403(b) Safety - Bank Nationalization

When it comes to research, I look for absolutely everything I can to make the most informed decision possible. Interestingly enough though, I had not thought about or researched the "nationalization" concerns of Citigroup in the context of 403(b) accounts - AIG, yes - but not Citigroup. Thankfully, a very nice educator from halfway across the country e-mailed me asking about Primerica - a division of Citigroup.

After reading everything I could find, and discussing the topic with numerous other individuals, I truthfully cannot see any issues with Primerica. That does not mean they are the greatest company or have fabulous investment ideas or people working them, but as far as your account just "vanishing," I cannot even fathom that possibility.

First, Primerica (much like VALIC within AIG) has had its own managers and CEO, so it is almost like a separate company. Also, insurance companies generally have a higher standard of regulatory requirements with cash reserves mandated by the states that they do business in (state regulated). Once again, this is much like VALIC under AIG.

Second, while "nationalization" has been a hot topic and Citigroup appears under more stress than any other financial institution (the government says it does not wish to nationalize any bank), it is hard to imagine any situation in which your assets would just disappear. The overhanging threat of a complete meltdown in the credit market has receded, and with AIG, if anything were in trouble in October, it was. Those AIG/VALIC accounts are still functioning, and the state regulators have probably burned up the phone lines verifying all of the information of Primerica.

Additionally, Primerica has now been made part of the new "Citi Holdings" division which is generally speaking the non-bank (non-core) businesses under the Citi name.

The following is an article written by Jim Connolly of the National Underwriter on January 21, 2009:

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Primerica Placed in New Citi Division
By Jim Connolly
National Underwriter, January 21, 2009

Citigroup Inc. has put Primerica Financial Services Inc. in a new division that holds the company’s non-bank, “non-core” assets.

Citigroup, New York, is putting its core banking operations in a new Citicorp division. The other division, Citi Holdings, will hold Primerica, Duluth, Ga.

Citi Holdings also will hold other non-banking operations, such as Citigroup’s 49% stake in Morgan Stanley Smith Barney.

Citi Holdings managers “will seek to maximize the value of these [non-core] businesses by running them well, restructuring and managing them through this tough economic cycle, and taking advantage of value-enhancing disposition and combination opportunities as they emerge,” Citigroup says.

At Primerica, “there will not be a change in the way that business is done, because we have always operated as our own business and had our own CEO and management team,” says Peter Schneider, executive vice president of Primerica.

The shift into Citi Holdings will not lead to layoffs or additional employee attrition, Schneider says.

“Primerica has strong results and will continue to have strong results,” Schneider says. The unit is “extremely well capitalized,” he adds.

Although the life (insurance) market was difficult in 2008, the face amount of coverage issued held steady at $88 billion, and the number of applications fell just 1%, to 336,373, Schneider says.

The average face amount per policy increased slightly, to $299,200; from $296,400.
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Don't just take my word for it. I would suggest that you pull out your December 31 statement and call the number on the statement. I would imagine that the company is ready with answers. Also, your account may have lost some value based on the mutual funds held within it, but the shares of the mutual funds are still there. If making that phone call will help you sleep at night, by all means, please call.

Finally, I would like to thank the nice educator again who e-mailed me to ask about Citigroup, and if anyone else has a question, please feel free to write me. I am sure that many people have the same questions.

How Do I Sign My Friends Up? Is This Service Really Free?

After my post on Sunday, I received a few e-mails from subscribers about telling their friends about the blog. I was obviously humbled by this. If you are an e-mail subscriber, simply forward the post e-mail with a link to the blog (http://www.theeducatorsretirement.com/), or you can sign up your family/friends straight from the blog website - top right hand corner to enter e-mail addresses.

Please remember that anyone that signs up will need to verify the subscription by clicking on the link within the e-mail they receive from confirmations@emailenfuego.net. This is something that they must do to receive the posts via e-mail. This is a measure to make sure that they are not being "spammed".

I have also received a few e-mails asking whether this is a free blog and e-mail service. The answer is emphatically YES! This is completely free! Also, any subscribers e-mail addresses have not and will not be sold for any reason. Spam is bad enough without any more additions.

With all of that hopefully cleared up, I hope that everyone has enjoyed and benefited from this blog somehow. It continues to be an interesting time right now, and I wish you all only continued success at your schools and in your classrooms.

If there are any questions that you or your colleagues would like answered, please let me know. Just like in your schools, 100 people may have the same question, but if I do not know what it is, I cannot answer it.

Best personal regards,
Robby

A New Day for School Reform - NYT Editorial

Below is an editorial from Saturday's New York Times. With everything else floating around about the stimulus plan, this is a take on how the new Secretary of Education, Arne Duncan, could be altering No Child Left Behind and other educational initiatives.

A New Day for School Reform
Editorial
Published: February 21, 2009

Congress took a potentially transformative step when it devoted $100 billion in the stimulus package to education. Carefully targeted, this money could revive the reform efforts that began promisingly with President Bush’s No Child Left Behind Act of 2002 — but later languished when his administration buckled under to political pressures from state officials.

Arne Duncan, the new education secretary, will need to resist those pressures. The Bush administration allowed states to phony-up statistics on everything from graduation rates to student achievement to teacher training and state education standards. As a result, the country has yet to reach not only the goals that were clearly laid out in the law but also farsighted education reforms dating to the mid-1990s.

The stimulus package, including a $54 billion “stabilization” fund to protect schools against layoffs and budget cuts, is rightly framed to encourage compliance. States will need to create data collection systems that should ideally show how children perform year to year as well as how teachers affect student performance over time. States will also be required to improve academic standards as well as the notoriously weak tests now used to measure achievement — replacing, for instance, the pervasive fill-in-the-bubble tests with advanced assessments that better measure writing and thinking.

The No Child Left Behind law required the states to place “highly qualified teachers” in every classroom. But federal officials allowed states to game the system, which led inevitably to fakery. This time around, states that want federal money will rightly be required to improve teacher effectiveness and to end the odious practice of dumping the least qualified teachers into the neediest schools.

Mr. Duncan has also been given authority over a $5 billion grant program called the “Race to the Top Fund,” designed to encourage innovation. The secretary can set a new tone by rewarding states that work hard for reform and bypassing states that do not.

The bottom line is that the stimulus package has given the country a real chance to resuscitate school reform. Mr. Duncan will need to stay the course despite the pressures that will inevitably come from states that have resisted reform all along.

Source: The New York Times

Will You Miss Out on Social Security Benefits? - Your Retirement and the Windfall Elimination Provision

One of the biggest issues facing educators (at least in Georgia) is whether or not they have been contributing to Social Security. If they have not, then the Georgia Teachers Retirement System (TRS) pension they receive will be used in a calculation by the Social Security Administration (SSA) that can reduce any Social Security benefits that they receive. This comes as a great surprise to many that it effects.

It is such a shock because every single year we all receive those little Social Security statements that project a benefit for us. We see that projected benefit, and we think, "Well, at least I will have that..." But not so fast...

The SSA uses something called the "Windfall Elimination Provision" (WEP) to calculate your benefit since you paid into a pension plan and did not pay into social security. The formula used takes your monthly pension payment, all of the earnings over the year that you paid and did not pay into social security and recalculates your benefit. Since most educators will be employed and pay into the system for 30 years, this reduction could be somewhat dramatic.

Recently, I helped a client that is a former educator project her SSA benefit. Like most people, she thought that her SSA benefit statement was going to be her benefit. She was projected to have about $900 a month at her full retirement age (66 for her). After plugging the numbers in the WEP calculator on-line, her monthly benefit dropped to about $580 total. This is a reduction of $320 a month or $3,840 annually - a huge difference.

Survivor Benefits

This does not only affect your SSA benefit, but this could and most likely will greatly affect any benefit that you could possibly receive from your spouse's SSA benefit. The calculation on the spousal benefits are a bit difficult to explain, but even though that little statement your spouse receives may say that their surviving spouse could receive $X,XXX, it most likely will be quite a bit less and possibly nothing.

What Are Your Options?

Every employer (school system) is potentially different, so check with your human resources department to see what you have available.

All of the options below assume that you contribute to TRS.

1 - Do not contribute to SSA, do not contribute to any other pension

If you are employed by a county that does not pay into SSA, then you most likely have a higher net paycheck coming to you than if you did. If this is the case, then this is a great reason to use some of the extra 6.2% of your gross pay (what you would be paying into SSA) to start a 403(b). I have written about starting one many times, and this is a prime example as to why it is needed.

2 - Do not contribute to SSA, your system has an alternative system

In Gwinnett County, educators do not pay into SSA, but they do contribute 1% of their gross pay to the Gwinnett Retirement System (GRS). This is similar to SSA, but this is something that should be discussed directly with GRS. Additionally, since you have an extra 5.2% of your salary, it is a good idea to put some of that away in a 403(b) here too.

3 - Do not contribute to SSA, your system mandates a 403(b) contribution

My wife was previously an educator in Rockdale County, and over there, educators do not contribute to SSA, but they have a mandatory 2% employee contribution to a 403(b) account. The good thing about this plan is that employer also makes a mandatory 4% employer contribution for the employee to a 403(b) account (in the employee's name). All contributions from the employer and employee are 100% vested immediately, thus if the employee leaves the system, the accounts are theirs.

Final Thoughts

If you do not contribute to SSA, now is the time to understand what your options are and what you can do to help yourself. Call SSA and call human resources for your system.

When a financial planner sits down to evaluate a plan, we look at pensions, 401(k)s, 403(b)s, and social security. If one of those items is potentially reduced or nonexistent, that is a major change in evaluating your potential retirement income. Your TRS pension is a great foundation for your retirement, but you really need to know what other income sources you will have.

Take some time to research your situation, and then start looking to plan your retirement income. E-mail me with questions if needed.