When Rick Scott, the disgraced former CEO of Hospital Corporation of America, won election as governor of Florida in 2010, he began making good on a campaign promise to slash the size and cost of government in a state that has been hard hit by the recession and collapsing home prices. Part of his plan, a reduction in state and county government workers' pension and health care benefits, was approved for the most part by the state legislature in May.
This led to a rush by employees nearing retirement age to get out early to avoid having current benefits reduced. The deadline for the reductions in benefits was set to take effect on July 1. The outcome: The number of people opting for early retirement doubled in the first six months of 2011 compared to the year-ago period.
One advisor who started getting lots of calls for help was Laura Steckler, a financial advisor with Raymond James in Miami. "Throughout this year, I've been hearing from a lot of public sector employees—federal, state and local—and I can tell you there's a lot of misinformation people have," Steckler says.
But there are also a lot of legitimate concerns for such employees, she says. "Most of the changes that have been made in Florida public pensions, like raising the retirement age to 65 from 62, have affected new hires. But some have affected current employees, such as a reduction in the interest rate paid in the Deferred Retirement Option Program." (This program, offered in some form in many jurisdictions across the country, allows employees to earn credits worth several years of retirement pay and earn interest on the balance, receiving the amount as a lump sum on retirement. Florida just reduced the interest rate paid in its program from 6.3% to 1.3% for those who signed up for the option after July 1.)
This scenario is playing out all over the country as public employees' benefits, including pensions and health care, come under attack by strapped local governments.
According to the National Conference of State Legislatures, over the last two years 41 states have made cuts in their employee pension benefits. In many states, such as Florida, these cuts also hit county workers, like teachers, police and firefighters. City governments are also cutting back on benefits.
In Wisconsin, where the new Republican Governor Scott Walker and a Republican legislature earlier this year passed a controversial law restricting public employee union bargaining rights, the state retirement system estimated that requests by employees for retirement jumped in 2011 by 46.4%, while retirements almost doubled during the year. And that was against a backdrop of scarce private sector jobs.
Early retirements are also up this year by 27% in Ohio, 60% in New Jersey, and over 20% in California.
Steckler says she feels the cuts are "not good for the American worker," but they provide a lot of opportunity for financial advisors who can offer reliable information and advice to public employees.
"It's fair to say that across the country, most financial advisors don't really understand how public pensions work." She recommends at a time when hundreds of thousands of public employees are worried about cutbacks in benefits, and are wondering whether they can afford to, or ought to, retire early to preserve the benefits they have, it would be smart for advisors to take the time to research the public pension programs in their local area and the state, so they can provide good advice.
She says that becoming a public-employee benefits expert could be a good business move. "A lot of advisors probably think that these public workers don't have much to invest," she says, "but they'd be surprised. There are a lot of assets, and a lot of people to help here. You don't always get them or their money right away. It might take a few years, but I'm planting seeds." She adds, "I just enrolled a University of Miami analyst, a very smart woman who had a pension with a current value of $700,000, and she didn't even know it. I have a cop with $2 million in his pension balance. He didn't know it either."
Too often, people just look at what their monthly pension check will be, she explains.
There is also a little-known option that lets them take that money as a lump sum and roll it into an IRA, instead just collecting a monthly pension check—an option she says allows them to have full control of the assets and to make it all available to a surviving spouse—something that isn't true of most monthly pension payouts.
Jack Cramer, who runs a service in Boulder, Colo., advising financial advisors and broker dealers how to step up their practices and become wealth managers says that Steckler and people like her are onto something. "This is a massive opportunity for advisors," he says. "Especially for advisors in the bank channel who have a trusted brand they build on."
Cramer suggests that financial advisors who operate in cities—particularly state capitals or large urban centers where there are large numbers of public employees—"get knowledgeable about the public retirement plans in your neighborhood." Then, he says, "get in touch with the public agencies' HR person, who is bound to be feeling embattled and offer yourself as a resource to them."
Beyond that, he says advisors who have boned up on local public pensions should "crank up the marketing machine. Offer seminars and lunch-and-learn sessions for public employees."
He compares the current plight of public employees to situations where a community faces a plant closing, only on a national scale. "It is presenting a good opportunity for financial advisors who make a special effort to help people," he says. "A lot of advisors want to be more than just financial advisors. They want to be life advisors. And here's a case where you can do that, with clients who may be leaving careers early and looking to do something else. For an advisor, this is the fun stuff."