By Frank Ricci
When I grow up, I want to be a retired firefighter!
Okay, that may have not been your response to that timeless question. However, about 10 years into your career this answer will hold more relevance. Long nights away from your family, missed baseball games and birthdays…we have all sacrificed our time for the greater good with the hope to be able to retire with dignity. This was the promise for your dedication to your community.
Truth be told, our system is under attack by those who will shake your hand with one hand and slash your budget with the other. Our political leaders are trying to trade that solemn promise for the latest talking point. We must stand together, get involved, and participate in politics. Accountability starts with you! While you must stay engaged, this fight will play out over the rest of your career. There are options that can put your family in a better position.
Deferred compensation is one way to guard and supplement your retirement. However, many of our members invest in these plans without asking the right questions. In episode 188 of our Politics & Tactics radio show, our two special guests were Bobby Halton and Tom Cama. Tom is a financial advisor for PlanMember Securities Corp Located in Carpentaria, California. I was blown away by the positive response to our show and, as promised, the following is the back and forth from the episode.
The big questions our members need to know is how to evaluate the fees, the company, and its rep. However, let’s start with the basics to get everybody on the same page.
What is a 457 plan? Do I have to contribute to it?
It is a voluntary deferred contribution that allows a firefighter the opportunity to save money tax deferred to supplement their pension and or other retirement plans. It is a firefighter’s 401k…..
What is the difference between a 457 and a 401K?
401k is traditionally designed for employees in the public sector, whereas the 457 is designed for municipal workers. The major difference is the 401k works best with social security because distribution on either plan cannot start penalty-free until age 59 and a half. As for the 457, distributions can begin once the participant has separation from service, in other words, when they retire from the department, no matter their age.
How much can I contribute to the plan on annual basis?
This year, the base contribution level has increased from $16,500 to 17,000. The age-50 catch-up has stayed the same, which is $5,500. Total contribution is $22,500.
Do the contributions have to come from my paycheck?
Yes, the contributions must come from payroll deduction or transfers from other 457 plans. You cannot transfer other retirement plans into the 457 plan that have age-59-and-a-half restrictions.
Do I have to send my contributions to a city-authorized investment company?
Yes, the municipality is the owner of the plan and actually owns your investment. You are only allowed to invest into the investment companies that they have been established as providers in the plan.
What types of investments vehicles are allowed in the plan?
Traditionally, variable annuities were the only investment offered. Now the investment options have been expanded. Some plans allow index annuities and mutual funds.
What is the difference between a variable annuity and a mutual fund?
Excellent question: A variable annuity (VA) is an insurance product and a mutual fund (MF) is a security-investment product. Both products are directly linked to stock or bond markets but the VA is placed on an insurance chassis. The mutual fund like investments in a VA is called sub-accounts and does differ from the mutual funds that have the same namesake. Also most VA has M&E Fees and surrender charges.
I have seen M&E fees vary from annual charges of 1/2 percent to 1.35 percent. These fees go to the insurance company to pay their cost of doing business and for commissions. VA also usually has surrender charges applied to the accounts. They average 10 years with a 10-percent countdown: 10, 9 8, 7,6,5,4,3,2,1, 0.
Mutual Funds do NOT have M&E Fees but do have sale charges. You can buy A, B, or C shares. These shares describe the method of how sales charges are applied. A shares are usually around 4.5 to 5.5 percent charges with no CDS; C shares usually have a 1 percent annual fee with a one-year CDS. Both VAs and MFs have fund charges applied to the accounts; this is how the managers at the fund companies get paid. All of this is described in the prospectus, that legal pamphlet you receive when you purchase these investments. I strongly recommend you read these books. As I have just given you a wide-brush stock, description of the two types of investments, the prospectus if very accurate. Hey, it’s your money, you should now what’s going on.
How do I know if my account is being charged an M&E Fee and if it has a surrender period?
Three choices: Ask your rep, call the 800 number on your statement, or read your prospectus.
How often should my account be reviewed by my representative?
First of all, never ever don’topen your statement when it arrives via U.S. mail or via e-mail. Also keep in mind, the subaccounts in your VAs and MFs have money managers who watch their own specific investment pool. But who is watching the collection of funds in your portfolio?
Maybe your advisor is suggesting making changes monthly quarterly annually. But on what criteria are these changes being made? Are they making sure that the fund managers that were in place when you signed on are still in charge? Are they checking to see if the fund collection does not have an equity overlap? Are they rebalancing your account? Some funds do this automatically.
How do I know if my investment is suitable according to my risk tolerance?
The allocation you started with may no longer be suitable for your risk tolerance today. You can take the exams that come with the sales literature or you can work with an advisor who has a software program that will help determine how risky or conservative your investing should be.
How am I taxed on the funds when I withdrawal I take distribution?
When you retire and start to draw income from this savings, you will be taxed on the money that comes out of the plan as ordinary income–in other words, as if it was a paycheck.
If you have any questions check out the archived show HERE or give Tom a call. Next episode we will be covering the difference between defined contribution verses defined benefit and the taking points how to maintain a DB plan for all your members. We will be asking Tom back! On behalf of Anthony Avillo and Chris Pepler we hope to have you call in! Until next time be safe.
Thomas
CamaCama Financial Advisors
250 State Street Unit K1
North Haven, CT 06473
Tel. 203 824-2022
www,camafinancial.com
FRANK RICCIis a lieutenant with the New Haven (CT) Fire Department. He is a vice president of the New Haven Fire Fighters and a contributing author to the Safety and Survival chapter of Fire Engineering’s Handbook for Firefighter I and II (Fire Engineering, 2008). He was the project manager for Emergency Training Solutions’ Firefighters Handbook I and II Power Point presentations. He is an FDIC H.O.T. instructor and lecturer; he won a landmark case before the U.S. Supreme Court. He testified before Congress and has been a lead consultant for Yale on several studies. He developed the Fire Engineering film, “Smoke Showing.” He is a co-creator of Fire Engineering’s Tactical Building Blocks Poster series and has several Training Minute segments and the
DVDs Firefighter Survival Techniques, Tactical Perspectives of Command, Ventilation, Search, and Fire Attack (Fire Engineering).
