joel

Appleby: Thank you for the correction. Please note I have edited my reply. Do you agree with the edited version? Thanks and Peace, Joel L. Frank

Shelton, Is this a salary reduction 403b or an erisa 403b? Is there an employer match?

Each succeeding non-spouse beneficiary of an IRA has the option of designating the balance of the account as his or her own "Beneficiary IRA". In turn, the owner of the "beneficiary IRA" has the option of using his or her own life expectancy in the calculation of Required Minimum Distributions. In order to avoid possible IRS penalties RMDs must start by December 31st of the year following the year of inheriting the IRA. Peace and Hope, Joel L. Frank

mwyatt, There are (so far) 4 contributors to this thread. You and Pax took one viewpoint while mbozek and me took the opposite view. Pax bailed out early. Now we're down to 3 people with you being a minority of one. You now say to me: "You obviously don't want to even address my last points or listen to what anyone else on this board has to say". Besides Pax, who else on this thread am I not "listening" to? Mwyatt, I have listened to you. With all due respect, you are confusing "listening" with blind acceptance of your party line position. Peace, Joel L. Frank

mwyatt: My original post states: The following comes from Contingencies Magazine. See: A Free Market For Life Insurance, P. 17 March-April 2002, @ www.contingencies.org: “No one should want another person to have a financial (pecuniary) interest in his or her death. Adhering to the principle of insurable interest is one method of achieving that goal, but it's not the only one. (And the industry sometimes violates the principle. For example, a company that offers a life only immediate annuity has a financial interest in the early death of the annuitant"). Question: Are DB pension plans, that compel life only annuities, also guilty of this violation? ============================================= You assert : "I think that we have seriously drifted from the original premise of the sale of insurance policies via viatication..." I disagree...a clear reading of the thread reveals that we have, indeed, remained focussed on my original question which is: Are DB pension plans, that compel life only annuities also guilty of profitting by the demise of their annuitants." It is my contention that a an employer should provide a choice of plans, DB or DC as the primary employment based retirement plan. (see: www.myfrs.com). When ONLY the DB approach is offered, with life annuitization as the sole payout scheme, then the employer's hands are NOT clean and it is, indeed, guilty of profitting upon the demise of the annuitant. If demanding a choice of plans equates into being inflexible then I plead guilty. Peace, Joel L. Frank

Topic Review (Newest First) mwyatt Dear Mr. Frank: I understand that you have a serious beef with defined benefit plans and annuity contracts. We all have our differing points of opinion, yours from looking at what your contributions could have gotten in the open market rather than funding your government pension, mine from looking at defined benefit plans and real knowledge of supposedly sophisticated investors' actual results (not what they brag about on the 19th hole). Let us agree to disagree... I can't say that I am particularly happy that you chose to post a private e-mail response to you on the bulletin board. ============================================== Dear mwyatt: I could not disagree with you more! You are (apparently were) a willing contributor to this thread. In the middle of this public dialogue you decided that one particular thought of yours, for reasons known only to yourself, should not be posted but rather emailed to me personally, where obviously the other contributors/viewers would not have the opportunity to read your remarks. Personlly, I find such tactics insulting; to say the least. Question: Why did you want to communicate this particular response to me personally rather than posting it for all to see? Moreover, your expectation that I would respect the confidentiality of this particular post of yours, communicated to me in the form of a "private email", is an affront to the integrity of these message boards. Peace, Joel L. Frank

As evidenced by their posts the actuaries, I believe, don't fully appreciate the fact that a potential DC balance and the potential retirement income therefrom has absolutely no correlation to the FAS as is the case with a DB plan. Additionally, with reference to my article, it must be emphasized that the Final Average Salary ($70,000) is the same regardless of which retirement approach was adopted back in 1964. So the DB particpant is thrilled to accept a DB that is equal to his FAS. Afterall how many teachers retire at 100.0% of pay for life. As far as the DC participant is concerned his goal should be to just match the $70,000 at least in the current climate. He maintained a $70,000 lifestyle during his last year or so of employment so he should welcome the opportunity to continue that lifestyle for at least the first couple of years of retirement. The primary goal of every DB plan sponsor is to payout pensions from earnings and to invade principal as little and as infrequently as possible. (Even after the market decline of the last 2 years there are many DB plans that still sport a surplus, admittedly a shrinking one.) Why shouldn't the employee have the same opportunity over 50-60 years of work and retirement. My hypo reveals this has been achieved in a grand way over the past 4 decades for those who were willing to accept the same prudent man investment risk that the EMPLOYER was more than willing to assume in the establishment/funding of a DB plan. Peace, Joel L. Frank

Mwyatt: Please don't get the impression that I have come to favor annuitiztion over the last 48 hours. I think my contributions to this thread reveal my opinion of annuitization. The point of my last post was to show how stunned I was that an actuary---who just got through telling us about the virtues of a lifetime income guarantee via annuitization--- could not do better than .02 X $1.3 million. Personally, I would advise a risk free investment in a GNMA fund for the entire amount. .06 X $1.3 million = $78,000. This is achieved with very low exposure to downside risk due to a rise in interest rates. Note: this investment yields 11.4% more than the $70,000 lifetime DB pension that the hypo would be receiving if he opted to remain in 1964 with the TRS. Peace, Joel

Here is my emailed reply to mwyatt. ========================================= .02 X $138,000...give me a break!! Remember, if this hypo remained with the TRS for the career of service he would be entitled to a DB pension of $70,000 annually. This requires a Reserve of about $700,000.00. So why not annuitize $700,000 and place the balance of $600,000, for the short term, in a GNMA fund that generates about 6%. Total income: $70,000 + 36,000 = $106,000.00 (no risk)! And the $600,000 can always be allocated to equities at the appropriate time. Peace, Joel L. Frank

mwyatt emailed me with his/her latest reply. I am of the opinion that it should be posted. Here it is. ============================================= > If you get a guaranteed income of $138,000 from what you say is $1,300,000 lump sum you have a bonus situation. Please go out to the private sector to see what the rest of us are dealing with... Not even looking from an actuarial standpoint, if you are a recent retiree facing 2% MM yields, your $1.3m will kick off about 26,000 the first year. So you are about $112,000 into your principal right off the bat. How long do you think that this is sustainable? Even with a 5-7% yield, you are talking about some serious principal robbing from the get go. Give it a rest please, most of us would be happy dealing with a guaranteed payment for the rest of our lives. If your REALLY want to get bent out of shape, start looking at the actual funding of governmental plans. We were working on a plan in the 80s that was seriously underfunded, and the only reaction by the Union was to ratchet up the pension amount AND lower the retirement age. Face it, the only folks who really deserve s! > ympathy aren't the participants, but rather the poor taxpayers who are supporting (unknowingly) schemes that in the private sector would have the DOL riding on the Four Hourses of Apocalypse!

This problem would be alleviated if there was a national registry like there is in the UK and Australia.

Hi mwyatt, Your closing comments makes my heart feel good! I join you in your request for placing this thread in the Newsletter. Please note that my hypo assumes full (no offset) of SS as is the case for public employees in NY state/city. The fixed annuity of $138,000 would be guaranteed by the NYCTRS based on their current annuity income rates. The 8 NYstate/city DB pension plans provided, up until a year ago, only adhoc colas. Now the cola is permanent and does not kick until the 6th year of retirement and provides no more that a .5 benefit with a cap of 3%. So if the COL rises 2% the pensioner gets no more than a 1% adjustment. If it rises 6% a 3% adjustment is forthcoming and if it rises 10% the adjustment remains at 3% because of the cap. I don't believe there is a DB plan, public or private, that grants 100% cola increases. Proof that the unions favor current dues paying members at the expense of their retired, but no longer dues paying members. But let's leave that hot topic for another thread. Peace, Joel L. Frank

Hi mwyatt, Do you recognize the "unsettling" amount as revealed in my "empowerment" article? It is $600,000 if we assume the DB plan also invested in the guaranteed interest account because they need only dedicate $700,000 to fund the DB pension, freeing up the balance of $600,000 to balance the state or corporate budget. So rather than being in the participant's IRA with the potential to generate income/wealth for as yet to be born beneficiaries it remains with the employer, to do as it sees fit. NOW HOW'S THAT FOR LEVERAGE? Peace, Joel

Dear mwyatt: Its tragic that diversification is not practiced as much as it is preached!! Additionally, a two year decline of stock prices is countered by two great years. So now let's focus on what really counts with DC plan investing---the long term! How do you feel the vast majority of DC plan participants have made out over a lifetime of investing? My position follows: Peace, Joel L. Frank ============================================= Joel L. Frank Registered User Registered: Oct 2001 Location: Posts: 39 Guest Article Government Employees' Pensions: It's All About Empowerment... But For Whom? -------------------------------------------------------------------------------- by Joel L. Frank In the 1960s and '70s, the nation's public institutions of higher education began to acknowledge just how hurtful the traditional defined benefit ("DB") type of pension plan was to their mobile employees. They addressed this portability problem by establishing defined contribution ("DC") pension plans as an option to DB plans. Case Study in New York In 1964 the New York State Legislature established an Optional Retirement Program ("ORP") for public employees at the public institutions of higher education. In order to be cost neutral, the employer is required to contribute the same amount to the employee's individual investment account maintained by the DC ORP as would have been contributed on the employee's behalf to the DB pension plan of the Teachers' Retirement System. (This also applied to the employee benefit package for health, disability and life insurance coverage.) The employee is not required to contribute. The employer contributes 12% of the first $16,500 of salary, plus 15% of the salary above $16,500. Let's assume that an employee who began his or her ORP participation in 1964 has been paid at the same level as a New York City public school teacher during each of the past 36 years. The individual's 2000 account balance would be $1.3 million if all of the contributions were invested in the Guaranteed Interest Fund, $1.7 million if all the contributions were invested in a mix of equities and bonds (the asset allocation employed by the Trustees of the eight DB plans of New York), or $2 million if all of the contributions were invested in the equities fund. It's True That Each Type of Plan Has Its Advantages The main advantage of a DB plan is that it assures retiring members with equal periods of service at a given employer a consistent ratio of retirement income to final average salary. And this ratio (though not the amount of retirement income) is predictable if it can be assumed that the employee will stay with a given employer until retirement. A major advantage of a DC plan is that it adds a consistent and visible percentage of salary to each member's total compensation at the time the compensation is earned. If one person's salary is more than another's, the deferred compensation is greater by the same percentage, not warped out of proportion by age or length of service. This pattern of funding, unlike a DB plan that defers most of the employer's contribution to the final years of long service, helps keep the pension plan a neutral factor when the person is deciding about joining or leaving an employer (also when the employer is making the decision). In an era when increasing numbers of the public workforce are no longer remaining with one governmental agency (federal, state or local) for an entire career, it seems reasonable for each employer along the way to contribute a fair share toward a person's retirement income, and for the individual to have the same ultimate income whether staying with one level of government or moving among the three. The DC plan also has budgeting advantages for the governmental unit. Pension costs are a constant percentage of salary each year. And the employer's pension obligation for each person is fully and permanently funded at the time the obligation is incurred, not left as an open liability tied to whatever salary levels the future brings. Employees Should Have a Choice Recognizing that a DC plan can be designed to provide retirement income at least equal to that of a DB plan, one might ask why haven't the public employee unions fought for their member's right to choose either approach. The answer lies in the word empowerment. The unions want to maintain their influence and control over the employee's life from the moment one first enters the public service until termination, retirement or death, whichever comes first! After all, who receives praise when a state legislature approves enhancements to the DB plan or a COLA for retirees? The unions, of course. The employee's right to choose the type of plan, DB or DC, which the employee believes would be best for him or herself and their respective families represents a threat to union influence and control. For example, an ORP participant who has the $1.3 million balance is excluded from participating in a COLA program and happily welcomes the exclusion. And why not?! The $1.3 million represents the present value of a lifetime fixed-dollar pension of $138,000 starting at age 65. (Think of this balance as the retiree's Pension Reserve Fund established by the DB plan.) How many public employees in this nation are about to retire, after 36 years of service with one employer, on a pension of half that amount or $69,000, let alone $138,000? And remember, investing the same contribution that the employer would have contributed to the DB plan if the employee chose, in 1964, to remain with the DB Teachers' Retirement System, generated $1.3 million. Every state should do the right thing, as Florida has just done, and establish an ORP for all of its employees. Current as well as future employees will have the right to choose either the Florida Retirement System's DB plan or the new Florida Retirement System's DC plan, known as the Florida Retirement System Public Employees Optional Retirement Program (FRS PEORP). Current members of the traditional DB plan will be allowed to transfer the present value of their accrued DB pension to their individually owned and directed investment account maintained by the PEORP. This is the largest pension conversion of its kind in the nation's history. The sun, indeed, shines in the Sunshine State. Just think about the number of employees at the nation's public institutions of higher education who opted out of DB plans in the 1960s-'70s. Close your eyes…just look at their contented faces. The word empowered is clearly visible. The nation's public employees, like their colleagues at the public institutions of higher education, should have the statutory right to accumulate wealth, if they so choose, through their employment-based pension plan. Annuitization of pension wealth should be voluntary not compulsory. After all, the state capitols and city halls do not issue stock options. Joel L. Frank PO Box 148 Marlboro, New Jersey 07746-0148 (732) 536-9472 rollover@optonline.net --------------------------------------------------------------------------------

Pax, C'mon, you KNOW that an employer only funded benefit whether it is vacation time, health insurance, sick leave or a DB pension is reflected in reduced salaries. Why are you leaving us?

Guest Article Government Employees' Pensions: It's All About Empowerment... But For Whom? -------------------------------------------------------------------------------- by Joel L. Frank In the 1960s and '70s, the nation's public institutions of higher education began to acknowledge just how hurtful the traditional defined benefit ("DB") type of pension plan was to their mobile employees. They addressed this portability problem by establishing defined contribution ("DC") pension plans as an option to DB plans. Case Study in New York In 1964 the New York State Legislature established an Optional Retirement Program ("ORP") for public employees at the public institutions of higher education. In order to be cost neutral, the employer is required to contribute the same amount to the employee's individual investment account maintained by the DC ORP as would have been contributed on the employee's behalf to the DB pension plan of the Teachers' Retirement System. (This also applied to the employee benefit package for health, disability and life insurance coverage.) The employee is not required to contribute. The employer contributes 12% of the first $16,500 of salary, plus 15% of the salary above $16,500. Let's assume that an employee who began his or her ORP participation in 1964 has been paid at the same level as a New York City public school teacher during each of the past 36 years. The individual's 2000 account balance would be $1.3 million if all of the contributions were invested in the Guaranteed Interest Fund, $1.7 million if all the contributions were invested in a mix of equities and bonds (the asset allocation employed by the Trustees of the eight DB plans of New York), or $2 million if all of the contributions were invested in the equities fund. It's True That Each Type of Plan Has Its Advantages The main advantage of a DB plan is that it assures retiring members with equal periods of service at a given employer a consistent ratio of retirement income to final average salary. And this ratio (though not the amount of retirement income) is predictable if it can be assumed that the employee will stay with a given employer until retirement. A major advantage of a DC plan is that it adds a consistent and visible percentage of salary to each member's total compensation at the time the compensation is earned. If one person's salary is more than another's, the deferred compensation is greater by the same percentage, not warped out of proportion by age or length of service. This pattern of funding, unlike a DB plan that defers most of the employer's contribution to the final years of long service, helps keep the pension plan a neutral factor when the person is deciding about joining or leaving an employer (also when the employer is making the decision). In an era when increasing numbers of the public workforce are no longer remaining with one governmental agency (federal, state or local) for an entire career, it seems reasonable for each employer along the way to contribute a fair share toward a person's retirement income, and for the individual to have the same ultimate income whether staying with one level of government or moving among the three. The DC plan also has budgeting advantages for the governmental unit. Pension costs are a constant percentage of salary each year. And the employer's pension obligation for each person is fully and permanently funded at the time the obligation is incurred, not left as an open liability tied to whatever salary levels the future brings. Employees Should Have a Choice Recognizing that a DC plan can be designed to provide retirement income at least equal to that of a DB plan, one might ask why haven't the public employee unions fought for their member's right to choose either approach. The answer lies in the word empowerment. The unions want to maintain their influence and control over the employee's life from the moment one first enters the public service until termination, retirement or death, whichever comes first! After all, who receives praise when a state legislature approves enhancements to the DB plan or a COLA for retirees? The unions, of course. The employee's right to choose the type of plan, DB or DC, which the employee believes would be best for him or herself and their respective families represents a threat to union influence and control. For example, an ORP participant who has the $1.3 million balance is excluded from participating in a COLA program and happily welcomes the exclusion. And why not?! The $1.3 million represents the present value of a lifetime fixed-dollar pension of $138,000 starting at age 65. (Think of this balance as the retiree's Pension Reserve Fund established by the DB plan.) How many public employees in this nation are about to retire, after 36 years of service with one employer, on a pension of half that amount or $69,000, let alone $138,000? And remember, investing the same contribution that the employer would have contributed to the DB plan if the employee chose, in 1964, to remain with the DB Teachers' Retirement System, generated $1.3 million. Every state should do the right thing, as Florida has just done, and establish an ORP for all of its employees. Current as well as future employees will have the right to choose either the Florida Retirement System's DB plan or the new Florida Retirement System's DC plan, known as the Florida Retirement System Public Employees Optional Retirement Program (FRS PEORP). Current members of the traditional DB plan will be allowed to transfer the present value of their accrued DB pension to their individually owned and directed investment account maintained by the PEORP. This is the largest pension conversion of its kind in the nation's history. The sun, indeed, shines in the Sunshine State. Just think about the number of employees at the nation's public institutions of higher education who opted out of DB plans in the 1960s-'70s. Close your eyes…just look at their contented faces. The word empowered is clearly visible. The nation's public employees, like their colleagues at the public institutions of higher education, should have the statutory right to accumulate wealth, if they so choose, through their employment-based pension plan. Annuitization of pension wealth should be voluntary not compulsory. After all, the state capitols and city halls do not issue stock options. Joel L. Frank PO Box 148 Marlboro, New Jersey 07746-0148 (732) 536-9472 Email: rollovertsa@dellnet.com -------------------------------------------------------------------------------- BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above. -------------------------------------------------------------------------------- URL of this page: http://www.benefitslink.com/articles/frank000908.shtml · This page last modified: Monday, October 16, 2000 · Webmaster: webmaster@BenefitsLink.com (Dave Baker) · Copyright 2002, BenefitsLink.com, Inc. (contact the webmaster for reprint permission) · Linking: Feel free to link directly to this page, even without specifically crediting BenefitsLink ® as its source. Glad you're here! · Privacy Policy

mbozek, Your employee safeguards are written into the law. Ernst & Young and Financial Engines are the investment advice/education providers. I encourage you to log onto: www.myfrs.com. In my opinion I feel that the Florida State Board of Administration as the Board of Trustees of the FRS is in the process of putting together what will shortly be known in retirement planning as the gold standard. I, for one, value your observations and look forward to your learned reaction to the Florida undertaking which is going to be the largest single transfer of capital from one plan to another in the history of pensions in the U.S. Peace and Hope, Joel L. Frank

Additionally, DB pensions that compel life annuitization is the same thing as a life insurance company offering only an immediate annuity to the owner of a matured endowment policy. With the latter it would be a violation of law. Why is it permitted with the former?

The regs should require an annuity holder to sign off on the following statement before one is allowed to convert his/her accumulation to an immediate annuity: "In return for XYZ insurance company's promise to pay a fixed monthly income of $3750 to Joe Doe for the remainder of his life, Joe Doe agrees to transfer his title to $500,000 to XYZ insurance company." Do you feel such a disclosure would increase or decrease immediate annuity sales and settlements?

Pax, It just seems to me that if the company allows for just one mode of settlement (annuitization) such settlement is clearly in ITS financial or pecuniary interests, not those of the annuitant's. Even an annuitant dying at age 100 leaves the insurance company/DB plan CLEARLY AHEAD when you factor in the leveraging of the Reserve funds from retirement to death which could be forty years (duh).

I read both articles. It seems to me that annuitization is in the best interests of the guarantor otherwise they would not be in the business.

mbozek, Here is the answer to you thought provoking quesion. Peace, Joel ========================================== Q60. Is there a financial penalty if I switch to the Investment Plan and later decide to switch back to the Pension Plan? A60. No. But while there's no penalty, you may need to "buy back" into the Pension Plan. (See the chart below.) If you are an eligible employee at the start of the Choice period*, the total amount you'll need to buy back into the plan is the "present value" of your accumulated benefit in the Pension Plan, assuming all your service had been in that plan. The Division of Retirement will calculate this amount once you notify your employer that you'd like to rejoin the Pension Plan. It will also be available through the CHOICE SERVICE, on this Web site, after the close of your Choice period. Remember, you can switch only once after you make your initial choice. If... Then... Your total balance in the Investment Plan is greater than the "buy-back" amount... Your Investment Plan balance will be reduced by the "buy-back" amount; the rest will stay in the Investment Plan. You will have assets in both plans. Your Investment Plan balance is less than the "buy-back" amount and you still want to switch back... You must make up the difference out of your own money. You choose the Investment Plan going forward but leave your current benefit frozen in the Pension Plan... You can't move your frozen money later to the Investment Plan; it must stay in the Pension Plan. * Employees hired after the Choice period begins will pay the total cost of the Pension Plan benefit for the time purchased.

The following comes from Contingencies Magazine. See: A Free Market For Life Insurance, P. 17 March-April 2002, @ www.contingencies.org: “No one should want another person to have a financial (pecuniary) interest in his or her death. Adhering to the principle of insurable interest is one method of achieving that goal, but it's not the only one. (And the industry sometimes violates the principle. For example, a company that offers a life only immediate annuity has a financial interest in the early death of the annuitant"). Question: Are DB pension plans, that compel life only annuities, also guilty of this violation? Peace and Hope, Joel L. Frank

dmj, Have you also noted that current Pension Plan participants have the right to transfer their accrued DB to their individual account maintained by the Investment Plan. I believe this is a first in the annals of public pension planning. Am I right? Peace, Joel

The Florida Retirement System is offering its 600,000 participants a choice of 2 plans: The traditional Defined Benefit Pension Plan or the new Defined Contribution plan known as the Investment Plan. What are your views of the Investment Plan? See www.myfrs.com. Peace, Joel L. Frank