September 18, 2008

Is My Retirement Safe? Is My 403(b) Safe?

Update 2 - March 3, 2009 - To read the latest happenings on AIG/VALIC please click here.

Update 1 - To read Part 2 of this post, discussing the recent market activities since this original post, please click here.

September 18, 2008

As a husband to an educator and friend to many educators, I have been asked continually over the past few days about the safety of their retirement. Below I will break apart each part of an educator's retirement so there is little confusion. First, your TRS pension, and then the 403(b) account - VALIC specifically.

Pension - Teachers Retirement System of Georgia (TRS)

The cornerstone of any educator's retirement is their pension from TRS. There is a clear basic formula as to what your benefit will be, and it does not change unless by law. The current formula is 2% for each year of service (30 is max) of the average of your highest two consecutive years' salaries. Thus, if I make $55,000 my 29th year and $60,000 my 30th year, I should receive a benefit pretty close to the following:

$55,000 + $60,000 = $115,000 / 2 = $57,500 average of 2 highest consecutive years

30 years X 2% per year = 60% benefit

60% X $57,500 = $34,500 per year

Additionally, you do receive a Cost Of Living Adjustment (COLA) of 1.5% every 6 months.

As the TRS website says:
TRS administers the fund from which teachers in the state’s public schools, many employees of the University System of Georgia, and certain other designated employees in educational-related work environments receive retirement benefits. TRS offers a defined benefit plan, guaranteeing a monthly benefit – based on a member’s final average salary and service – which is payable for the life of the member, and when applicable, transferable to a member’s spouse or beneficiary(ies).

A defined benefit retirement plan (401A) relieves its members of the burden of making investment decisions and assuming the risk associated with those decisions. TRS assumes this risk for its members. Therefore, the retirement benefit offered by TRS is secure. Unlike an IRA or 401K account, a TRS retirement benefit is not impacted by stock market performance. The State of Georgia guarantees TRS members will receive retirement income for life. Also, depending on the plan of retirement chosen, a TRS retirement benefit can be passed to a beneficiary at a member’s death, and the beneficiary continues to receive this income until his or her death.

TRS manages the retirement accounts of approximately 272,000 non-retired (active) members, and pays a monthly benefit to approximately 75,000 retired members and survivors. TRS retiree payroll is in excess of 2.2 billion dollars per year.

TRS benefits are administered and paid in accordance with laws enacted by the Georgia Legislature.

403(b) Accounts

Since the most pressing issue is the safety of the assets in 403(b) accounts, I will discuss them today. Tomorrow, I will discuss the investing, but today it is important to understand how safe your account is.

The parent company of VALIC is AIG, and they have been in the news with the threat of bankruptcy. Tuesday night, AIG was given a loan by the Federal Reserve for $85 billion, but if you have a VALIC 403(b), your assets are NOT going to be effected by AIG per the information they have provided..

According to a press release from AIG Retirement,

  • VALIC underwrites, issues and guarantees our annuity products. VALIC is financial strong with $3.4 billion in adjusted capital and surplus as of 6/30/08. Adjusted capital and surplus means that VALIC is able to meet its obligations (such as the fixed account options and fixed annuity contracts). VALIC's capital and surplus is completely separate from our ultimate parent, AIG.
  • FIXED ANNUITY: VALIC client assets in the guaranteed fixed investment options are protected by Texas state insurance regulations. The fixed options provide fixed rate earnings and a guarantee of principal. This guarantee is backed by the claims-paying ability of VALIC, which supports only the obligations of VALIC, not any obligations of AIG.
  • VARIABLE ASSETS: Client assets in the mutual funds or variable annuity account options are invested in mutual funds regulated by the SEC. A mutual fund's assets are owned by its shareholders and managed by a professional portfolio manager; thus, such funds are not affected by business actions involving AIG or AIG Retirement.

    • Further, since VALIC is domiciled in the State of Texas, Texas state law requires insurance company separate accounts to be held apart from the rest of the company assets. Therefore, the variable annuity separate account assets in these mutual funds are held for the exclusive benefit of the clients and their beneficiaries. This insulation provides safety for each client, and ensures that the account is not subject to claims from any person or entity other than a contract owner, plan participant or beneficiary.
    • The mutual fund and variable account options change in value each business day. Retirement investments are long-term investments, and fluctuating values means that when redeemed, the investments can be worth more or less than its original cost. This also means that client investment returns depend on the performance of the individual investments the client selected and not on the performance of AIG, or any of the AIG Retirement companies.

I hope this helps you feel a bit better about your retirement, and tomorrow I will discuss the investing side of the 403(b) accounts.

Sources: Teachers Retirement System of Georgia, AIG Retirement/VALIC


Anonymous said...

I would love to have confidence in AIG/VALIC except my account has lost about $4000 in the past month. I am currently looking into other retirment options. Losing my money should be my choice and not that of some company that does not seem to give a damn about me.

Robert (Robby) E. Schultz III, CFP®, ChFC®, CPWA® said...

I think you are equating the performance of your mutual funds with being AIG/VALIC's fault.

AIG/VALIC (who I personally do not like) is just the holder of the assets (also called custodian). They are not responsible for losing any money for you. The fund managers of the mutual funds you (or someone you designated) chose are the culprit. Considering the market was crushed in September, your loss could easily be within reason... even though it is hard to swallow.

The market generally does not have huge moves in a one month period, but it can happen both to the upside and downside.

Good luck.