Current Pension Topics
Don't Give Up Funds' Control

By JOEL L. FRANK

Q.: I am nearing 70 years of age and will be retiring on April 1. The combined balances of my Deferred Compensation 457(b) and 401(k) accounts is about $1 million. I will have to start Required Minimum Distributions next year. I have been encouraged by a financial planner to annuitize this amount so that I do not have to be concerned about investment decisions or required distributions. What is your opinion?

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

M.S.

A.: I feel this financial planner is more concerned with his current income than with your long-term financial condition. He or she stands to collect a commission of about $20,000 by selling you this product. If you take his/her advice, you will be transferring the title to your million dollars to the insurance company in return for a guaranteed lifetime income. You will not be allowed to make withdrawals beyond the regular monthly payment. You will be decreasing your net worth by one million dollars.

I vehemently reject this proposal for the following reasons: Your million dollars is in one of the best investment programs of its kind on the planet. All of your money should be in the Pre-Arranged Portfolio named "Target Fund."

The Target Fund is comprised of: 60 percent Stable Income, 20 percent Bonds, 11 percent Equity Index, 2 percent Mid-Cap, 5 percent International and 2 percent Small Cap. This is an ideal investment portfolio (mix) for a 70 year-old retiree. Stick with it for the rest of your life.

As far as Required Minimum Distributions are concerned, you will be notified by the Plan and the Plan will calculate the required withdrawal and send it to you each year. Upon your death the account balance goes to your designated beneficiaries. Please don't ever get talked into doing a rollover out of your Deferred Compensation Plan accounts. You are in the catbird seat. Never give it up!

For those of you who are retiring or severing employment with the city, I enthusiastically advise you to roll over your expensive/inferior pre-tax savings plan (HHC 403(b), TRS 403(b), BERS 403(b)) to the Deferred Compensation Plan (DCP) of the city and follow the above advice.

Also, remember to roll over your final pension loan amount and union annuity account. Invest all your money in the appropriate Target Date fund. There are nine such funds. Estimate how many years you are from the year you expect to begin regular withdrawals from the plan, not the year you expect to retire.

Example: You are age 35 and will retire at age 55. If you plan on making regular withdrawals starting at age 55, you should invest all your money in the 2025 Fund, but if you expect to retire at age 55, but not to begin taking regular withdrawals from your plan account until age 70, you should invest all your money in the 2040 Fund.

Remember, if you invest in a Target Date Fund, do not invest in any of the Core Investment Funds. I suggest investing all of your money in just one Target Date Fund; the one whose year most closely matches the year you expect to commence regular withdrawals from your DCP account.

Q.: I was surprised to learn recently that the TRS 403(b) fixed account sets the interest earned on amounts in one's account once a year in November. As such, all of the interest earned during the course of the year earns no further interest. It would seem that the interest earned on my account should increase each month as the amount in the account increases. For Teachers who have been in the system for a lengthy period of time with considerable amounts in their account, this represents a significant loss of interest. While they advertise that the account pays 8.25-percent interest, in fact the interest rate is less. I wonder where all of the interest earned on members' accounts goes if in fact the interest rate is truly 8.25 percent. This might be something worthy of discussion in your column.

C.A.

A.: You are referring to how often the interest is calculated and credited to your account. It is calculated and credited once a year or annually. There is no compounding. If the annual rate of 8.25 percent was calculated and credited quarterly, we would say it is compounded four times a year and the total interest for the year would be greater, as follows: Let's assume you have $100,000 in your account on December 31, 2006. On March 31, 2007 you multiply $100,000 by 1.020625 (0.25 X 0.0825) to arrive at $102,062.50. On June 30, 2007 you multiply $102,062.50 X 1.020625 to arrive at $104,167.53. On Sept. 30, 2007 you multiply $104,167.53 X 1.020625 to arrive at $106,315.98. And on Dec. 31, 2007 you multiply $106,315.98 X 1.020625 to arrive at $108,508.74.

When compounded quarterly, you have earned $258.74 in additional interest ($8,508.74 minus $8,250). The effective annual interest rate for 2007 would be 8.51 percent ($8,508.74 divided by $100,000). I suggest you write to Mayor Bloomberg as well as Governor Spitzer and tell them you feel you are being cheated. Include my example in your letter. I would also refer you to last month's Current Pension Topics, specifically the columns of Jan. 12, 19 and 26.