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.
There are exceptions. Periods like the post-2008 market collapse, could present opportunities in the stock market that would give the opportunity to further enhance their benefits. For instance, you have over 25 years in, and your lump sum can be rolled into the investment plan. Assuming the stock market will recover over the next few years, it could mean potential returns in excess of the four or five percent rate that remaining in the pension would grow. If the market had several good years, the value of your lump sum benefit could grow by significant amounts. Obviously, this would incur the risks of the stock market, so prudent investment selections, and good diversification would be necessary to offset the risks. As of December 31, 2009, the Standard and Poors 500 Stock index returned over 25% for the year 2009. If a special risk participant rolled a $750,000 lump sum into the investment plan, and achieved that return, the plan would gain around $150,000 in that year alone, and the plan could be worth close to $900,000. It is essential participants understand the risk before making such a decision.
The FRS Investment Plan allows employees to be vested after completing just one year of service. There is NO requirement to complete 25 or 30 years in order to retire. Once you are vested, whatever the value in your account becomes yours when you leave! After you terminate your employment under FRS, you may take the value of your account (after a waiting period of three full calendar months) no matter of your age or years of service. At that point you may receive the entire account in several ways including leaving it with FRS to manage, take the balance as a taxable distribution, or Roll it over to an IRA to defer the taxes until you withdraw from it. See our page on IRA rollovers
Investment plan money cannot be accessed while you are still employed with an FRS covered employer.
With the FRS Investment Plan, there is no need for the four payout options that you must select in the FRS Pension Plan. You will determine your income from the plan, and how and when you want it distributed. Withdrawals from the account are taxable as income in the year they are taken, and may also be subject to a 10% penalty for pre-mature distributions if you take money out prior to age 59 ½ (you may be able to avoid the pre-mature distribution penalty if you take substantially equal payments, ask your accountant or tax professional).
A major benefit of the Investment Plan is the ability to name one or several beneficiaries that will receive the entire account balance upon your death. Your beneficiary will default to Florida law which would be your spouse first, but you may designate any person you choose, your estate, a trust, or even an organization of your choice. In essence, the money is yours to do with what you wish, within the law and respecting taxation rules!
Your ability to roll the value of your Investment Plan into an IRA is what is most attractive about this option. Once in your IRA, you take control of your retirement finances, and your financial destiny. If you wish to use your one time “second election”, you must do so prior to your last day of employment. They will transfer the current value of your FRS Pension Plan into the Investment Plan, and after you leave employment you can roll it over into your IRA!