403(b) Investing - Choice of Firms and Investments

There was a huge response to the blog from yesterday regarding AIG VALIC and the safety of your account. From everything I have continued to read, the accounts do in fact seem to be safe with no issues. I would personally recommend not using VALIC due to fees, investment choices, etc.

In regards to the ability to choose a firm to use for your 403(b), most counties have more than one firm to choose from. In Gwinnett, you actually have the ability to choose between four firms - AIG VALIC, Lincoln National, Jefferson National, and Fidelity. It is probably obvious which one I would recommend - Fidelity.

Fees, investment choices, ability to roll it over later without fees, customer service, ease of use, etc. Fidelity pretty much is on the ball here.

Investments

I have received several questions over the last few days about investments and continuing to make contributions when the market is rough. First, on the investments, you should always try to make sure that you are well diversified. This does not mean choosing every fund, but looking at all of the funds, and selecting the best funds from a variety of categories - large cap, mid cap, small cap, international, etc. The amount you allocate to each also matters.

Personally, since you have a secure pension, I believe in allocating little to nothing in bonds in a 403(b). This is more aggressive, but considering, the bulk of your assets are already in fixed income (your pension), you are not making anywhere near the "bets" that business people make with their 401(k)'s. Everyone is different though, and the closer you get to retirement, the more you might want to see about having more bonds. The key is to be diversified and really understand what it is you are invested in.

Contributions

I know that when the market gets rough it is tough to think that you may be losing money on day one when you contribute, but the main point here is that no one can predict the bottom of the market. When the market is low, you are buying more shares of the funds you own with every paycheck. As the market turns and trends higher, your next paycheck will actually buy less shares. This is called "dollar cost averaging".

By investing this way, study after study has shown this to be the most effective and efficient way to maximize your return. Since you are contributing every month, sometimes you will buy when it is high and sometimes you will buy when it is low. Just continue making the contributions, and you will win over the long term. Just remember to diversify...

Let me know if you have any questions - just e-mail me.

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

Alternative Energy - Part 3 of 4 - A Look At Four Different Options

With the rise in the price of conventional fuels (namely oil and natural gas) earlier this year, there was a shift to look at different energy alternatives. Many people have pointed to the need for green energy, while others have talked about the U.S. dependency on foreign countries for oil. Whatever the reasons may be, alternative energy sources are going to become a growing part of our lives.

Today's post will be the third in a series of four posts discussing four different alternative energy sources - nuclear, solar, wind, and ethanol. While none of these sources to be discussed are new, the importance of each over the next 10+ years should grow.

We have already discussed nuclear and solar energy, so this week will be wind power.

Wind Power

Since the 1870's, the U.S. has been using wind power in some capacity. During that period, there were two companies producing windmills. They were used mostly in rural areas that allowed a farmer or rancher to pump groundwater to the surface for use. The windmill has been credited with helping to open the plains and west up for farmers and ranchers. In fact, one of those companies, Aermotor, is still making the exact same windmills today. However, on their website they have a disclaimer - "No. Water and electricity don't mix," so sorry no energy production.

Fast forward to today, and we have just started to realize exactly how abundant wind is as a resource. In the U.S., wind power accounts for 48 billion kWh of electricity a year which will serve approximately 4.5 million households. While that sounds very good, that is only about 1% of the current electricity demand in the U.S.

If we look around the globe, we begin to see how far behind we are in the utilization of wind power. In Denmark, over 22% of the nation's electricity comes from wind power. Germany and Spain come in second with both countries harnessing about 16% of their electricity from the wind. With only 1%, the U.S. has far to go to catch up.

Unless you have been sleeping the past two months, you have probably seen T. Boone Pickens in one of his many commercials talking about the "Pickens Plan". As a man that has literally amassed a huge fortune being an oil man, it is interesting seeing him switch to other forms of energy. His first comment on a current commercial is "Drill, Drill, Drill...(for oil)," and then he goes on to discuss wind and natural gas. His point, much like Joe's, is that we need to increase domestic oil production while moving toward alternatives. Of the alternatives, his favorite idea is wind.

His "Pickens Plan" proposes building wind facilities in the corridor that stretches from the Texas panhandle to North Dakota which is estimated to be able to produce at least 20% of the nation's electricity. Pickens has already started this move toward wind with Pickens' Mesa Power building the largest wind farm in the world in the Texas panhandle.

The huge windmills are actually now "wind turbines" and stand up to 410 feet tall with blades that stretch 148 feet in length. They are usually white, and if you have ever been near one, you hear the low "swoosh" of the blades as they turn.

The costs to move to wind power are not cheap. About 70% of the cost to harness wind power is the turbine. Over 75% of the market for turbines is effectively controlled by four companies (Vestas Wind Systems of Denmark, Gamesa of Spain, GE, and Siemens Power Generation of Denmark). Three of the four are from Europe which makes sense considering the capacity to which they currently use it.

The way utilities in Denmark, Spain, and Germany pay for the wind turbines is through government subsidy programs and wind power that is sold at above-market prices on the grid. The hope is the U.S. will be similar. If Congress will continue the wind generation subsidies, then the utilities will definitely see the advantages of moving toward the abundant resource.

Interestingly, due to the current utilization in European countries, the U.S. should be able to learn from those countries and make any transition easier. Also, since many countries do not have the space or wind that the U.S. has, the U.S. looks poised to be the next growth venue for wind power (30% per year over the past 6 years). There should be a pick up in manufacturing plants and electricity plants for wind power. This could spark renewed interest in rural America with rural cities suddenly growing.

It is not all positive for wind energy though. The sites must be suitable with a minimum and maximum amount of wind plus there are the environmental concerns (birds mainly), neighbors to worry about, and construction and transmission cost to get to the grid.

Also, wind does not exactly follow a supply/demand model. When the wind blows, the turbine turns. When it does not blow, the turbine doesn't move. Pretty easy to understand, but the wind does not pay attention to the energy demand as to whether or not it blows. Thus, someone will need to come up with ways to "store" the energy when the wind blows and the excess power is not needed.

I know T. Boone Pickens will be working on these issues...

Sources: The Pickens Plan, Janus

Alternative Energy - Part 2 of 4 - A Look At Four Different Options

With the rise in the price of conventional fuels (namely oil and natural gas) earlier this year, there was a shift to look at different energy alternatives. Many people have pointed to the need for green energy, while others have talked about the U.S. dependency on foreign countries for oil. Whatever the reasons may be, alternative energy sources are going to become a growing part of our lives.

Today's post will be the second in a series of four posts discussing four different alternative energy sources - nuclear, solar, wind, and ethanol. While none of these sources to be discussed are new, the importance of each over the next 10+ years should grow.

Solar Energy

Solar Energy has been around for decades, but many really do not know or understand the basics. Essentially, there are two ways to harness the sun's energy - solar thermal and photovoltaics.

Solar thermal is the lessor known and lessor used solar energy option, and it is generally used to heat swimming pools and water in residential homes. Solar thermal is also being used commercially by extremely large power plants. A plant generating energy via solar thermal uses literally acres of mirrors to focus the rays to create steam to drive turbines to create power. One plant, Nevada Solar One, uses more than 300 acres of mirrors to generate power for 14,000 homes around Las Vegas. One report by the Energy Information Administration of the U.S. Department of Energy believes that solar thermal systems will grow 23% in 2008 over 2007.

The solar energy we all know about though is photovoltaics or "PV". PV uses silicon to create solar cells that energize electrons and generate electricity. They can be used in something like that solar calculator we all have, or something much, much larger - say a home or store.

Solar cells are being used more and more, and the main issue for them is efficiency. The space that each solar cell has is finite, but the efficiency in which it can create electricity is the catch. The only real problem for solar cells (in a region that can utilize them effectively) is the start-up costs. The cells are not cheap, but current government tax subsidies and a push for green power have helped some businesses (retailers specifically) to look at them seriously.

Earlier this year, Wal-Mart (WMT) announced a pilot program in which they were installing solar cells on the roofs of 22 stores (Sam's and Wal-Marts) to study the efficiencies. SunPower is the maker of the cell that Wal-Mart is testing. The proprietary "SunPower T-10" solar roof tile tilts at a 10-degree angle to increase energy capture, and it is claimed to be 50 percent more efficient than conventional solar panels. The savings to Wal-Mart started on Day One...

Wal-Mart is not alone though as Kohl's, Safeway, and Whole Foods Markets have started their own programs. While none of these have more than 10% of their stores set up for solar power generation, if Congress will continue the solar subsidies, it is believed the popularity of solar cells for retailers would increase.

As the technology improves, the current solar cells that only allow 15-22% of the solar energy to be converted into usable energy will be replaced by much more efficient systems. As they improve and costs drop, do not be surprised to see them popping up on residential roofs and store roofs alike. The projection is for the use of solar cells to jump 50% from 2007 to 2010.

Sources: U.S. Department of Energy, Reuters, Janus