Randy Silvey is the president of Silverlight Financial
With all the talk about changes to federal retirement, I think it’s time for a proposal to actually give more benefits to federal employees under the Federal Employee Retirement System (FERS).
Silverlight Financial, a fed-focused advisory firm in the Kansas City metro area, is delivering such a proposal to individual members of the House and Senate budget committees, as well as the Office of Personnel Management and the White House.
If a concerted effort is made to push against the powerful tide of “cut and slash,” could the government instead be persuaded to foot the bill for a brand-new benefit? Could they agree to support a new service that provides value to an assortment of factions and raise little conceptual resistance?
As we’ve seen over the years, federal retirement benefits (specifically FERS) are injured and sick, and need resuscitation. FERS is plagued by unsustainable (long-term) high costs and debatable employee retirement success, and anemic public perception decisively places federal employee retirement benefits in a triage situation.
So the idea to improve FERS is simple — FIRST-AID: Federal Institutions Retirement Systems Training – Advice, Information and Direction.
FIRST-AID is a “beefed up” spinoff of what fed-focused advisers offer in the form of retirement readiness reviews. Silverlight Financial employed their company’s version of these reviews, the Federal Retirement Readiness Review (FRRR), as a jumping-off point for this new proposal.
These existing reviews are typically free (no obligation), personal one-on-one evaluations designed to look at federal employees retirement situation. These assessments study to see if feds are on track to reach the desired financial futures they are looking forward to. It allows the employee to receive unbiased opinions from an experienced, live and qualified adviser.
FIRST-AID is looking to augment these types of personalized reviews by inserting an employer-sponsored advisory relationship for all 1.8 million-plus FERS employees.
If the FIRST-AID proposal is approved, FERS employees will receive (free to them) annual meetings/reviews with a fiduciary-registered investment adviser (RIA). The annual examinations, along with other tools, will focus on educating, guiding and coaching the FERS workforce.
There are a number of items that hinder the personal financial interest and ultimately, retirement success of many federal (specifically FERS) employees.
Most of the impediments lead back to the lack of understanding and knowledge about their Thrift Savings Plan (TSP) and other federal retirement income benefits. FIRST-AID would grant FERS employees personalized TSP allocation advice, training on the FERS retirement system and (ongoing) education on numerous financial and retirement planning issues.
The goal of FIRST-AID is to put feds on a better path to achieve greater TSP growth. In the proposal, the additional target growth goal would be 2 percent.
We are confident in pursuing this goal rate based on the following research:
A report by Aon Hewitt, and Financial Engines research conducted between 2006 and 2012. Those receiving help (advice from a qualified adviser) outperformed those that did not by 3.32 percent, net of fees.
Vanguard Adviser’s Alpha estimates that advice from a competent financial adviser adds value equal to roughly 3 percent per year.
If achieved, the 2 percent additional growth rate could potentially make a substantial improvement to FERS employees’ TSP accounts.
Example: FERS employee with 28 years of service, average annual earnings of $86,365, employee and employer each contribute 5 percent to TSP account, 2 percent (additional) growth. According to the investment calculator provided by bankrate.com, that would equal $203,485 in additional TSP account value.
This idea comes as Congress is considering eliminating or significantly alternating several, if not all, of the FERS retirement income benefits, including the Special Retirement Supplement (SRS), which seems the most vulnerable. Unless leadership receives a viable alternative, the SRS will likely not survive the 2018 budget.
In 2016, Uncle Sam spent over $865 million in SRS benefits. Yet, the “average” usage of the SRS benefit, is less than two years by retired FERS employees. Making it, overall, a short-term supplement that does not prepare the regular FERS employee for long-term retirement survival.
Moving from SRS to FIRST-AID is like the old adage: You can give a person a fish, and they can eat for a day, or you can teach them to fish, and they can eat forever.
Under the FIRST-AID proposal, a stepped approach is suggested to the elimination of the SRS. Instead of an immediate removal, slowly reduce the SRS benefit over a number of years. In the meantime, offer the FIRST-AID program to potentially offset the small annual SRS reductions.
The cost for the FIRST-AID program would be less than 24 percent of the SRS 2016 cost.
Finally, FIRST-AID is expected to pay for itself. Ultimately creating enough additional retirement income for FERS employees that new tax revenues will offset the FIRST-AID costs.
Bonus: Estimates show potential federal spending on the FIRST-AID program could create a net positive cash flow. From the beginning of an average FERS employee’s career to the grave, assessments show a 1,157 percent return on benefit costs through additional tax revenues (assuming an average 15 percent federal tax bracket). If implemented and accurate, this would likely make the FIRST-AID program the first federal benefit that could (long-term) pay for itself and help lower the deficit.
FIRST-AID would give federal employees a much-needed shot in the arm to make their retirement savings healthier and so they can accomplish their long-term financial and personal goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. Silverlight Financial, Infinity Financial Services and its affiliates do not provide tax, legal or accounting advice. This material is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com .