If you’re an employee of the state of Florida, you’re likely part of the Florida Retirement System (FRS) in some way. You may have heard about the state of flux the pension system is in. Speaker of the House, Will Weatherford, is leading the effort to change the current pension system to a 401(k). As we move forward working with more and more people just like you, we will be keeping you up to date with a summary of the news and changes occurring that may affect you. We’ll also be explaining key terms and common misunderstandings about FRS that we’ve found prevalent among our clients nearing retirement.
Speaker of the House, Will Weatherford has renewed his attempt to bring change to the state’s pension plan. In March of 2013, the House passed bill (HB-7011) by a vote of 74-42 which closed the guaranteed pension plan to new hires. This bill did not pass through the senate and was, as such, not passed into law.
Despite reports showing that FRS had greatly improved its returns from the 0.29% in 2012 to 13.12% in its 2013 fiscal year, the program has fallen from 87% funded in 2012 to 86.2% in 2013. A pension system is considered to be healthy if 80% or more of its obligations to members are in the coffers. The fund outperformed its custom benchmark by 1.1% during this time. Investment funds use benchmarks to measure their performance, much the same way a mutual fund may use the Dow Jones Industrial Average to gauge how well they’ve done.
Several retirement employees will see significant salary increases this year. 156 of 179 employees received raises above the standard raise which was approved for all state workers. The SBA gave raises of $20,000 or more to seven employees with six-figure salaries, as of Oct. 1, when employees in most other state agencies got pay increases of $1,000 or $1,400. Thirteen others got raises between $10,000 and $17,329 and seven got $10,000 raises. These raises were given in an attempt to bring salaries more in line with the national average.
The future of FRS is certainly in question. Consider that the custom benchmark can be whatever FRS makes it. Consider also that during the most profitable year of the stock market in the last ten, the fund made 13.12% but still lost overall value. The reason is simple, but goes largely ignored in public forums. The amount of retirees on the plan is increasing and they are living longer which means the amount of money required to be paid out in pension benefits continues to rise each year.
If the fund continues to spend more than it earns, the only ways to overcome the problem will be to either force current employees to contribute more from their paychecks, increase state taxes, or decrease the amount of pension benefits each retiree receives. There is a limited amount of money in the world and when your expenses are larger than your income, eventually you need to either make more or spend less.
“The funded ratio of the 100 largest corporate pension plans increased for the third month in a row in November, nearing 94 percent. According to data from the Milliman 100 Pension Funding Index, the pension deficit is below $100 billion for the first time in five years as the funded status increased by $34 billion during November. Milliman predicts that if the discount rate stays at least where it is at 4.78 percent through 2015 and the pension portfolios of the top 100 achieve 7.5 percent returns, it would result in a pension surplus by the end of 2014 and a projected pension surplus of $92 billion or a funded ratio of 105.9 percent by the end of 2015.” – Private pension deficit below $100 billion by Paula Aven Gladych
I get a chuckle out of the comments I hear from people who believe that a move from the pension plan to a 401k system would be putting the retirement plan into the hands of Wall Street. Where do they think FRS pension managers come from? Having been in government myself, I’ve seen firsthand, the waste and abuse of money and fiscal responsibility, yet for some reason we still believe that our governments will be the best custodians of our financial future.
I question the state’s ability to effectively implement a retirement plan for its employees when, during the best of times, it continues to lose and its corporate peers continue to gain. Like the manatee, the Florida Retirement System is an endangered and bloated sea cow.
How would a change from the pension system to a 401k affect Law Enforcement participants? Only new hires would be required to join the 401k system. Those who are already vested in FRS will be able to continue with the pension plan. 401k participants will become responsible for themselves to save enough and exert more control over how they invest. Most law enforcement officers I’ve met don’t feel comfortable with their level of investment knowledge which could create a lot of anxiety. Often, I see people who aren’t sure how to invest looking for a simple answer. These people normally speak to another law enforcement officer instead of consulting with a financial advisor, but if your child had to plan a legal defense, would you be comfortable with the advice they received from a friend or would you urge them to seek an attorney?
Chris Storace acts as a fiduciary, meaning that he is legally bound to work in the client’s best interest. “As a financial planner, I create maps which advise clients of the best paths to take to their destination. I point out pitfalls and deserts as well as mountains, and smooth sailing coastlines.” There are people who will be better served by FRS than any other retirement vehicle as there will be others who need something different. Something of which they may not even be aware exists. Which one are you? We can help you find out by providing non-biased financial advice in the form of a mutually agreeable plan between the client and advisor. We'll educate you about all your options and show you how your choices might impact your financial future. Once completed, you may choose to implement the plan with our team, another professional or even on your own. The purchase of a financial plan is simply the purchase of professional financial advice specific to you. Call us for an appointment to learn more about our process.
Term of the Month:
Bond - A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities. Bond prices have an inverse relationship to interest rates. As rates rise, bond prices decrease.