May 2018

7 Reasons Not To Switch To The FRS Investment Plan 

The Florida Retirement System has two main plans that every teacher, police officer, firefighter (and many more) can pick. Before you make any decision you need to consult with your financial advisor, this is meant as a general guide and it is not financial advise.

We are going to explain 7 reasons why you shouldn’t switch to the FRS investment plan. Hopefully this article gives you more insight and you are able to understand the pros and cons of switching to the FRS better.

We are not looking to dissuade anyone, we only want to make sure you understand your decision.

1. Higher Risk 

Investments have more upside potential but a higher risk. This means you can lose money. If you are not a risk taker, it may not a good idea for you to switch to the Investment Plan.

One of the reasons people do not perform well with investments is because of their behavior when things do not go right. Here is an interesting article on why people are so bad at investing. Not everyone can endure the stress of their investments dropping 20-30%.

Make sure you understand the risks.

2. Managing Investments Is Hard

Managing your investments is not an easy task. Investment managers get paid significant money in Wall Street to make sure they perform and make money.

You need significant knowledge to make sure your investment performance is up to par. Most people do not have the time, discipline or inclination to manage their own investments.

However, FRS Investment Plan does have an option that is called a Self Directed Brokerage Account (SDBA). In this option you can have a professional manager mange your funds for you. The cost is the same as any other investment management company will charge you. To read more on the SBDA you can go here.

If you would like to understand the FRS Self Directed Brokerage Account better, contact us can guide you to an experienced financial advisor that will explain you all the pros and cons. 

3. No DROP 

DROP is a very unique program that the FRS offers to all employees that are in the pension program. The way it works is when you reach retirement age you can keep working. At the same time that you work you can receive your pension into the DROP account for a certain number of years (5 years usually).

The longer you work the more money you accumulate in your DROP account. So you can expect to have around 5 years of your pension deposited into the DROP account. 

4. Timing 

Many FRS employees that where about to retire (or retired) in 2008 experienced a crash in their FRS investment plan. Many of these teachers where not able have the retirement they expected. All this is because of bad timing.

Timing a market is incredibly difficult, even the most experience investors like Warren Buffet say you shouldn’t try to time a market. 

5. Few Investment Options 

For the most part, if you do not elect the FRS Self Directed Brokerage Account, you will have limited choices. As of 2018 you only have 22 mutual funds to pick in the FRS investment plan. Also, 11 of those funds are target date funds.

The average 401k in the US has 25 mutual fund options. This may not seem like a large difference, however you need to understand that there are over 6,000 mutual funds available.  

6. Irreversible Decision 

You can only switch to the investment plan one time. If you elect to switch you cannot switch back into the FRS pension plan. Many people in the past made the decision to switch at the wrong time for example in 2008. There was even a class action lawsuit, and still people where not allow to switch back.  

7. Generating Life Time Income 

This is a complex topic, but with interest rates this low, it is not easy to generate income from investments. Back in the day you could retire, pick a portfolio of bonds, and you knew you would have enough income to live. Now, the 10 year treasury is under 3%, which makes income hard to come by.

There are many ways of generating income from your assets, but all of them have trade-offs. Either you give up control of you assets, access or have a higher risk. 

Who should consider the FRS Investment plan? 

If you understand all of the above risks then you can consider switching to the investment plan.

Here are a few people that need to consider switching:

• Will not reach a pension vesting period
• Terminally ill people that know they will not receive many pension payments
• Have other use for the lump sum money
• Do not need guaranteed life time income

If you need a local financial advisor to help you see how much money you are going to get contact us, and we can point you in the right direction.