What Now? 403(b) and Pension Comments

Last week I received numerous e-mails about 403(b) accounts and pensions. "How safe is my 403(b)?"; "Will it just go away?"; "If I take it all out what happens?"; "Is the TRS pension guaranteed?"

403(b) Safety

A 403(b) is much like any other type of retirement account - 401(k), IRA, Roth, SEP-IRA - when it comes to investing. Within most 403(b) accounts you have a fixed annuity option, a cash/money market option, and then various mutual funds that you can own.

• Fixed Annuity - This option allows you to put your money in a "fixed annuity" that generates a return somewhat along the lines of a CD. The exception here is that most fixed annuity investments only let you take 10-25% out of the investment at a time. This is usually not a good investment due to the constraints of taking the funds from the account - even when you are trying to get them out in retirement. While this does not lose money, it also generally only keeps up just above the rate of inflation.
• Cash/Money Market - This option allows you to park uninvested cash in a place that earns a rate of return that is along normal money market rates. It will not have the return that the Fixed Annuity has, but you can withdraw, reinvest, or hold it without fearing that you cannot touch it (unlike a Fixed Annuity). This is a good place to hold cash for future investments or distributions.
• Mutual Funds - This option is the one where you will buy shares of a "mutual fund" that owns usually 25-100 stocks. A mutual fund can make or lose money. It is an investment that can go up or down based on the underlying investments in the companies of the fund. Depending on the fund, you may invest in bonds, big, small, or even international companies. Some of the funds will correlate more with the Dow, S&P 500, or Nasdaq, etc. The custodian (AIG-VALIC, Fidelity, Lincoln National, etc.) is not to blame or get credit for the performance of the funds. The funds are run by fund managers that use your money to invest in companies.
  
  
  • For example - if you own the "Janus High Yield Fund," the fund is run by a manager from the Janus fund company that will use your money to invest in high yield bonds from various companies.

What I would like to stress here is that your 403(b) investments should depend on your age, risk tolerance, and goals. In coordination with your TRS pension, your 403(b) is a powerful tool when used correctly, and it can help you realize some of your dreams after you retire from education. There is a huge difference though between making sure you do not want to lose any money and making wise investments. Know your risk tolerance and expectations.

Also, rolling over your 403(b) to an IRA is fine (if you can), but taking all of your money from the 403(b) as a distribution creates a taxable event that can have huge tax implications. Do not take a distribution without first talking to an accountant or financial advisor. It could cost you 35-45% in taxes!

TRS Pension

There are many things to consider when you start thinking about your TRS pension benefits, but one of them is not if the fund will be there. As of June 2007, the pension fund was worth $53.3 billion, and it paid out about $2.2 billion with about $1.7 billion in contributions. Thus, only about $0.5 billion was taken from the fund in FY 2007.

The fund, as of June 2007, was "balanced" with about 62% in equities and 38% in cash and bonds. TRS has not yet released the June 2008 figures, but even with the declines in the stock market, the fund is viable and continues to be reevaluated every year by auditors and actuaries. In June 2009, the employee and employer rates of contribution will rise slightly due to past stock market performance. This increase is to insure the benefits that have been guaranteed to educators.

One important thing to remember is that the TRS benefit is guaranteed by Georgia law. It is not just a guideline but a law.

One additional item on your pension benefits - TRS is proposing a change to the Cost of Living Adjustment (COLA). It is absolutely imperative for all educators - current and retired - to write a letter to TRS asking them to NOT change the wording as the proposal requests. The wording that would change could and most likely would ultimately change your pension benefit. GAE and PAGE are both against this action, and I cannot imagine an educator that is for the change. My post, TRS Board of Trustees to Vote on Cost of Living Adjustment (COLA) Change, on the proposed change includes a my comments and a copy of the letter that I sent to Jeffrey Ezell, Executive Director of TRS, last week.

I hope your school year is going well, and please e-mail me if you have any questions.