October 25, 2013 (From PLANSPONSOR.com): Federal mortgage giants Fannie Mae and Freddie Mac are terminating their pension plans at the end of the year.
Federal Housing Finance Agency (FHFA) Acting Director Edward J. DeMarco released a statement saying the agency directed the organizations to terminate their defined-benefit pension plans as of Dec. 31, 2013. “Terminating the defined-benefit retirement plans eliminates risk to Fannie Mae and Freddie Mac and helps to conserve their assets on behalf of taxpayers, one of our main priorities as conservator,” he said.
DeMarco noted that the plans were already closed to new entrants. Pension-plan participants will be able to elect an annuity or a lump-sum payment. They can then roll over into an individual retirement account (IRA) or 401(k), the statement said. “Freddie Mac and Fannie Mae will continue to provide competitive benefits for their employees through their defined-contribution plans,” DeMarco added.
In response to the announcement, National Public Pension Coalition Executive Director Jordan Marks said: “Pensions are a critical leg of the retirement-security stool, and we do a great disservice to retirees when we eliminate these systems. At a time when the country is facing an unprecedented retirement crisis, we ought to pursue policies that enhance retirement security for all Americans—not policies that threaten to retire a generation of workers into retirement.”
The majority of workers do not max out contributions to their 457(b) plan during the course of their employment. During the last few years of employment, they realize this fact and would like to contribute more than the normal maximum contribution of $17,500. If you are 3-4 years away from retirement, you can take advantage of the Deferral Acceleration for Retirement (DAR) provision. The DAR allows you to contribute a maximum amount equal to twice the normal maximum for each of the three years prior to your retirement. $17,500 x 2 = $35,000 x 3 years = a maximum contribution of $105,000. Contributing at this rate will, most probably, drastically reduce your take-home-pay, so most do not do it. You need not contribute the full maximum. You can sign up to do anywhere from $17,500 to $35,000 per year for each of the last three years. If you are serious about contributing more and want to know how you can make up the short fall in your take-home-pay, give me a call.
Social Security recipients will see an increase of 1.7 percent for 2014, while those paying into the system will see a payroll-tax increase of 2.9 percent. The wage base will increase to $117,000 from the current base of $113,700. The payroll tax remains at 12.4 percent, which is equally shared between employer and employee.
Are you a public school worker in New Jersey? Do you contribute to a high, commission-based 403(b)/457(b) variable annuity/mutual fund? Do you know there is a no-cost alternative?
In 1963 the State of New Jersey established the Supplemental Annuity Collective Trust (SACT) Variable Annuity as a voluntary way for employees to save after-tax dollars to supplement their fixed pensions. New Jersey public education employees may also contribute to the SACT Variable Annuity on a pre-tax basis. The SACT is super special because the law establishing the Trust mandates that the state pay all administrative and investment management costs incurred in operating the Trust. If you contribute $200 per paycheck to the SACT—$200 is invested for you. This makes the SACT Variable Annuity a cost-free alternative to your high commission-based 403(b)/457(b) variable annuity/mutual fund.
Your high commission-based variable annuity/mutual fund is costing you about 3 percent per year. Do you have any idea how the 3 percent payment impacts the growth of your money? Example: Every year, for 40 years, Bob and Rob contribute to their retirement accounts. Their first-year salary is $30,000 with annual increases of 3 percent. They invest 10 percent of their salary. Both earn an 8-percent annual return before commissions and fees. At the end of 40 years, Bob has an account balance of $1.1 million, while Rob’s account balance is $582,000. Why the massive difference? Bob invested his money in the SACT Variable Annuity at no cost to him, while Rob invested his money in a high commission-based variable annuity/mutual fund. Bob never paid any commission or fees while Rob paid 3 percent every year for 40 years.
How does a retiring/separating-from-service participant manage his or her SACT Variable Annuity account?
Most retirees choose a lump-sum settlement. If they have no immediate need for the money, they roll over the earnings portion of the settlement to a Traditional IRA and the contributions portion of the settlement to a Roth IRA. If the contributions were pre-tax, then the entire lump-sum settlement is rolled over to a Traditional IRA. I welcome your questions.
Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via e-mail at firstname.lastname@example.org.