The Governor’s Proposal for FRS Reform.

Rick Scott has released his proposal for reform of the Florida Retirement System. As expected, the changes are far reaching and dramatic.

Newly elected Governor Rick Scott has released his proposal for reform of the Florida Retirement System.  As expected, the changes are far reaching and dramatic.  The Governor’s Bill on Pension Reform (beginning of page 610) proposal is 213 pages long, so we have attempted to hit the highlights, as the details will unfold ad infinitum over the next several weeks.

“Floridians shouldn’t have to send more of their MONEY to Tallahassee to pay for non-essential government programs or solely fund the retirement programs of government employees.”

This quote from Governor Governor Scott’s speech today in Eustis seems to sum his position on the Florida Retirement System up neatly, by lumping you in with “non-essential government programs”.  Along with cutting your benefits, and taxing you to pay for future benefits, Governor Scott kicked off his self-proclaimed “job’s budget” by eliminating almost 9000 jobs in the state!

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Scott’s Proposals for FRS

It might be be premature to make any decisions until the details are known.

As you are no doubt aware, Governor Scott is slipping tidbits about his plan for FRS into the news.  Unfortunately, those tidbits are sparse in detail and his full plan is not scheduled to be released until February 7, so it is very difficult to get a grasp of how they will ultimately affect Florida Retirement System workers and retirees.  It is obvious the changes, IF ENACTED, will be significant.  It might be be premature to make any decisions until the details are known.  In the meantime, 1,000,000 strong FRS participants and retirees should be contacting their legislators and directing those representatives as to how they want to be represented in Tallahassee.

Think Twice?

The sales piece presents the information on the basis that you could be making a “costly mistake” and giving up “valuable benefits available to you only in the Investment Plan”. Which benefit can FRS offer that no one else can? Let’s review the claims one by one.

We have received several calls over the last week or so in regard to a new “alert” that appears on the MyFRS.com website, under the “alerts and hot topics” banner.  The piece is titled “THINK TWICE BEFORE ROLLING OUT OF THE INVESTMENT PLAN”. Some of the calls were questioning a few of the points made in the “alert”, and several were more interested in why FRS would post such an “alert” in the first place.

Let’s start with the last question first.  Why?  Why would the Florida Retirement System post such a letter on their Pension website?  We can only imagine it is a sales piece produced by the administrators of the Investment Plan for the purpose of “selling” participants on the idea of maintaining their Investment Plan with FRS as opposed to participants rolling their lump sum out of FRS and into a “rollover IRA” with an independent investment firm.   It is likely the administrators of the assets are paid based on the total sum of the assets they administer, so keeping more money in FRS is beneficial for them.   While it is understandable, it does bring up a few other questions that are interesting.

The sales piece presents the information on the basis that you could be making a “costly mistake” and giving up “valuable benefits available to you only in the FRS Investment Plan”.  This point was the impetus of many of our calls.  Which benefit can FRS offer that no one else can?  Let’s review the claims one by one.

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Your Nest Egg in Volatile times

Seems like wherever we turn, we are at risk of losing our hard earned savings. Interestingly, it is just that volatility that makes them attractive. We have all heard the adage, no pain no gain.

We have spent a great deal of time lately dwelling on potential changes in Florida Retirement System benefits.  Since the legislative session is over until next winter, we can breathe easy at least until then.  In the meantime, the news is full of dire financial news and predictions.  We are in year three of a terrible recession, and the devastating crash in real estate prices has set us all back a few years.   So what is a person to do to try and protect their nest egg?

In order to discuss how to protect one’s nest egg, we should probably start with trying to figure out what risk is, and how do we deal with it.  For this discussion, let’s define risk as the possibility of losing money!  Does that sound fair?  The legislature has added risk to our pensions by threatening us with the loss of benefits we thought were secure.  The real estate market has become risky as the value of our homes has declined, and the stock market goes up and down on a regular basis.  Seems like wherever we turn, we are at risk of losing our hard earned savings.  Interestingly, it is just that volatility that makes them attractive.  We have all heard the adage, no pain no gain.  Without risk, there can really be no reward!

Over the last twenty five years, I have witnessed some seemingly cataclysmic events – all having dire consequences on savings and investments.  Remember the stock market crash of 1987?  That was probably my first real taste of risk.  I was old enough to have some assets and investments and remember being horrified that they were losing money so quickly.  When something like that happens, it is easy to err on the side of fear, and sell into the panic.  The fight or flight mechanism kicks in and since we don’t really understand what is going on, we run!  Unfortunately, as often as it happens – we know it will be a mistake.  The average investor buys when they should be selling, and sells when they should be buying.  After several hundred years of experience, we know that time will cure most of the markets ills.  The crash of 1987 was regained in a mere two years.  The fall after 9-11 took less than six months.  Even the devastation after the fall of Lehman Brothers in September of 2008 triggered the worst financial panic in our history was regained in about 18 months.  The Florida Retirement System Pension plan has rebounded to $118 billion from a low of $83 billion (Current FRS Plan Balance).  Had you sold into the panic, those losses become real, with no real way of regaining your losses.  On the contrary, had you maintained your holdings in a well diversified portfolio, you would have been made whole in relatively short order!

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FRS Investment Plan Basics

The FRS Investment Plan is a “defined contribution” plan as determined by Section 401(a) of the Internal Revenue Code – meaning it is comprised of money the employer deposits into your retirement account, plus any interest, earnings or growth from the investments in the account, less expenses.You have a say in the way your money is invested within the scope of the investments offered within the plan.

FRS Investment Plan Basics

The FRS Investment Plan is a “defined contribution” plan as determined by Section 401(a) of the Internal Revenue Code – meaning it is comprised of money the employer deposits into your retirement account, plus any interest, earnings or growth from the investments in the account, less expenses. The amount of the contributions are determined by law and based on your “membership class”. You have a say in the way your money is invested within the scope of the investments offered within the plan.  You select from a variety of investment funds which in turn are invested in stocks, bonds, foreign companies, foreign bonds, money markets, or portfolio’s managed by FRS.

You must elect to participate in the FRS Investment Plan within the first five months after you are hired.  New employees are automatically enrolled in the FRS Pension Plan when they are hired.  The FRS Investment Plan was designed for shorter term and mobile employees, and specifically for those who may not intend to work for the six years required to vest in the FRS Pension Plan.  If you meet this description, it is possible you should elect the FRS Investment Plan as soon as possible after your start date.  If you don’t meet this description, meaning you intend to put in your 25 years, you will probably want to stay in the Pension Plan until just prior to the date that you retire.

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