneficiaries, other income, etc. all play a roll in making this decision. What I can say is that I have been told that people want to use a PLOP to: pay off their house, go on vacation, spend it, buy a car, a child's wedding, and to "control it." All of these ideas hold some merit, but when you are taking money from your retirement, you run the risk of hurting your future retirement income stream (your pension amount) and in the short term, you create a taxable event if the PLOP is not rolled over to an IRA account.

For example, if you take a $50,000 PLOP (as the TRS example explains) to buy a car and go on a once in lifetime vacation, you will be incurring a hefty IRS and Georgia tax, and you can take on an extra 10% if you are under 59.5. A rough estimate for a 55 year old taking a $50,000 PLOP to spend and not rollover into an IRA is easily $17,500 which is 35% (10% tax penalty, 20% federal, and 5% Georgia). Granted, this is just a rough estimate, so anyone's potential tax could be higher or lower than this estimate.

Now, I have also been asked about using a PLOP as a way to make sure that contingent beneficiaries (of the pension) receive some of the benefit of an educator's working years. I definitely understand this thinking, but I would argue that taking the full pension amount (using whatever option you choose) then buying life insurance instead may be a better solution. Yes, you are paying for coverage, but the potential payout to your beneficiaries may out weigh the costs.

Using the TRS example, a retiring, 60 year old male in decent health could get a $500,000, 20 year term life insurance policy for $246-298 a month (based on an on-line quote from This would mean that the retiree would still have at least $75 more a month than taking the $50,000 PLOP... and the $75 would increase every year based on COLAs.

In the end, the main idea in today's post is that there are various issues and options for a retiring educator to consider. A PLOP sounds like a great idea, and it could be in one case, but it could also hamper future retirement income beyond recovery in another case. This is why it is a great idea to sit down with a financial advisor and/or tax professional to discuss the options before any final decisions are made.

January 31, 2011

Investment Options for 2011

In case you missed it, 2010 was another great investment year. The S&P 500 finished its second consecutive year with double digits gains increasing by 15.06% after being up 26.46% in 2009. The Dow Jones Industrial Average (DJIA) also had a very good 2010, and it has gained more than 80% off its March 2009 lows. These are some very impressive numbers, but what should you do now?

Well, if the last few years have not shown you that you should be invested and diversify, then I probably cannot sway you anyway. For those that do listen though...

"It is definitely hard to see what areas of the market will stage the best performance, so since almost all of you seldom make changes to your portfolios, you must continue to diversify your portfolio - if nothing else, rebalance from last year!" - January 2010

Yes, I said that last year, and I completely agree again. When you rebalance, you take money from your winners, and redistribute it across your portfolio. The winners give some money to the laggards, but your portfolio will get back to that target allocation that you set (hopefully, you have a financial adviser that is helping you make plans). Do not simply pile in to last year's winners, and hope for a repeat performance.

I have received a few emails asking about bonds and interest rates, and it should become an issue late this year or early next year. Essentially, why would someone buy a 30-year treasury bond at 4.5% or a 10 year note at 3.3% when they can buy the same things in a short period of time with a higher yield? With this in mind, I would suggest to look to other areas of fixed income for your allocation. Essentially, you want to try to limit the interest rate sensitive bonds in your portfolio if possible. A core/total bond fund, high yield bond fund, and an international bond fund should most likely all fare better than a US government bond fund this year.

For those that continue to complain about CD rates, I am sorry, but you are in for another year of pain. The Federal Reserve will most likely not raise rates until the end of the year or early next year, so money market rates and CD rates will stay extremely low.

As for the equity holdings, I have preached and preached about diversification and about my favorite area - mid caps. Make sure you have a good mix of large caps, mid caps, small caps, and international holdings in your 403(b)/457 accounts - and understand what those allocations should be.

Finally, I cannot stress enough the importance of research and seeking qualified advice. When I manage money for my clients, I look at what has changed in the market, economy, and with them. I may make numerous trades in a year or just a few, but there is always a reason behind it. I have read a number of emails that point to parents, neighbors, friends, and/or colleagues as sources of advice and information. While I am sure that all of these people mean well, the vast majority most likely do not have the experience or knowledge to really guide you through to retirement and beyond. Would you go to your bank for medical advice? So why go to your neighbor for financial advice? Find a qualified professional to help you set goals, allocations, and understand your retirement.

For 2011, Wall Street analysts are forecasting another good year in the stock market as the economy continues to improve, and I know we would all like to see continued improvement and positive returns.

January 27, 2011

Where Do We Go from Here?

I always find it interesting the emails that I receive from my "little" blog. What started as a way to help some friends has grown more than I ever thought it would.

I have received questions regarding pensions from 39 states, more WEP/GPO questions and comments than I can ever count, numerous inquiries about retirement accounts and investments, and various other subjects that range from personal to the implausible. Honestly, I really do read each and every email and try to answer them or direct them to someone who can.

I have covered many subjects on retirement accounts (403b, 457, 401k, etc.), and I can only say "save" so many times, so I have tried to answer those questions individually. If you want to see what I have written before on the subject simply use the search feature on the blog (even I do).

So, I have been gathering a few emails that mentioned topics for me to cover, and I think I will start there:
  • Investment Options for 2011 - It seems that a number of people have liked my breakdowns in previous years of the investment options for 403(b) plans, so that will be covered first.
  • Pension Options - The PLOP Discussed - I have received a few questions about the PLOP option available under the TRS of Georgia plan.
  • How Well is Georgia's TRS Plan Funded? - Numerous news articles have been highlighting the issues of pensions around the nation, so I will discuss Georgia's own TRS plan.
  • A Suggestion for Employers of (Georgia's) Educators - After talking to numerous educators over the years at various stages of their employment and retirement, I have a suggestion to pass along.
  • Arguments FOR the WEP/GPO - I can already feel my inbox filling up after this one, but unless you know the arguments for the WEP/GPO, can you really argue intelligently against it? Before I even start... I am against the WEP/GPO in almost every case.
Ok, the above is my game plan for future posts, so if your subject isn't covered, let me know. I will try to work on it individually or down the line for everyone.

Thanks for your comments, suggestions, and questions, and I wish you all only the best.