Munson: Retiring With A CAP, DCP, 403(b)? Yikes!

CFA, CFP®, Founder and CIO of Portfolio Wealth Advisors

If you have been at LANL for a few decades, I feel your pain. By that I mean the labyrinth of different pension, retirement and one-off compensation schemes.

Just think about how your typical defense contractor feels every five years when their entire retirement plan gets changed. Let’s break down the typical set up for those who worked in the UC days. Keep in mind this is a fast summary, so if you have any detailed questions, just email me.

Back in 2002 and 2003 there was a budget crisis that created a ‘disappointing’ salary increase within the UC system due to limited state funding. Instead of buckling down, the UC Regents simply approved a work around called the Capital Accumulation Provision (CAP).

Essentially, this provided a special retirement account funded with 3 percent and 5 percent of salary, for each of those two years. On top of that, you didn’t even have to invest the cash. It simply got credited with UCRP trust earnings, around 7.5 percent. Don’t worry about what the trust actually earns, this is academia. So, now you have this account that earns a decent return with no effort. The bad news is that you can’t add to it, and when you retire, they force you to take the cash out. So much for a free ride on high returns with little risk.

One thing that has confused my clients in the past is what to do with those assets after retirement. This is simpler than you think. Just roll it over into a qualified plan (an IRA rollover is just one example). If you pull the cash out, and don’t transfer to a qualified plan, you will pay earned income rates for that calendar year. Avoid this at all costs, unless the amount in your CAP is very small.

Don’t rely on a call center jockey that may not understand retirement planning to advise you or even understand what the CAP is in the first place.

Next on the list is the UC Defined Contribution Plan or DCP. Since I’m a subject matter specialist I get to call it by its jargon, a 401(a). Unlike a 401(k), the DCP isn’t covered by Federal ERISA laws (it’s a States rights thing), and ultimately designed for government entities.

This particular one required mandatory employee contributions. Depending on your job, UC would then kick in some more cash. In the end, you should simply view this as a legacy 401(k)-type account. When you retire, you can move it to any qualified plan without paying taxes. When you take the money out to support your lifestyle, you simply pay earned income rates just like an IRA withdrawal.

Last on the list is the 403(b). Designed for schools, hospitals and nonprofits, the 403(b) is like a bad step-sister of the 401(k). First off, they aren’t covered by ERISA, and are exempt from non-discrimination testing. That allows highly paid workers to put all the cash they want without regard to how lower paid workers contribute. They get away with that if the plan, wait for it … does not make contributions to the 403(b). Thus, make no contributions to employees, exempt yourself from ERISA laws, and forget pesky rules on the highly compensated. Outside of that it’s the same concept as a 401(k) as far as a retiring LANS employee is concerned.

On a practical note, the choices for these plans are separate from your regular LANS 401(k). The fund line up is similar, but I tend to mix and match allocations between the three plans to get a master allocation based on what I believe are the best options (low cost passive funds or go home).

As you get ready to retire from LANL, or are forced to take a package, add all the plans up. Use this golden opportunity to see how you are actually invested, and what type of allocation you have in total.

No single account lives on an island, but you could if you prepare properly.

Lee Munson, CFA, CFP, is the Founder and Chief Investment Officer of Portfolio Wealth Advisors. His firm manages more than $280 million in assets for baby boomers. A regular guest on CNBC, Fox Business, and quoted in The Wall Street Journal, Munson lives and works in Albuquerque when not visiting clients in Los Alamos or skiing Taos.