Archives for February 2022

New tools, fewer fund reviews and an evolving retirement landscape await the Federal Retirement Thrift Investment Board in 2022. The group, which oversees the Thrift Savings Plan, the federal employee 401(K), announced a series of changes at its latest meeting as well as forecasts for the continued pandemic economic recovery.

TSP participation rates for the Federal Employees Retirement System — the system for feds who have joined government service since 1987 — and active duty uniformed services were at all-time highs in January: 94.9% and 81.3%, respectively. Tee Ramos, FRTIB director of participant services, said an additional 3,400 newly separated participants began receiving monthly payments last month, joining the 241,642 participants who were already receiving payments.

The amounts of contributions to and disbursements from the fund have increased year over year since 2012, but the net cash flow has slowly decreased in that time. The TSP’s balance dropped to $780.6 million in January from $811.7 million in December, and from $792.6 million in November, according to FRTIB’s January 2022 report.

However, from a personnel side, the pandemic and supply chain issues have affected Participant Services’ ability to maintain staffing at contact centers, while they hope to be back on track in March thanks to a hiring and training pipeline.

Ramos said the turnover rate is unusually high, above 90%, or more than double what it normally is. Vendors have launched campaigns to recruit previously terminated employees, raised pay during contract negotiations to be more competitive, and people hired in January or early February are winding down training and will be ready to “hit the phones in March.”

Fortunately for the TSP’s staff and participants, new digital tools through the ThriftLine Service Center are scheduled to launch midway through the year, as part of FRTIB’s multi-year modernization effort called Converge. These include a mobile app, virtual assistant, live-agent chat, electronic signature and electronic payment options, and a secure account inbox for statements and other transaction notices, according to a letter to TSP participants.

Program Manager Tanner Nohe said readiness testing will complete on time, and performance testing will start next month. Agencies that will use the new payroll portal will be credentialed and trained through mid-March, Nohe said.

Blended Retirement System activity slows as legacy auto-enroll ends

One new metric for fiscal year 2022 is the BRS full matching contribution rate, which measures the percentage of active duty Blended Retirement System (BRS) participants deferring 5% or greater. BRS was created by the 2016 National Defense Authorization Act, combining the uniformed services’ traditional legacy retirement pension, or “defined benefit,” with a defined contribution benefit into the TSP. The BRS began in January 2018, and while those under the legacy system were grandfathered in there was also an opt-in period that ended in 2019.

For the first quarter of 2022, participation in the BRS full matching contribution was at 69%, lower than the 80% target rate set by FRTIB. Dennis McNulty, the board’s Strategic Performance Branch chief, said this was driven mainly by auto enrollees who were enrolled prior to the increase of the default contribution rate.

“This is the first quarter that we’ve combined the deferral rates for both BRS auto enrollees as well as BRS opt-ins into a single metric. We had previously only included the BRS participants who had opted in,” he said. “Based on a review of historical data, the full matching rate for the combined BRS population has steadily increased over the past year, and we expect this metric to continue to increase going forward to the impact of the 5% deferral rate.”

Fewer fund reviews and faster target dates

FRTIB also voted Wednesday to begin reviewing investment policies on an annual basis going forward, rather than on the quarterly schedule it currently uses. Under the Federal Employees’ Retirement System Act of 1986, FRTIB has to review the polices but the law does not specify how frequently.

A study of regulatory and client guidance, industry surveys and the practices of large public defined-contribution plans turned up little in the way of clarity, except that annual reviews are more common than other large public investment fund clients. The board also considered that quarterly reviews could give the impression that recent investment performance or trends motivate board policy, while annual reviews are more in line with the long-term nature of the TSP’s investment policy.

“Put simply, TSP’s current circumstances are that the TSP offers a small number of passive index strategies, supporting four of the five funds that were created by statute. Changes in the type and number of funds is extremely rare, as are changes in the funds’ benchmarks,” said FRTIB Chief Investment Officer Sean McCaffrey. “Review of the funds in board meetings consists of monitoring of the success of the passive investment strategies. In other words, the funds are not actively managed, and deviations from benchmark resulting from investment management are expected to be small.”

Employers find it harder to plan for workers’ retirement

Now that FRTIB is using a two-manager structure for the TSP, State Street Global Advisors, which manages part of the C, F, I and S funds, gave board members some future outlooks for 2022 and beyond.

Brendan Curran, D.C. head of U.S. Investment strategy for State Street Global Advisors, said target date funds, like the TSP’s Lifecycle funds, are gaining popularity and have delivered higher median returns and lower volatility for participants, compared to portfolios that a participant self-constructed. Participants may not always construct allocations that are optimal and may not check their balance frequently because of their busy schedules or other priorities, Curran said.

Where State Street is focusing now, are the future compounding challenges of retirement planning: People living and working longer, and benefits structures getting more complicated. He said a recent convening of 13 plan sponsors revealed that employers need more tools to determine when their workers are likely to retire, and they are changing their philosophies around the retention of retiree assets to drive scale and keep costs low for all plan participants.

“Additionally, we see more and more plan sponsors revisiting the distribution options that are available in plan so that it’s not so black and white that participants have to keep all their savings in plan or take them all their assets out on one lump sum, instead looking at systematic and partial withdrawal technology,” Curran said, adding that one solution may be to pull target dates forward.

Personally, things are going pretty well. Winter is almost over. I made it to work yesterday in 17 minutes. And then had my choice of subsidized parking spots. Our multi-choice office coffee maker works like a charm. And its free. So life is pretty good. That said there is, as always, a downside, including a furnace that doesn’t generate heat. But also…

Both my local supermarkets are running low on cat food. That’s important when shopping for your daughter who owns/is owned by a bottomless pit mouser. Princess Leaha, the cat, is a charmer. But she can also pack it away. And howl when hungry. On the economic front, my local gas station is getting $4.46 a gallon. And last but definitely not least I, like millions around the world, wish Russia’s long-time President would get a new hobby. Maybe pickleball. That could solve a lot of problems. But…

It’d unlikely that peace will come overnight. If ever. Or that the supply chain problems will be settled anytime soon. Or that COVID will go away. Also we currently have a 21^st century version of the Cuba missile crisis except this time our adversaries say we are in their backyard and threatening them.

Although not fun, it is hard not to follow the news. For those paying attention or maybe actually on the front line — like many feds — it’s a time to seriously take stock. For many workers, especially those with the federal government, it could have an impact on whether they will retire early to, maybe, get some relaxation. Or whether the world and economic situation convince them they should work longer than planned. Maybe to add to their TSP, boost their starting annuity and keep inflation — which may be with us for awhile — from eating into their retirement annuity.

So what can people do — either by working longer or delaying their Social Security — that will boost and maintain their standard of living when they do decide to retire?

And whether you decide to slog on, or to retire early, there are things you can do to dramatically boost your retirement annuity when you do retire, or to help inflation proof it by delaying taking Social Security until age 70. Each year you delay taking it increases its amount by 8%. That’s a good investment under any circumstances. And guaranteed by the government. Many FERS retirees tap their TSP until they start collecting Social Security (at the higher value) then leave it alone and spend their Social Security.

Or you can choose to work longer and dramatically boost your lifetime federal annuity.

In May, benefits expert Tammy Flanagan was my guest on Your Turn. She pointed out that by working two more years, from age 60-to-62, an $80,000 per year employee can boost their starting annuity by almost $30,000. All the while drawing full salary, qualifying for pay raises and boosting their high-three average salary. Interested? After we did the show Tammy came up with this example of how delaying retirement can benefit you. A lot. Of course there are many other factors to consider. But money, as in having enough in your Golden Years, is a very big reason. You can adapt this example, of an $80K employee, extending work longer to get more in retirement. Here’s her example:

• Length of Service at age 60: 19 years
  • 19 x $80,000 x 1% = $15,200 x .90 = $13,680 (10% reduction under the MRA + 10 retirement because employee didn’t have 20 years of service at age 60 to qualify for an unreduced retirement)
• Length of Service at age 61: 20 years
  • 20 x $80,000 x 1% = $16,000 + $12,000 = $28,000(The extra $12,000 represents a FERS supplement of $1,000 a month payable to age 62 when retiree could file for SSA and get an even larger SSA benefit based on their lifetime of FICA taxed wages)
• Length of Service at age 62: 21 years
  • 21 x $80,000 x 1.1% = $18,400 + $24,000 = $42,480(The $24,000 represents the SSA benefit payable at age 62 of $2,000 a month from their lifetime of FICA taxed wages)

The difference between this person leaving at 60 vs. 62 is almost $30,000 a year more income for only two more years on the job. Of course, at age 62, the person who left at age 60 could claim their SSA benefit, but the gap would still be close to $5,000 a year or $600 a month in their FERS basic retirement benefit for life! In addition, they would have benefited from two more years at their presumably highest earning years added to their SSA record, and two more years of contributions and growth to their TSP accounts. A win-win, if you can stand to work longer.

Of course, they could delay SSA and withdraw $24,000 a year from their TSP account so that they could receive $43,000 a year by delaying claiming SSA to age 70, and then take much smaller payments from the TSP so that they will satisfy the required minimum distribution requirements at age 72.

Both plans are definitely worthy of your retirement planning options.

Tammy is now “in retirement” (which in her case means working full-time as a retirement consultant). She can be reached at Tammy@retirefederal.com.

Nearly Useless Factoid

By David Thornton

Source: The Economist

So is the grass always greener on the other side? Or just sometimes? Take, for instance, cost of living adjustments for federal, military and Social Security recipients. Bigger is always better, right?

Or is a super-sized COLA a yes, no, maybe or it-depends sort of thing?

If all goes well, to the White House plan, white collar federal workers will be getting a 4.6% pay raise in January, 2023. That amount, first reported by Federal News Network, will be in the budget the president sends Congress next month. While that is the largest proposed in many years it could, when the economic dust settles, be much smaller than the 2023 cost of living adjustment for feds, Social Security and military retirees. Final amount TBD later this year.

We won’t know the actual pay raise until Congress and the White House sign off on it. We won’t know the final amount of the COLA (for FERS, CSRS and Social Security retirees) until next October. It will be based on the rise in living costs (as measured by the Consumer Price Index) next year. Currently the inflation rate is 7.5%, the highest in 20 years. It could go up, drop or remain level. Time will tell. Last month CSRS and Social Security retirees got a 5.9% COLA and those under FERS got the 4.9% diet COLA. Both were among the biggest in years.

While many people confuse raises vs. COLAs, they are totally different statistical critters.

Many retirees miss the good old days of pay raises. Many active duty feds can’t wait to retire so they can (if they’re under CSRS) keep up with inflation. Sometimes each group envies the other. Both have a point.

Up to a point.

Sometimes.

Lots of people track federal pay raises and retiree COLAs. Back when Congress controlled increases for Social Security the retirees nearly always fare better than workers. At least on a percentage basis. But since adopting the “new” system, which links retirees to actual inflation (as measured by the CPI-W) while workers get raises based on fiscal situations and politics, the workers have done better (as in getting slightly higher percentage increases) than retirees.

Both sides can make a case that the other side is getting the best deal. But according to the bipartisan Congressional Research Service, the pay raise side has been doing better than the inflation-followers. That, it explains, is because pay raises were designed to reflect one thing, including productivity, while COLAs are supposed to guarantee retirees protection against inflation. Sometimes the two vary, greatly. Here’s the language from a CSRS Report dated Jan 10, 2010. It said:

Pay increases for current federal workers and COLAs for retired federal workers often differ because they are based on changes in different economic variables. Pay increases for federal workers are based on changes in private-sector wages and salaries, whereas COLAs for retirees are based on increases the general level of prices in the national economy. The objective of federal pay policy is to keep pay in the federal government competitive with pay in the private sector. Increases in pay for federal civil service workers therefore are indexed to increases in the wages and salaries of private-sector employees. Over time, wage increases reflect increases in the nation’s output of goods and services as well as price increases. Because wage increases in the private sector reflect growth in the productivity of labor, wages tend to increase faster than prices when measured over long periods of time. Social Security benefits and federal retirement annuities are indexed to increases in the CPI, which measures changes in the price of a market basket of consumer goods and services. Congress has linked COLAs for Social Security and federal employee pensions to the rate of increase in the general level of prices to protect retirement income from losing purchasing power through the effects of price inflation. COLAs ensure that a retiree’s income will purchase the same amount of goods and services after years of retirement that it purchased at the start of retirement. COLAs do not reflect increases in the productivity of people who are still in the work force, and thus they do not increase the real purchasing power of retirement income. COLAs do not make retirees better off financially; they merely protect them from becoming financially worse-off over time as prices rise.

Nearly Useless Factoid

By David Thornton

Source: USGS