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.
Low fees. FRS Investment Plan fees are certainly low. Since FRS is not a “for profit” business, maintaining low fees is logical. It would be hard for any company to compete with a “not for profit” entity like a government investment manager. The real question, though, is not what the fees are, but what your net return is after the fees are deducted. It is interesting to note that FRS does not really discuss the returns on your investment. Instead, the piece focuses on the low fees. Before anyone makes a decision based solely on fees, it would behoove them to investigate the total benefit they would earn after fees. Many times the lowest cost provider does not offer the best product.
Other fees. Again, the fees discussed are most likely accurate. It is pretty obvious in this section they are referring to the fees associated with a variable annuity. It is hard to argue the fee structure of a variable annuity contract is expensive, but it is intriguing why the sales piece doesn’t identify the product. Instead, it is inferred that the “product” is similar to the FRS Investment plan, just much more expensive. Since they are not comparing apples with apples, one might call into question the fairness of the piece. Several callers felt that was a little bit misleading. If the participant decides a variable annuity is attractive, then the comparison FRS might make, would be the fees of the variable annuity offered through FRS against other variable annuities, and not compare it with the standard fees associated with leaving your money in the Investment Plan. Their point is valid – the fees on variable annuities are high, and many of the benefits are redundant to benefits already enjoyed with an IRA. Please be sure you understand the fees, and the associated benefit to insure you are getting the value for your money that you need.
10% Penalty. Again, it is true that if you make distributions directly from FRS after reaching age 55 you will not be subject to the 10% early withdrawal penalty assessed by the IRS. However, it is not true, and very misleading for the piece to further declare that “you will be subject to the 10% penalty on any withdrawals from these (outside of FRS) plans unless you wait until you are at least age 59 1/2“. Rule 72t of the IRS code allows one to take distributions from an IRA without the 10% penalty. Your tax advisor can help you to do it. There are some rules that must be followed, but it can be, and is implemented by many participants.
Protection from Creditors. If you roll your Investment Plan account into an IRA it is protected in the exact same manner as if the money were maintained within FRS. A Rollover IRA provides the same levels of protection as your Pension, particularly if they are kept segregated from your contributory IRA. Your financial advisor could help you avoid such a mistake.
Unbiased Financial Planners. The existence of the sales piece itself demonstrates the irony of this statement. Any participant that has ever called the “financial planners” at the FRS consulting hotline in regard to rolling their money out of FRS will find that they are anything but unbiased. Even after you file the necessary paperwork to make the transfer to an outside IRA, you will get a phone call before they honor the transfer to make sure you are doing what you want to do, and to try and talk you out of leaving FRS. You might not be pressured to “buy other products or services”, but you most assuredly will be pressured to not to leave FRS.
The guidance line may offer guidance, but you might want to question the training, experience, and certifications of the anonymous voice on the phone. It is very possible the “financial planners” are not certified, nor have they passed the securities examination, or insurance licensing regimens and continuing education requirements of outside planners. More often than not, free advice is worth exactly what you pay for it. One could argue that a personal relationship with an advisor that takes the time and effort to get to know you and your financial situation is superior to the random operator that one gets when they call a number where “operators are standing by”. You should question whether the “unbiased” advice is geared toward your needs, or simply a “boiler plate” plan for one of the three risk profiles offered in the Investment Plan. A financial plan should be dedicated to your individual circumstances, with someone you are comfortable with.
Distribution Options. We have some issues with this claim. An IRA rollover is self directed, and as such allows you to take distributions as you deem necessary, not in the limited capacities offered through the FRS Investment Plan. An IRA will allow you to take distributions “on demand” – meaning when you want or need them! FRS will automatically withhold a minimum of 20% for taxes on your distribution. A normal IRA rollover will allow you to adjust the withholding to a more accurate number, or no withholding at all. FRS offers some options, but they are limited relative to the options outside of FRS.
Your own Investment Plan. This is absolutely true! Unlike the Pension Plan, which still subjects you to the potential changes and amendments being proposed by the legislature, the FRS Investment Plan falls into the “defined contribution” category and , by law, once you are vested the money in your account is yours and will no longer be subject to the legislative changes that might affect your pension in the future. If you choose to roll your money into an IRA outside of FRS, then it is even farther from the meddling hands of the politicians.
Roll Eligible funds. True, but it could certainly be argued that by rolling your money out of the Investment Plan and into an IRA at almost any other financial firm would allow you to access a wide range of investment opportunities not available at FRS. There are thousands of mutual funds, Treasury and corporate bonds, Stocks, Annuities, CD’s, money market accounts, gold or silver, real estate, or an almost unlimited menu of options to choose from. Within the FRS Investment Plan there are only 17 mutual funds to choose from, over half of which are managed by FRS internally.
At FRSOptions, we agree. It would be prudent to THINK TWICE about moving your money out of the FRS Investment Plan and into an IRA Rollover at an investment firm independent of the Florida Retirement System Investment Plan. It is an option that could provide a multitude of additional options for you and your family. While the Florida Retirement System Pension Plan is one of the premier defined benefit plans in the Nation, the Investment Plan may not be the best place to keep your IRA rollover. As always, we think you should keep you Options open.