Baby Boomers, Educators, Financial Planning, Millennials

Indiana Teachers: An Update to the Indiana Public Retirement System (INPRS)

Listen up Indiana Educators: before long, there will be talk in the teachers’ lounge about changes coming to the Indiana Public Retirement System, which TRF became a part of a few years ago. Although well intentioned, the information you get in the teachers’ lounge isn’t always accurate. So here is a breakdown of the upcoming changes:

I. The Guaranteed Fund will be no more. After December 31st, 2016 the Guaranteed Fund will be replaced by a Stable Value Fund. What does this mean to you?

First, it means that you will no longer have a fund guaranteeing to pay you 0.66%, which is hardly any guarantee at all–I remember early in my career when the Guaranteed Fund paid 6%, but that was a long, long time ago. Chances are you are in the Guaranteed Fund not because of the interest rate, but because you want a fund that will protect your principal. Well, unfortunately a Stable Value fund does not provide any guarantees against loss of principal. A Stable Value fund is typically made up of a diversified portfolio of short-term high-quality fixed-income securities like Treasuries, corporate bonds, and mortgage-backed securities. Because of the investments in these securities the fund cannot offer a guarantee against loss, nor can it guarantee a specified interest rate.

Now, don’t panic about the loss of the Guaranteed Fund. Despite not offering any guarantees, Stable Value Funds do not have a history of losing principal; while it is possible, it is not common.  A benefit of the structure of a Stable Value Fund is the opportunity to keep pace with increasing interest rates. As I mentioned, Stable Value Funds invest in short-term high-quality fixed-income securities (i.e. bonds); when the short-term bonds mature, they are reinvested in new bonds, which will have higher yields if interest rates are rising. The end result is a rising yield from the Stable Value Fund as interests rates rise. In my opinion, this is an improvement; the only thing the Guaranteed Fund has done the last 5 years is guarantee that your money would not keep pace with inflation.

Quick summary: The replacement of the Guaranteed Fund with a Stable Value Fund is not necessarily a bad thing. Yes, there is a little more risk in the Stable Value Fund, but there is the opportunity to earn more and keep up with interest rates as they rise. Talk with your financial advisor to see how this change might impact your investment strategy, and to determine if you should make any changes. Need a CERTIFIED FINANCIAL PLANNER™ professional to help you analyze the change, feel free to contact me here.

II. The Annuity Rate Floor Expires in 2017. If you plan to annuitize your ASA account, beginning January 1, 2017 your monthly benefit may be (see: probably will) be lower. Before you panic, this is not referring to your pension amount…as of now, there is no change to that monthly benefit. Remember, your pension is based off a formula, not a predetermined interest rate. The change is impacting the monthly benefit you would receive by combining your ASA account with your pension. Currently, the rate used to determine the monthly benefit from the ASA is 4.5%. Beginning January 1st, 2017, the rate used would fall to 3% under the current rates (note: there is more to how these numbers are determined, but to simplify the news, I omitted the details. For the exact calculations and how it works in the background click here and scroll down to the “INPRS Annuity Rate Floor Expires Section”).

If you do not plan to annuitize your ASA account, this change does not impact you.

Quick Summary: If you plan to annuitze your ASA account, your monthly benefit from the ASA will most likely be less beginning January 1, 2017.

III. INPRS will no longer provide annuities. As early as April 1, 2017 INRPS will no longer provide annuities, but will instead provide the opportunity for members to obtain fixed-rate annuities through MetLife. There isn’t much information on this change, but I would expect more to come as April 1, 2017 gets closer. So, stay tuned.

Quick Summary: Your annuity option will change, and there should be more details coming.

If you are an Indiana educator looking for an independent financial advisor to help with your financial planning, you can reach me here.

Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.