August 9, 2013

Coming to Terms with the Windfall Elimination Provision and Government Pension Offset

Each week I receive emails from readers of The Educator's Retirement discussing wide ranging topics from different state pensions to 403(b)/457 questions, yet the one subject that I receive the most emails about is the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). I read about stories where soon-to-be or current retirees suddenly find themselves without a benefit (Social Security) that they thought they would receive. I answer every single email and sometimes have more dialogue with the writers. Sometimes, I just read/listen and confirm what they have been told, and other times, I try to point them in a direction that they might be able to receive some help. I know that far too often my responses are not what the writers want to hear...

Today, I want to tell everyone a story... It is not a story where someone beats the WEP/GPO, but to me, it is a positive story that I wish more people would start to understand about the WEP/GPO.

I am lucky in my job as an investment adviser that I get to see numerous clients that span the complete spectrum of wealth. I treat each one the same since whatever problems/issues they are facing are real to them. To one person it could be an estate tax issue, to someone else it might be trying to convince them to contribute to their retirement plan or pay down debt, and to another it might be discussing their investments. All of their issues are real.

When I started at my firm 15+ years ago, I had never heard of WEP or GPO. As far as I knew, those issues were remote and had no bearing on me. When I started to learn about the issue a few years later from a group of educators that included a family member and their friends, I took a long, hard look at the issue. I read everything I could find on the web, and yet, both the WEP and GPO seemed to get little attention. I discussed the issue with a few clients at the time and explained what I had found...

A very short time later, a different family member (who was also an educator) needed some help making some career decisions that could possibly have retirement income repercussions. I read more and made some phone calls to Social Security, Georgia's Teacher Retirement System (TRS), and even both local school systems being discussed. The issue was important, it was relevant, and the advice I could be giving was going to have very real long term positives or negatives for this family member. Imagine dealing with THAT every family get together!!??!!

Since I became an "expert" on the WEP/GPO, whenever one of my firm's clients had questions about either the WEP or GPO, I was routinely called in to discuss the ramifications with them. Unfortunately, sometimes even the client did not have any idea that they could/would be affected by this rule. To make it more confusing, around Atlanta some school systems do contribute to Social Security and some do not. Some that do not have mandatory replacement retirement plans (instead of Social Security) and others simply "promote" participation in 403(b) plans. A group of 10 educators from various school systems around Atlanta may be in completely different retirement income situations and not even know it.

So... now to the story...

"Mary" and her family have been clients of my firm since the early 90's - well before my time here. When I started to learn about the WEP/GPO and discussed Mary's situation with her many, many years ago, she was pretty much surprised and astounded that she did not know anything about it. She talked to friends, did some research on her own, and even discussed it with TRS, and she started to understand what was going to happen to her Social Security benefits.

Mary's husband, "John," had a very good job and had been paying in to Social Security since college. Mary and John had always believed that Mary would receive her "spousal benefits" based on John's Social Security earnings/benefits. Even if something happened to John, they still believed that Mary would reap the rewards of John's Social Security benefits. I mean it works for everyone else, right?

Every year, John and Mary would come to our office to discuss their taxes, investments, retirement income, etc. And, every year, we would get around to discussing potential Social Security benefits for both of them. We always had projections for John's benefits, but we always omitted Mary's completely. I always told her that if she received anything, just consider it found money.

After being an educator in Georgia's public schools for 30 years, Mary retired from her public school position. Later that summer, she was offered a position at a private school, and while the salary and benefits were less, she loved it - AND was paying to Social Security. Additionally, Mary was lucky enough to have had 30 years in the Georgia TRS system, so she was eligible for her educators' pension.

John and Mary have continued to come in to our office for their annual "check up" and discuss their situation. It has now been seven years since Mary "retired" as a public school educator and took a position at the private school. Since our first conversation regarding the WEP/GPO, John and Mary made some changes. Mary started a 403(b) account (even though it was late in her career), she took the private school position (when some would have retired completely), and she learned to never expect a penny from Social Security. This is not to say that Mary squirrels away every penny she makes, but she is watchful of their money and thinks about the long term. John and Mary enjoy their life, family, and have fun, but they learned to set limits and stay within those limits.

Last week, Mary sent me her Social Security statement with a note that the next day she was having a conference call with Social Security because she turns 66 later this year (Mary's Full Retirement Age with Social Security). I went through Mary's potential benefits page and then researched her earnings page. While Mary had 39 years in which she contributed to Social Security, I calculated that she only had 19 years of "substantial earnings" thus she was going to be subject to the maximum WEP. I did the quick calculation to get my projected benefit for her, then gave Mary a call.

We discussed what I had calculated and how I had come to my figure. She was pretty sure I was going to be right, but the Social Security conference call would verify everything for her the next day. I did ask her to do me one favor though during her conference call. Even though I knew the answer, I wanted her to ask Social Security what, if any, "spousal benefit" she could receive...

The next afternoon, Mary called me to discuss the outcome of the conference call. Just as we discussed and I calculated, her benefit was reduced by the maximum WEP. Also, she did ask Social Security about her "spousal benefit," and it had been reduced to zero as we had suspected - but had hoped otherwise. In the end, Mary's benefits had been greatly effected by the WEP, and Mary's "spousal benefits" were reduced to zero by the GPO... so where is the positive here?

As we finished up discussing the conference call with Social Security, Mary surprised me by thanking me. Mary told me that while she had hoped her benefits would not be effected and that I was simply wrong, she knew what the end result would be. Since we had been talking about this 10+ years, Mary had been able to change. Change her thinking on her Social Security benefits, change her spending habits, change her savings habits and goals, and even change her "ultimate" retirement date. Was she happy about the reduced benefits? Of course not, but Mary has been able to help herself and her family by altering those ideas that she had 10+ years ago.

We can all get mad at the system and listen to the empty campaign promises of those in Washington, but ultimately, with the problems facing the national debt, social security, and healthcare systems, is the WEP/GPO really going to go away? I wish the answer was yes, but I see the answer continuing to be no. I am not saying that anyone should stop being against it, but I am also saying that the realistic view is that it does not seem to be going away anytime soon.

My hope for all of those that are affected by the WEP/GPO is that they learn about the issue early enough to be able to help themselves like Mary did. I know it will not be easy. But, if we are able to be proactive and educate those that will be subject to the WEP/GPO, hopefully, some of them will be able to take the bull by the horns themselves.

Good luck!

May 15, 2013

How Do You Make Your (Financial) Decisions?

This week I have been attending an AICPA Employee Benefit Plan conference in Dallas, Texas. This is my first conference of this type, so I was a bit apprehensive as to what I would "get" from the conference. That apprehension did not last long.

The very first session was a general session with a recorded video from the Assistant Secretary of Labor (note - due to a meeting, she was unable to attend). Of course, there were numerous parts of the video that did not really interest me, but then the speaker stated...

"How do you make your (financial) decisions?"

Suddenly, I was listening to the speaker talk my kind of language...

She was talking about how the Department of Labor (DOL) was interested in how employees made their financial decisions. One of the quick things the speaker stated was that the DOL had come to the decision that bad, conflicted advice was worse than no advice... Um, not good.

The DOL was looking for things like:

  • How do you make retirement decisions?
    • Do you read, talk to someone, "just know," or ???
  • If you do talk to someone,
    • How do you choose?
    • How do you know this person has your best interest in mind?

So, if the DOL is interested in this information, I should be too. Please tell me your answers by emailing me

The speaker then mentioned how a SEC registered investment advisor representative has a fiduciary standard whereas a broker usually has only a suitability standard.

In case I have lost you, the standards above are not the same thing.

The "Fiduciary Standard" is the highest standard of care. A fiduciary must work in the best interest of the client only and not in the interest of the fiduciary. In fact, by being an SEC registered investment advisor representative, the representative has stated that they will follow the fiduciary standard.

The "Suitability Standard" is different in that the investment that is being offered only has to be considered "suitable" not necessarily in the client's best interest. Broker-Dealers and their representatives are usually held to this standard.

What does this mean to you? Well, it depends. I have reviewed hundreds of portfolios over the years. Some have been suitable but benefit the representative more than the client due to commissions and fees that might be hidden from the client (think annuities as an example). Some have clear fees and are setup to help the client, but maybe the funds are just lackluster and the representative does not trade much or ever. Some have been spot on with clearly defined fees, well regarded funds, and a good track record...

What I am trying to tell you is that not all your "advisors" are created equal or even follow the same guidelines. Do you know how your advisor gets paid? I promise - your advisor is being paid.

In another class at the conference, the speaker stated, "Most employees think that their plans are 'free' or 'very low cost' since they are not 'charged' fees." As I have discussed before, there are numerous investment products that charge very high fees, but some could be hidden in the "fund expenses" of the plan. Do you know what you are really paying for your accounts?

All of these questions are important, and if you do not know the answer, do not be afraid to ask. The markets have been great since March 2009, but that does not mean that you cannot question your advisor.

I would enjoy hearing from you about your answers to all of these questions, and if you wish to ask me questions, feel free. My email is