If You Can, Should You Leave Your DROP Moneys in Your City’s Pension Plan or Look Elsewhere? Is It Time You Looked Elsewhere? *

  A First Responder friend of mine in Drop via a City Pension Plan said he recently attended a retirement meeting run by the pension board and the board members were basically trying to talk everyone into leaving their DROP moneys in the plan upon termination of DROP.  They essentially and incredulously inferred, “why in the hell would you move your moneys elsewhere when you could leave your DROP moneys in your city’s pension plan?!?!?”

  They berated all comers in the financial world, grossly exaggerated what fees were being charged(well, compared to us), and so forth and so forth. While I was a tad surprised by this I wasn’t exactly shocked as I have served on pension boards (GE and P&F) for over 22 years so I have seen it first hand numerous times. I must note however, that I truly believe these board members are the exception to the rule.

So let’s calmly sift through all of this A-Z style.

First of all – I am only referring to pension funds that will allow you to stay after you terminate DROP (leave your money in the plan) and will then pay whatever the fund earns (or market return rate) i.e. if they earn 12% you get 12% (minus a fee in some cases) -- if they lose 12% you lose 12% and so forth.  I am not referencing the few Florida pension funds left out there paying a guaranteed fixed rate of 6 or 7% + --- please see section 3 of my 2015 LinkedIn article covering your 5 DROP rollover options (city or state) after you read this article for more info. https://www.dhirubhai.net/post/edit/5971026992135491584

    So why would pension board members so vigorously pressure plan participants to keep their money in the plan? Before we get into a myriad of reasons, let's be clear. IT’S YOUR MONEY!  It is YOUR DECISION and this decision with your DROP moneys does not have to be “all or nothing’.  Repeat - it does NOT have to be an all or nothing decision.

  If your plan allows you to keep your money there after you terminate DROP, well, hmmmm, maybe it might make sense, BUT then again, maybe it doesn’t?  You DO NOT have to leave all your money there, nor do you have to move all your money elsewhere. The world is your oyster so to say and you have flexibility and seemingly unlimited choices.

Every once in a while we there may be a reason we recommend leaving a bit of money there, but most often it is strictly for an immediate distribution to take care of major debt payoff or other need. And this is certainly not very often. In certain circumstances, usually for cash flow planning in one's 50's, we may also recommend moving a small portion of one's DROP moneys to one's 457 Deferred Comp Fixed Rate Account.  

There are certainly some valid reasons for looking elsewhere and moving your moneys elsewhere(PLUG ALERT -- us being one of those), but again, it does not have to be an all or nothing. In fact, 99% of the time we recommend a combination of 2 or 3 of the above for various reasons which we can get into further in person should you wish to meet. Note: you can also see the article link above). Again, it doesn’t have to be an all or nothing decision and if anyone is pressuring you to move your moneys all this way or that way – just RUN AWAY! 

   So why would certain pension board members vigorously pressure plan participants to keep their money in the plan? What's in it for them? Numerous reasons I guess, so let's see if we can connect the dots or at minimum just say "hell with the reasons, does it make any sense for you regardless of their reasons?"

 Hmmm, maybe it is like my old Treasurer at my Kiwanis Club years ago – naturally an important job for the club, but it always seemed like he felt better, or maybe more important in his mind, if we had $10k in the account vs $2-3k. If we needed to cut a check for $5k it was like pulling teeth and he seemed to take it personally. I hear pension board members act like the fund is losing money if we send our DROP payments to the members. Again, it is the retiree's money, NOT the board's, not the City's -- it is YOUR DROP money - not theirs.

 I do know quite a few pension board members who, consciously or unconsciously, seem to "walk taller" if they say they serve on a BIGGER pension fund vs a BIG pension fund etc. Kind of like the guy who boats about having a 104ft. yacht vs. a 103ft. yacht lol. I have been there so I guess I maybe get it, but it seems weak -- we serve to serve regardless of it being $600million or $100million.

So why else would be they put pressure on their DROP members to leave their money in the plan? Maybe it is the herd mentality? Maybe it's the feeling like you're with us or against us? Or maybe they have convinced themselves because of this or that reason that since THEY were going to do it so you that everyone else should do it. One size fits all? Uh, not always.

  Frankly, I do not think board members and the fund should really want any of the liability or hassle of overseeing your DROP moneys once you have terminated DROP? You retired – Congrats! Enjoy life -- we’ll send you your pension check, but please take your DROP moneys and go! :)

 “But Mark, I spoke to so and so and I am still thinking about leaving my DROP moneys in plan. I hear the fees are low and no 10% penalties on withdrawals…yaddah yaddah yaddah”. Bottom-line like anything, it all comes down to “do the pros outweigh the cons?”.    So let's dive in.

A) LOW FEES! There is no free lunch and pension funds have costs. While the fund may or may not charge YOU an extra fee to manage your DROP make no mistake about it - there are costs and fees are being charged that you are inherently paying somehow some way. Money managers, funds, consultants, custodians, actuaries, attorneys, administrators, staff, rent, supplies, and more. No matter how you slice it, those expenses, even if collectively lower than normal, will eat into the overall investment return even if only slightly. 

B) "The fund is doing great!" Well, in the last 10 years, who isn't? How did you do in 2008? or through other rocky markets? Most board members don't really know exactly how the fund is really doing day to day or how it did this year or that year or 1, 3, 5, 7 10, 15, 20 year #'s, inception etc. unless they are at a meeting with some of those #'s in front of them (or if they are the chair and really up on it). They don't watch its fluctuations daily, let alone monthly in most cases. Again, no fault of their own, it is just that "board member" isn't their full-time career. So what about other important day to day factors?

C) You, your financial situation, and the board/administrator  

Most pension administrators are great and know their stuff, but do you they really have the time to get you know you? Your finances? Your cash flow needs? Your debt burden if any? Wants? Wishes? Travel plans? Bucket lists? Family’s circumstances? Health? Risk tolerance? Time horizon?  They can more than help you with your pension and answer many questions, but dealing with your DROP after you terminate?? It's really not in their job description and frankly they have more than enough on their plate already.

D) Your Income and Withdrawal Needs

How much and how often can I withdraw moneys? Uhhhhhhhhhhhh

Can they do it for you on a moment’s notice? Uhhhhhhhh

“I need money tomorrow! AGH, nope, make that yesterday!?” Can you wire me the money? Move it to my checking account? Other? Uhhhhhhhhhh

Going forward, can I get money “as needed/when I want” or am I limited to frequency, amounts, and more? Uhhhhhh the latter.

What if you need more income? a rising income? Can you seek higher yield or rising income options with them? Uhhhhhhhhhh

 E) General Day to Day Account Access

Can you view your account online 24/7 on your smart phone? laptop? tablet? other? Uhhhhhh

Can you get real time pricing and account values? Uhhhhhhh

Can you access investment return overall and per holding 24/7 in real time online or other? Huh?

Or are they posted in arrears i.e. one month or so after the fiscal quarter ends etc.? Uhhhh, yes.

F) Advice, Guidance, Meetings, Talk to? One on One

Who do you call if you’re worried about anything? i.e. the markets? The funds? The managers? The fund's asset allocation? Other? Uhhhhh

Who do you call if you need A-Z of anything else? Uhhhhhh

Are you calling the Administrator? (it really is not his or her job) Uhhhhhh

Are you calling a board member, active or retired? (obviously not their job, passion, and life’s work either). Uhhhhhh

The consultant? actuary? attorney? mayor? city commissioner? Uhhhhhhh, no, no, no

G) Managing Risk (assuming your returns float with or mirror the fund’s returns)

FYI -- Above see YOUR PLAN -- this is how we as board members see our plans lol - seriously! If we could see it everyday and it was OUR personal money, we would soon realize that reality is far different.

Can the fund get you 100% out of the market if need be? Uhhhhhhhh

Or are you stuck riding the ups and downs of the market and the fund regardless of market conditions? Uhhhh, of course

Many municipal pension funds were down -24% to -28% or more in the calendar year of 2008. Can you stomach these potential downward swings and bear markets?  The market can go down?

Does the fund have a “Safe harbor” option? A what?

H) You vs. the collective

Is the fund positioned for your goals, risk tolerance, time horizon, or is it positioned collectively for the infinite time horizon of the fund and its participants? Uhhhh, the latter?

Do you they provide a pre and post financial plan and retirement roadmap covering A-Z of you and yours? Yeah right, a what?

Who do you call for ongoing advice and will you get real customized comprehensive tailored advice? Ghostbusters?

Are they even allowed to truly give advice? Hmmmm, no idea

I) RECOURSE?

I am not litigious by any means, but I did serve as a FINRA Arbitrator for 22 years -- if you had a major grievance, who do you grieve to? Could you sue? Go to arbitration? FINRA? SEC? other? and wouldn’t you want that to be a private matter vs. public? No idea, and certainly not

And as you can tell, the answer to almost all these questions above is NO, NOT LIKELY, DOUBTFUL, RARELY, NO IDEA, and so forth. 

Again, if you are a board member trustee, why would you want the liability heaped upon you, your pension board, and plan for being responsible for someone's DROP moneys after they have terminated DROP? Why would you wish to burden your administrator with “banking” type functions like withdrawals, distributions, checks, wiring retirees money, dealing with eventual RMD’s (Required Minimum Distribution) calculations at 72, fielding Pre-50 and 59 1/2 tax questions, ongoing investment/market questions, fielding numerous phone calls during turbulent market conditions, and more. They have enough on their plate.  

I truly don’t think the pros outweigh the cons for both parties.  The fund should not take on the liability and you can and should find prudent advisory alternatives elsewhere.  

 If you want YES answers to the above questions, let’s talk. It is what we do. You are our niche. Retiring soon? Already? Hope to? Not sure if you can? Left your DROP money in your plan, but open to looking elsewhere?   Let’s talk! We come to you as we serve 1st Responders (and more) at 150+ departments around Florida from Ocala to South Beach. 

Have a question? or wish to meet? Let's talk and make it happen so simply contact me at 954-494-2134 or [email protected]

 Sincerely,

Mark T. Burnam

Director of Client Services at The Second Half Team* **

When are we in your area next? Text DROP to 22828 for our Upcoming Travel Schedule   (sent no more than once every 4-6 weeks)

* This article is intended to be an educational ABC's piece and are not promises or guarantees of financial security. While The Second Half Team is working with 500+ First Responders (and more) at 200+ departments/agencies around Florida we are independent of and not affiliated in any way with the Florida Retirement System (FRS) and hence any/all information provided by the Second Half Team has not been approved or endorsed by FRS or any Chapter 175 pension plans/board members/or otherwise. Past performance is not a guarantee of future results. This article is for informational or client communication purposes only and is not a solicitation or recommendation to buy or invest in any product or service. Investment in any financial instrument can carry significant risks. Past performance is not a guarantee or indication of future results. Investors are reminded that investing involves risk, including the possible loss of the principal amount invested. You should carefully consider the investment objectives, risks, charges and expenses of Swaine & Leidel Wealth Services, LLC, dba the Second Half Team (the "Firm") before investing. Information on the Firm and its advisors can be found on SEC's website https://adviserinfo.sec.gov. The CRD number for the Firm is 163454. Investment advice is provided by Swaine & Leidel Wealth Services, LLC, dba the Second Half Team, and SEC Registered Investment Adviser. We are not CPAs or Tax Advisors – you should consult with your CPA or tax advisor regarding your particular tax situation. We are more than happy to discuss with them as well if you so desire. 

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