Current Pension Topics
Picking a Target Date Fund

By JOEL L. FRANK

Q.: I belong to the Deferred Compensation Plan. How do I pick a Target Date Fund or Pre-Arranged Portfolio?

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net .

J.R.

A.: The earliest date you can take a distribution from the Deferred Compensation Plan (DCP) is upon retirement/severance of employment with the city. The latest date is the year you retire/sever employment with the city, if you continue to work past age 70-1/2. If you retire/sever employment with the city before age 70-1/2, you must begin taking withdrawals at age 70-1/2. These mandatory withdrawals are called Required Minimum Distributions (RMD).

In order to pick the Target Date fund that is best for you, you first need to decide on the approximate year you expect to start making regular withdrawals from the plan. This year does not have to be the year you retire/sever employment with the city. Ideally, it should be put off for as long as Federal tax law permits in order to take full advantage of tax-deferred growth.

Example 1: Assume Paul's birth year is 1970 and he expects to retire at age 55 in 2025. Currently he feels he will not have to start to withdraw money from his DCP account until age 70-1/2, in 2040. This is the fund he should invest his entire contribution in. Example 2: Pauline's birth year is 1986. She plans to retire at age 41 in 2027. She also plans on drawing down her DCP account balance at that time. She should invest in the 2025 Fund, because that is the plan that comes closest to the time she plans to begin regular withdrawals.

Tip: For those of you who would like to be a little more aggressive with your savings, I recommend the Target Date fund with a little higher concentration in equities or the same concentration in equities but for a longer period of time. In example 1, that would be the 2045 Fund, with an equity exposure of 100 percent for an additional 5-year period. In example 2, that would be the 2030 Fund, with a 90-percent equity exposure compared to the 2025 Fund with an 88-percent exposure to equities.

Please note that almost all of you will begin your regular withdrawal program prior to age 70-1/2. At that age, you will still have a healthy exposure to equities: 49 percent with 51 percent invested in fixed-income securities. It won't be until you reach age 85 that your equity exposure will be reduced to 20 percent with 80 percent in fixed income. And this is the mix you will keep for the balance of your life. So you can see that if you follow the Deferred Compensation Board's guidance and invest all your money in a single Target Date Fund, you will always be exposed to equities, which in my opinion is quite sound.

Q.: In a recent column, you mentioned that members of all tiers are entitled to take lump-sum payment from their pension plans upon retirement. Where do these payments come from?

A.G.

A.: For members of Tiers 1-2, these lump-sum amounts come from "excess/surplus" in their Annuity Savings account and the final loan amount. For members of Tiers 3-4, these lump-sum amounts come from the final loan amount.

Thousands of you are anxiously waiting for the appellate court decision in Nager vs. Teachers' Retirement Board (TRB) of the City of New York. Arnold Nager on behalf of the Class alleges that the TRB mismanaged the assets of the Variable Annuity B Fund by intentionally disobeying its legislative directive to invest its assets in fixed income and equity securities. Since its inception on July 1, 1983, the TRB has invested Variable B funds in guaranteed-interest rate instruments. The trial court found in favor of the TRB. Its decision is on appeal with the Appellate Division of the Supreme Court of the State of New York. If you would like to have a copy of the Plaintiffs' Appellate Brief along with the Respondents' Reply Brief, just drop me a note with your e-mail address and I will dash a copy off to each to you.