Keys to successful retirement saving

Start early
Contribute as much as you can to your savings plans as early as possible. That way, your savings have a longer time to benefit from potential investment growth—and you enhance your ability to reach your retirement goal. A delay of even a few years could cost you thousands of dollars.

Pay yourself first
One secret to building financial security is to regularly pay yourself first. Instead of paying your bills first and trying to save what is left over, set money aside before you pay your bills. This way you can develop a budget around saving, and not the other way around.

Automatic payments, such as payroll deducted contributions or automatic contributions from your checking or savings account, not only help build your savings but also make it more affordable because you are budgeting for smaller, regular amounts.

Diversify your investments
You’ve heard the old saying, “Don’t put all your eggs in one basket.” This is the basic idea behind diversification.

Putting your money in different types of investments can help you achieve a more consistent long-term performance than you would likely achieve if you put all your money in a single type of investment. In theory, when certain types of investments are declining in value, other types are gaining value.

Give your savings a raise
Is your contribution amount due for a raise? It is important to look at your contribution level annually and move toward maximum contributions in your 403(b) and/or IRA.

Because some districts process adjustments to your 403(b) contributions only once or twice per year, check with your business office as to when you are allowed to make changes and plan accordingly.

Want to know more? Give us a call at 1-800-279-4030.

Retirement FAQ

While we talk with members about a number of retirement savings topics, there are some questions that our financial planners often hear that we’d like to share with you, along with suggestions to consider.

Remember, as a Wisconsin public school employee, you have access to our financial planning services, where you can explore these questions or others you may have.

Most asked retirement questions at Member Benefits
I just opened a 403(b) / IRA. How do I access my info?
If I want to make both pretax and Roth (after-tax) contributions to my 403(b), do I need to open two accounts?
Can I retire?
Is my account invested the right way?
Should I keep my life insurance?
When should I start Social Security?
How should I draw my Wisconsin Retirement System (WRS) pension?
How can I reduce my taxes on my required minimum distributions (RMDs) at age 70½?
Can I access my retirement accounts before age 59 ½ without penalty?

I just opened a 403(b) / IRA. How do I access my info?

The first time you sign in to yourMONEY to manage your retirement account(s), your login ID will be your Social Security number and your password will be your date of birth. You will then be asked to change your login ID and password before you can move forward in the site.

Visit yourMONEY to learn how to create an online account.

If I want to make both pretax and Roth (after-tax) contributions to my 403(b), do I need to open two accounts?

No. If allowed by your district, a 403(b) can house both pretax and after-tax contributions.

Can I retire?

The answer is complex and depends on many factors, but a few basics to consider from a financial standpoint include:

For more in-depth assistance, consider taking advantage of our fee-based financial planning services. You can get a comprehensive analysis of your investment portfolio or determine whether you’re on track to meet your retirement goals. If you’re within ten years of retirement, we’ll guide you step by step using our highly focused retirement planning tool.

Is my account invested the right way?

Member Benefits offers three different ways you can invest your funds to help meet your investment needs. These options include a target retirement fund option, “do-it-yourself” option, and advisor managed portfolio option. A few years ago, Member Benefits developed advisor managed portfolios to help reduce the fear of making poor investment choices. After completing an “Investor Suitability Profile Questionnaire” meant to determine your tolerance for risk, you can select one of the five predefined portfolios based on the results of your assessment. The advisor managed portfolios are selected from pre-vetted mutual funds offered by Member Benefits, require a small investment of time, are low maintenance, and auto-rebalance each year so your investment mix aligns with your investment goals. Learn more about our advisor managed portfolios or speak with one of our RIS Specialists for additional information about our advisor managed portfolios and other investment options available to you.

Should I keep my life insurance?

Sometimes it makes sense to keep it, and sometimes not as much. A few questions to help guide your decision include:

When should I start Social Security?

According to the Social Security Administration, you can start benefits as early as age 62 or as late as age 70. You either collect a smaller amount per month over a longer period of time, or draw a larger amount per month over a shorter period of time.

One main factor to consider when making the decision is how your taxes may be affected. Social Security is not taxed on the Wisconsin income tax return, and up to 15% is not taxed on your federal income tax return.

However, if you want to wait to take your benefit and draw from pretax retirement accounts to make up the difference you could be drawing from Social Security, 100% of that will be taxable on both your federal and state income tax returns. In addition, you’ll be giving up potential growth on the funds you drew from your retirement savings accounts. Many people don’t consider this when deciding on what age to begin drawing their benefits.

How should I draw my Wisconsin Retirement System (WRS) pension?

Keep in mind when talking to your peers that everyone’s situation is unique, so basing your decisions on theirs may not be what is best for you in the long run. Further, Employee Trust Funds (ETF) employees are not allowed to make specific recommendations.

Fortunately for you, Member Benefits’ planners are trained and licensed to help you decide which options work best for you, and we test various options (including the accelerated method) when we do the fee-based Retirement Income Analysis for those within ten years of retirement.

How can I reduce my taxes at age 70½?

Prior to the new changes in tax law, you may have deducted charitable contributions on your itemized deduction form Schedule A. However, for tax year 2018, your standard deduction might be greater than your total itemized deductions, leaving your charitable contributions “on the table,” so to speak. This means 100% of your RMD (including the amount you gave away as a charitable contribution) will be included in taxable income.

Alternatively, once you are required to start taking RMDs from your pretax retirement accounts, you could choose to have your Traditional IRA RMDs contributed directly to charity. This is known as a Qualified Charitable Distribution (QCD). The QCD is excluded from taxable income.

QCDs only apply to age 70½ distributions from Traditional IRAs. However, you may still be able to take advantage of this if you only have a 403(b), or if your spouse has a 401(k). Our financial planners can help you calculate how much you might want to rollover to a Traditional IRA that will generate a QCD equal to the amount you intend to gift each year. You will still have an RMD from your 403(b), but it will be a smaller amount.

Another option is to take your full RMD at the beginning of the year instead of at the end of the year. If you don’t need the money and are looking for a place to reinvest, consider the Personal Investment Accounts (PIAs) offered through WEA Member Benefits. By reinvesting your RMD outside of retirement accounts early in the year, growth during those twelve months would not be included in future years’ RMDs.

If you have not yet reached age 70½, we might be able to take some strategic steps now, such as Roth conversions, gifting, or distributions reinvested in a PIA to reduce your RMDs in the future. The lower tax rates passed by Congress are due to sunset in 2025. Talk to your tax advisor to determine the best action for you.

Can I access my retirement accounts before age 59 ½ without penalty?

Maybe. If you want to retire before age 59½ and begin taking distributions from your 403(b) or 401(k), you will generally be subject to not only income tax, but a 10% early distribution penalty. However, the “Rule of 55” is an exception. If you leave the employer under which your retirement plan is held during or after the year you turn age 55, you are not subject to the penalty for withdrawals. If you have a retirement account with a former employer, it may make sense to move it into your current employer’s plan if you plan to use the Rule of 55.

This exception does not apply to Traditional IRAs. You have to wait until 59½. This is a word of caution should you be approached by an outside broker recommending you move your 403(b) or 401(k) to a Traditional IRA.

Take advantage of our financial planning services

Visit weabenefits.com/fps or call 1-800-279-4030.

*Consultation is free; however, if you choose to invest in the WEA Tax Sheltered Annuity or WEAC IRA program, fees will apply. Consider all expenses before investing. Must meet eligibility rules to participate.
**Fee-based service. Must meet eligibility rules to participate. Family members may also be eligible. Call for details. Wisconsin residency required.
Fees and services subject to change. Terms controlled by signed service agreement.

Wondering what to do with your required minimum distribution?

If you find that you don’t currently need to use your required minimum distribution from a Traditional IRA, SIMPLE IRA, or SEP IRA and are wondering what to do with it, consider placing all or some of it into a Personal Investment Account (PIA) with Member Benefits.

The PIA is an option for investing your money outside of a retirement account. There are several tax benefits to this type of investment compared to a savings, checking, or certificate of deposit account. And, there is just one low maintenance fee of 0.35% annually on the balance of your account. There are no broker’s commissions, management fees, or confusing annuity riders—just the one fee. (Mutual fund operating expenses will still apply.)

Visit weabenefits.com/pia or call 1-800-279-4030 for more information about this investment opportunity.

Setting your own course to a secure retirement

Continued from Charting a course to a secure retirement.

You can’t know everything that will happen in your life—but if you recognize what the challenges may be, anticipate them, and plan for them, the chances of overcoming obstacles and achieving your goals are much greater. Here are seven things you can do to be prepared.

  1. Know where your money is going. Whether or not you’re in charge of the household finances, you should have a good idea of what accounts you have (as well as the ability to access those accounts), what your monthly expenses are, and how much you are saving. Be part of the decision-making process and you’ll build financial confidence.
  2. Save now, no matter what the amount. Even if you can only put a small amount toward retirement, do it today. It’s never too early or too late to get started. Putting just an extra $20–$50 per paycheck still adds up over time. Further, as you pay off loans, reduce or eliminate expenses, or get a raise, take that amount and redirect it to your retirement savings. You won’t miss it because you’re already living without that extra money—but you will welcome it later.
  3. Build your savvy. Seek out reliable information on saving for retirement to help you make good decisions. Some of the basics you should learn about before investing include how fees impact your retirement account, diversification, risk, and the types of investment products available. You should also learn what retirement income sources are available to you through your employer and how much you need to save to retire comfortably. Take advantage of our free financial education and individual consultations as well as our financial planning services to help you evaluate your financial picture and create a strategy that works for you.
  4. Keep retirement savings a priority. Because women tend to assume the role of caregiver, they often put their own needs (including financial) last. But your mantra should be, “Pay yourself first.” It can be tempting to give your kids a free ride to college, but they can fund their college costs with loans, scholarships, grants, and their own hard-earned cash. There are no loans to pay for retirement.
  5. Consider long-term care insurance (LTCi). With an LTCi policy, you will have more choices about living situations and types of care if you or a partner are ever in need of assistance. Only LTCi is designed to cover the cost of long-term care services, which are generally not covered by health insurance or Medicare. It may just help save your finances.
  6. Get help with caregiving. Whether you are caring for aging parents or needing help yourself, take time to research all of the community resources available. You may be able to find low-cost assistance or receive financial aid for certain types of care. Contact your local Area Agency on Aging or disability resource center. If you need help negotiating with family members over the cost of care or time involvement, you may also find agencies that help mediate those decisions.
  7. Maintain your health. No one can predict what will happen in the future, but maintaining your mental, physical, and social health will reduce your odds of costly illness later.

Charting a course to a secure retirement: Member stories

Continued from Charting a course to a secure retirement.

Everyone’s life experiences are different. The stories these three Wisconsin educators share illustrate that point and may inspire you to take some positive steps now as you embark on your own financial voyage.

Peggy

Peggy Weber just finished up her final weeks at Osceola Elementary. At just age 55, she’s retiring after 34 years in education. She’s feeling good about it and she should because she did a lot of things right—intentionally or not.

“My dad really encouraged me to get into education. His family had gotten through the depression with the help of his mother’s steady income as a teacher in a one-room school house, and he felt there was security there. I started college as a business major but he kept nudging me. I finally took some education classes and really loved it.”

Peggy has always been a saver. “The notion of spending what I have to and saving what I can has been my philosophy all my life without really thinking much about it.”

She started a 403(b) early on with just a small monthly amount. “My husband had a 401(k) at his workplace, and I thought I should have my own investments. Because the contributions were payroll deducted, I never missed the money.” Peggy made a point of increasing her contributions as her salary increased until she maxed out.

“I understand the idea of sacrificing the wants of today for long-term gains. I think that comes from growing up on a farm. I’m fortunate to have had that messaging and lucky to have made good decisions at the right time.”

Peggy was married for 30 years and had two children. “My children were born in May and June so I didn’t lose time from work for maternity leave.” She divorced several years ago which had a financial impact, but Peggy says it was manageable because they were both conservative in their spending and she had her 403(b).

Last year, Peggy had a Retirement Income Analysis with Brenda from Member Benefits. “I went into the process kind of blind. I knew I had done a lot of things fairly well, but I didn’t feel confident I was really OK. After the meeting, I just floated out of the office. I felt like a million bucks. And, I thought of my dad who passed away seven years ago. It was a moment of appreciation. ‘Dad, I’m going to be okay—more than okay.’”

Janice

Janice Delo taught 7th grade science in Milton for 25 years. She retired earlier than she expected because of her husband’s declining health. “We wanted to travel and do other things on our bucket list while it was still possible. It was a difficult decision because I loved teaching, but I’m glad now because he was gone a lot sooner than expected.”

Jan’s husband, Les, passed away in April. “We were about 50/50 with managing our finances. It helped that we were on the same page about spending and saving. We made decisions together. We lived a moderate lifestyle which allowed us to put money in our 403(b) and IRA accounts. And, our master’s degrees gave us a bump in pay.”

One decision they made was to pay up their long-term care insurance policies a few years ago when the benefit was being eliminated. “It was a really nice benefit and a good decision because, eight months later, Les went into the hospital and then to a care center and never came home again. We only tapped into the policy for about a month and a half, but it was still comforting to know it was there and that I will have it, too.”

Jan thinks that most people will need long-term care services at some point. Her mother has Alzheimer’s and just moved into an assisted living facility. “She doesn’t have long-term care insurance so she’ll have to spend down her assets and get Medicaid,” Jan concedes. “After being in the facility with Les and seeing what’s involved, I understand why it costs so much. We didn’t have kids and I want to make sure everything is set up for those who will take care of my estate. I’m very happy to have the insurance.”

After Les died, there were a lot of financial tasks to deal with. “I didn’t have any idea of what needed to happen. I had an eldercare attorney that was very helpful in guiding me through the process. I also met with Brenda at Member Benefits and I consolidated most of my retirement accounts because it’ll be easier to manage.”

Pat

“What really changed things for me was when my husband was diagnosed with cancer in 2003. He passed away nine months later. Suddenly, my family was down to one income. I was totally unprepared. Blindsided,” shares Pat Howell, a retired teacher from Monona Grove School District.

Pat was left with three children (two in college) and all of the family finances to tend to. “We hadn’t talked about our finances before Brian passed away, so I wasn’t sure what I was going to do.”

Fortunately, Pat had started putting money away in a 403(b) when she started in the district in 1991 and she also took advantage of opportunities to learn about finances by attending seminars offered by WEAC’s Bob Moeller. “Learning about and managing finances has been an ongoing part of life. It’s a different discipline with it’s own language, and I have relied on others to know that language and help me understand it,” Pat says.

She had to make some big adjustments after Brian died. Bob helped her set up a plan and figure out the big picture. “It was a huge benefit to have access to Bob back then and now Brenda at Member Benefits. They have helped me find ways to save, set goals, and create a plan to achieve those goals.”

Pat says the biggest obstacle for women in becoming financially secure is the tendency to rely on someone else. “Be as active and knowledgeable as you can in managing your money. Knowledge is power. That’s not to say you have to figure everything out by yourself. You don’t. Other people can help you. Having Member Benefits available for educators is a great asset. Take advantage of this resource.”

Losing her husband so soon was not how Pat thought things would go. “You just never know what direction your life will go in,” she explains. Pat managed to get her three children through college. “It was a pay as we go process. We worked as a team. They were expected to contribute and they did,” she says proudly.

She also retired pretty much according to plan…because she had a plan and she worked it.

Charting a course to a secure retirement

In fact, women are 80% more likely than men to be impoverished at age 65 and older (National Institute on Retirement Security). And they seem to be aware of this—just 10% of women feel very confident in their ability to retire (Transamerica Center for Retirement Studies).

This is often because women have to navigate unique barriers in order to secure their retirement. While the following factors put many women at a financial disadvantage when it’s time to retire, there are steps they can take to help minimize or eliminate them.

And what better way to learn than from your colleagues in education. Peggy Weber, Janice Delo, and Pat Howell all share their own experiences and knowledge gained to help break down some of these barriers and inspire you be the captain of your own financial journey.

Lower lifetime earnings

Women’s lifetime earnings are often lower than men’s. When you factor in the income disparity women still face (women earned 81.8% of the median weekly earnings of men in 2017, according to the Bureau of Labor Statistics) and the higher likelihood that women will take time away from the workforce to raise kids or care for aging parents, women are more likely to have lower earnings overall.

These added responsibilities often have a negative impact on their finances in several ways. Women who are caregivers are more likely to arrive late or leave early from work, cut back to part-time hours, decline promotions, or leave the labor force all together. This translates into less in Social Security payments, pension benefits, and retirement savings (whether employee or employer contributed).

It’s also common for women to delay saving for retirement to pay for college or to help out other family members. And those who don’t start saving for retirement early miss out on the benefits of compound interest, which is more difficult and costly to make up for later on.

“Start saving early, even if it’s just $10 a month. It adds up, and you’ll never regret it.” – Janice

Less tolerance for risk

Women tend to take fewer risks with their financial investments than men do. Unfortunately, low-risk investments usually earn relatively low returns (marketwatch.com). By investing too conservatively, women run the risk that the rate of inflation will outpace the rate of return on their investments. This may increase their likelihood of facing financial uncertainty in retirement.

“I’m conservative with money day-to-day, but I’m moderately aggressive as an investor. It’s worked well for me. I just set it, forget it, and let it grow.” – Peggy

Chronic illness

Because women live longer, they are at greater risk for having a chronic illness. Women are also less likely to have a partner at home to care for them if they suffer from chronic illness, which means they must shoulder additional costs related to hospital stays or long-term care services

More than 70% of nursing home residents are women, and among people age 75 or older, women are 60% more likely than men to need help with one or more activities of daily living, such as eating, bathing, dressing, or getting around inside the home (AARP)

“I regret not understanding the value of the long-term care insurance plan we had at the district. When it was being eliminated, we had the chance to pay it up and I didn’t. That was a mistake.” – Peggy

Being on their own

Women are more likely to be on their own later in life because:

Also according to Pew Research, 90% of women will be the sole financial decision makers for their households at some point in their lives. The loss of a spouse—whether by death or divorce—typically results in a lower standard of living and less financial security. And, because women with partners are quite often not involved in their household finances, they may struggle and feel ill-prepared to make financial decisions once they’re on their own.

“I got help after my husband died. It helped me to set goals and put together a plan to achieve them.” – Pat

Adjusting your sail

By taking the time now to plan for your financial future, you may gain peace of mind knowing that you’re doing all you can to provide for yourself and your family. And in our busy lives, we could all use a bit more peace of mind. In the end, it’s all about you, your goals, dreams, and financial success.

Ready. Set. Grow. Open an IRA account today

Fees matter.

The number one factor in determining your rate of return—after asset allocation—is cost. Fees eat into your bottom line, so you’ll want to minimize the fees you pay. Learn more about fees.

Tax advantages.

Increase your retirement savings and take advantage of tax benefits. Traditional IRAs give you tax-deferred growth and possible tax deductibility now, while Roth IRAs offer tax-free growth, meaning no taxes later on. Try our Roth vs. Traditional IRA calculator.

Know your limits.

If you’re not maximizing your contributions, you may wish to re-evaluate the amount you’re putting toward retirement. Not only do you lower your taxable income, you ensure you’re doing everything you can to reach your retirement goals. Review contribution limits.

Learn more about the 403(b) and IRA

Each section has information, tools, and resources to help you understand what you need to consider when choosing a retirement plan.

Learn about the Roth, investment strategy, risk tolerance, choosing beneficiaries, and much more.

Protecting a legacy: Participant level protections

Effective January 1, 2023, the Prudential Guaranteed Investment was renamed to the Guaranteed Stable Investment. The Prudential Retirement Insurance & Annuity Company (PRIAC) was purchased by Empower Annuity Insurance Company (EAIC). As you read this article, any reference to PRIAC should be replaced with EAIC. Any reference to Prudential should be replaced by Empower.

A detailed evaluation of the Guaranteed Investment and our partnership with Prudential Retirement Insurance and Annuity Company (PRIAC) in their role as manager of the account wrapped up last fall. In the end, the team found that under the current market conditions, PRIAC still provides one of the strongest guarantees and crediting rates in the marketplace.

New participant level protections

Continuing with PRIAC brought the addition of participant level protections (PLP) to the Prudential Guaranteed Investment Account (PGI)—403(b) and IRA. These protections kick in to preserve the guarantee of the fund and are state of the art in terms of plan participant protections. The PLP puts controls in place that effectively restrict withdrawals if certain economic conditions exist (simultaneously) that would jeopardize the safety of the fund and those participating in it. The PLP cannot be activated until July 1, 2018.

Benefit responsive withdrawals are not impacted

It’s important to note that the fund will still be benefit responsive, meaning:

What triggers the PLP?

Certain transfers or withdrawals may be limited to 20% of a member’s balance per calendar year if certain market conditions exist. There are three triggers that all need to exist at the same time before the PLP kicks in:

FIRST…
The yield on one or more specified benchmarks is greater than or equal to the crediting rate of the PGI.

SECOND…
The total cash going out from the PGI exceeds a specified threshold. Basically, more cash is going out than coming in.

THIRD…
The market value of the underlying investments supporting the PGI is less than or equal to the PGI book value. (The book value of an asset is its original purchase cost, and market value is the price that could be obtained by selling an asset on a competitive, open market.

Until all these conditions exist at the same time, the PLP is not in effect and participants can freely withdraw/transfer PGI funds in either program.

If all the conditions exist at the same time, the PLP is activated and is in effect for the remainder of the calendar year.

What happens once the PLP is triggered?

Once the PLP is activated, the amount of PGI withdrawals and/or transfers for the year are measured against the participant’s beginning of the year PGI balance. (For 2018, however, the account balance will be as of February 1.)

If the withdrawal/transfer amount is greater than 20% of the participant’s first of the year account balance, a participant will only be able to make transfers and withdrawals that are benefit responsive for the remainder of the year. The 20% PLP limit is tracked separately for the 403(b) and IRA PGI accounts.

Transaction type Counts toward PLP limitRestricted after limit is met
Benefit responsive withdrawals*YesNo
Transfers between PGI 403(b) and IRANoNo
Transfers from PGI to another investment inside or outside of the WEA 403(b) and IRA YesYes
Auto-rebalance or initial enrollment in advisor managed portfolio resulting in transfer out of PGIYesNo
All other non-benefit- responsive transfers or withdrawals from PGI YesYes
*Benefit responsive withdrawals are not the same for 403(b) and IRA accounts as noted in the article.

While the PLP may feel restrictive, it is important for the protection of members and the longevity of the fund. Other providers often impose more restrictive PLP terms.

Questions? Call 1-800-279-4030.

 

*Interest is compounded daily to produce a yield net of Empower’s administrative fee of 0.60%. Empower Annuity Insurance Company (EAIC) is compensated in connection with this product by deducting an amount for investment expenses and risk from the investment experience of certain assets held in EAIC’s general account. For more information, go to weabenefits.com/empower.

Protecting a legacy: The update

Effective January 1, 2023, the Prudential Guaranteed Investment was renamed to the Guaranteed Stable Investment. The Prudential Retirement Insurance & Annuity Company (PRIAC) was purchased by Empower Annuity Insurance Company (EAIC). As you read this article, any reference to PRIAC should be replaced with EAIC. Any reference to Prudential should be replaced by Empower.

In the Summer 2017 issue of your$, we shared that we were in the midst of a detailed evaluation of the Guaranteed Investment and our partnership with Prudential Retirement Insurance and Annuity Company (PRIAC) in their role as manager of the account.

In that article, “Protecting a Legacy,” consultants Mike Driscoll and Jim King—both with a vast amount of knowledge in the stable value investment realm and firsthand experience with the Guaranteed Investment—and Member Benefits staff, explained the objectives of the project, noted possible changes, and promised an update in January…so here it is.

Below, Mike, Jim, and Member Benefits respond to questions about the evaluation results and what it means for members like you.

Why do an evaluation of this scale and what did it entail?

Member Benefits: Just as we monitor our mutual fund offerings to make sure they continue to meet our standards, we monitor the Guaranteed Investment. We also regularly evaluate PRIAC in their role as manager of the account to ensure the best interests of our participants are being served. This evaluation was more comprehensive. It included sending out requests for proposals (RFP) to over 30 companies to identify options and to determine if the program as offerednow is still competitive.

Mike: The RFP allowed us to evaluate PRIAC—their fees and crediting rate—and compare it to marketplace alternatives.

What were the results of the RFP?

Mike: The team looked at the entire stable value marketplace for traditional providers that offer stable value products to 403(b) plans. There were five organizations we felt could be good partners for Member Benefits and the membership.

Jim: The overarching goal was to see if there was a better way to offer the stable value fund, whether that meant to change to a new provider or to diversify the fund by adding another stable value manager or guarantor. It took about 10 months to complete the analysis.

Mike: Under the current market conditions, PRIAC still provides one of the strongest guarantees and crediting rates in the marketplace, and we decided not to diversify the portfolio at this time.

In the last article, we noted that some companies being vetted were rated higher than PRIAC. We also discussed PRIAC’s designation as a Systemically Important Financial Institution (SIFI) by the Financial Stability Oversight Council. How did that play into the outcome?

Jim: PRIAC remains very strong in the marketplace and they carry strong financial strength ratings that are the basis of the guarantee they are able to offer. They are a leader in stable value and still represent a very solid investment and partner.

Mike: Some firms were rated slightly higher, but there is no concern that PRIAC is going to run into trouble. Although PRIAC is a SIFI (“too big to fail”), the designation did not play a significant role in our decision.

The benefits of diversification in the Guaranteed Investment account were discussed at length in July. Why was it decided not to diversify?

Jim: The analysis the team went through was very much like a cost-benefit analysis. We determined that diversification would be a desired concept but not at any cost. We concluded that the cost of diversification, meaning the impact on the crediting rate, did not justify the additional benefit of diversification. This is because we did not find another provider that could offer a better rate and contract than PRIAC at this time. Introducing another guarantor would have negatively impacted the crediting rate.

Mike: We are conscious of the fact that diversification is important, but we won’t do it if it will significantly impair what the membership has today. We won’t take a step back just to diversify.

Member Benefits: Current market conditions are not conducive to diversification. The benefit of the contract with PRIAC is that it’s one of the most flexible contracts in terms of the ability to diversify when market conditions are right. That means the cost of diversification could be offset by the benefits of diversification in a higher interest rate environment. We will be monitoring market conditions and the investment rate environment, and if it appears there is a window of time when it makes sense to diversify, we will reevaluate it.

“This program is so unique and important to the membership, we will do whatever we need to do to ensure the viability of this program for long-term investors in the future.”

You predicted in July that the rate may go lower before stabilizing. The 2018 rate is 3.15%—0.35% lower than 2017. So you were right. What needs to happen for that rate to turn around?

Jim: Market interest rates would have to increase in order for the crediting rate to go up, but it would rise at a slower rate than the market. Basically, the crediting rate of stable value funds lag the market. So when interest rates are increasing, stable value fund rates should increase, but more slowly. The same is true when interest rates are decreasing. Stable value fund rates should fall but more slowly.

A few members have said they can get a higher rate someplace else. That contradicts what you have said about what’s available. How do you explain that?

Mike: There may be stable value funds that provide a slightly higher crediting rate to members—but that may come at a significant cost. Certain stable value funds tie up your money for up to 10 years. So you are giving up significant liquidity to get that rate. Members may not realize that while they have the freedom to move their money from Member Benefits, they may not have that freedom with another company.

Member Benefits: We put a high value on liquidity for members. We do not have a surrender period that ties up your money for extended periods of time—typically 6‒10 years with other companies.

Jim: Here’s an example. Let’s say a member moves to an account for the 4% guarantee, but it has a 10-year surrender period. They will get 4% even if the market drops, but if the market goes up, they will miss out on the ability to earn a higher rate for 10 years because of the surrender period.

Withdrawal restrictions were another anticipated change. What does that look like?

Jim: Participant level protections (PLP) have been developed that will increase the safety of members who are in the fund. Going forward, the fund will always be benefit responsive, meaning that members will always be able to receive their guaranteed amount upon retirement, disability, death, termination of employment, and as required minimum distributions at age 70½. Members will be able to withdraw under those conditions at all times—no exceptions. Certain transfers or withdrawals may be limited to 20% of a member’s balance per calendar year if certain severe market conditions exist. These protections kick in to preserve the guarantee of the fund and are state of the art in terms of 403(b) plan participant protections.

Mike: There are three triggers before the PLP kicks in. First, certain specified benchmark yields would need to increase above the crediting rate of the fund. Second, the cash flow of the fund would have to be negative, meaning that the fund is being subject to withdrawal requests that exceed the contribution level received during that calendar year. And third, the market value of the underlying investments supporting the fund is less than the contract value. If these three things happen at the same time, then and only then will a participant be limited in moving money out at the 20% per year limitation.

Member Benefits: Other providers often impose more restrictive PLP terms. The PLP cannot be triggered before July 1, 2018 and is based on the account balance at the beginning of the year (February 1 for 2018).

Based on your experience and knowledge of this account and stable value funds, how do you feel about the results of this evaluation?

Mike: Members should feel good and be proud of the work the team did because we are looking out for their best interest and striving to have the best investment programs available for Wisconsin public school employees. The team is open to making changes that will improve the program. However, we will not make a change if it is detrimental to the member. We have stayed true to the principles of why the program was put together: for the protection and safety of principal and to get a reasonable rate of return.

Jim: I feel very good the process was conducted with the benefit of members being paramount and that the current contract with PRIAC is a state-of-the-art 403(b) contract that does not exist elsewhere. The process was a complete review of what is available in terms of best practices in the stable value world. It set a foundation for Member Benefits to move very quickly if market conditions are supportive of diversification, meaning we have done all the legwork related to the due diligence process and completely vetted the marketplace.

What are the next steps?

Jim: We will be diligent in monitoring market conditions and we are ready, willing, and able to act if conditions are appropriate.

Mike: The team does not view this as the end of the process but rather as part of their ongoing due diligence.

Member Benefits: It’s our responsibility to protect the members and their investments. This program is so unique and important to the membership, we will do whatever we need to do to ensure the viability of this program for long-term investors in the future.

If you missed the previous article…

 

*Interest is compounded daily to produce a yield net of Empower’s administrative fee of 0.60%. Empower Annuity Insurance Company (EAIC) is compensated in connection with this product by deducting an amount for investment expenses and risk from the investment experience of certain assets held in EAIC’s general account. For more information, go to weabenefits.com/empower.