Current Pension Topics: Consider 'Option' Choice Early

Current Pension Topics
Consider 'Option' Choice Early

By JOEL L. FRANK

Recently, within a few days of each other, I received two telephone calls from pension system members desirous of changing the option they chose upon retirement in 2003. The selection of an option or no option (maximum) is very serious business. Once selected, it is almost impossible to change.

The selection of an option results in a reduced retirement allowance, because the required reserve fund must be used to provide a benefit other than just a maximum lifetime income to the retired member. Because the various state and city retirement systems guarantee lifetime incomes to the member, the ages of the retiring member and the other person (joint annuitant) must be taken into consideration by the Chief Actuary. This is true for all options other than the ones providing for lump-sum death benefits upon the death of the retired member.

Let's take an example. Bill, age 65, is a member of the New York City Employees Retirement System and Rhonda, also age 65, is his wife. Bill wants his retirement allowance to be paid to his wife for the remainder of her life in the event he dies before her. Assume Bill is entitled to a maximum retirement allowance of $50,000 per year. The $50,000 is payable to Bill during his lifetime - upon Bill's death there is no provision for a beneficiary. In order to have his retirement allowance continue for the remainder of his wife's life, he must be willing to accept less income during his life. The actuary tells us that Bill will receive 82.7 percent of maximum ($50,000 x 0.827), or $41,350 annually, for life with the provision that, in the event he dies before his wife, she will continue to receive $41,350 annually for the remainder of her life. The annual pre-tax cost of this benefit is $8,650 ($50,000 minus $41,350). Bill and Rhonda are paying a lot of money for this joint benefit. This may or may not be an appropriate option for them. The time to analyze and ponder a suitable payout scheme is before - not after - the selection becomes irrevocable. If you are unsure as to what your payout scheme should be, please contact me at least six months prior to your retirement date.

Many of you are saddled with high-cost and inferior 403(b) investments. Since 1990, the IRS has permitted 403(b) investment holders to move their accounts to other 403(b) investments that are not in their employer's investment product lineup. Over the past 16 years, this has been an effective way to move your money from a high-cost/inferior vendor to a low-cost/superior vendor. Revenue Ruling 90-24 authorizes these tax-free Section 403(b) capital transfers.

Effective Jan. 1, 2007, Revenue Ruling 90-24 will be substantially modified. You will only be allowed to transfer your 403(b) money among 403(b) investment products that are in your employer's investment product lineup. So, for example, if you have money with the Teachers' Retirement System 403(b) program and have been using Revenue Ruling 90-24 to periodically move your money to a 403(b) investment with The Vanguard Group, you will no longer be able to do this after Dec. 31, 2006 unless the Department of Education decides to expand its 403(b) investment lineup to include The Vanguard Group. In the 36-year history of offering a 403(b) investment program to its K-12 staff, the Department of Education has never expanded its investment product lineup beyond the TRS.

Please note that the above applies to "transfers," not "rollovers." Once an inservice holder of a 403(b) account attains age 59-1/2, he/she is eligible to roll over the account to a special rollover account with the city's 401(k) plan.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, by fax at (732) 536-7373, or via e-mail at rollover@optonline.net.