FRS DROP Program

By | Uncategorized | No Comments

FRS DROP Program 

The FRS DROP program is a retirement plan that is available to all Florida Retirement Systems employees. The Deferred Retirement Option Program (DROP) is a plan you can elect after you have reached your vested retirement age or years of service.

DROP is a great plan that was created to incentivize employees to stay a little longer in their most productive years. 

How Does It Work? 

Imagine the DROP program like double dipping. You will still get paid your salary, but the FRS will deposit your pension into a separate account for every year that you work. The maximum is 5 years in DROP for most employees, some employers offer a 8 year DROP program.

You do not have to stay all the years in DROP. If you elect to leave after after a year, you will get a years worth. All the projections of how much you will receive are in your DROP paperwork.

In general you will earn a low interest rate of 1.3% while the money is in the DROP account. In addition you will get a Cost Of Living Adjustment (COLA). This COLA will increase the amount that gets deposited into your DROP as well. Normal COLA is around 3%, but this can be changed by the FRS. 

Will DROP Go Away? 

We get this question all the time. However there is no evidence that the FRS DROP program is going away.

There where significant changes in 2011 that made it easier for the state of Florida to keep DROP for longer. 

Who Can Get DROP? 

Any FRS employee that is in the pension program and they have reached their full retirement age or years of service. This includes:

As long as you haven’t switch to the FRS investment plan you will be elegible for the DROP program. 

How Do I Receive DROP? 

You cannot enter DROP until you have reached retirement age or years of service. However, if you are about to enter DROP this is how it works.

Your DROP funds get placed in a retirement account. This account cannot go up or down. In the initial papers you receive you will see your exact DROP projections.

You will have access to your DROP account after you completely retire. Unlike a 403b or 401k you cannot take loans from DROP. 

What Are The Risks of DROP? 

If you reach your 5 years (or 8 years for some employers), you will be required to retire. So make sure you know you do not want to keep working after your DROP years.

In addition you will not receive anymore raises while you are in the DROP program. Your salary will be frozen.

However, there are no investment risks on the DROP. As you mentioned already, you will receive a statement with your DROP projections and that’s how much you will get. 

FRS DROP Rollover 

There are many ways to access your FRS Drop. However, one of the most common option is to do a rollover into your IRA.

A rollover is a simple qualified transfer. With this transfer you will not have to pay taxes on the the move. In addition, in your own IRA you will be able to pick from any type of investment you would like to have.

For more information on a rollover we can match you with a local financial advisor that can help you. 

DROP Options (or Pension Options) 

The famous DROP options are a way to name beneficiaries to your DROP and FRS Pension program.

Option 1

All the money to you, nothing to your beneficiaries. This is the highest payout for your self. You will get 100% of your pension.

Option 2

A 10 year period certain pay out. This means that your beneficiaries will get a benefit if you pass away within your first 10 years of retirement.

Example: Year 5 you pass away, your beneficiaries will get 5 years of your reduced pension.

The reduced cost of Option 2 will be approx. 5-10%. This number will vary depending you your age at retirement. With this option you will be able to pick a minor as a beneficiary. This is the only option that allows you to pick a minor.

Option 3

Option 3 is probably the most common option to pick. This option gives you the ability to pick your spouse as a beneficiary, and if you pass away, they will receive your pension for the rest of their lives.

There is a cost for picking this option. Your pension will be reduced between 15-25% depending on the age of your spouse.

Option 4

This option is a little strange as you elect to receive a sightly reduced pension (around %5) , and if either you or your beneficiary passes away then your pension gets cut to 2/3 what you where receiving. 

Should I Enter DROP 

That is the question… And you shouldn’t take that decision lightly, as there are many variables to consider. The best way to understand what to do is with knowledge. Contact a financial advisor with experience with the FRS and they can guide you.


FRS Investment Plan Switch Reasons

7 Reasons Not To Switch To The FRS Investment Plan

By | Uncategorized | No Comments

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.