Current Pension Topics: TRS Fixed-Return Fund Better Bet Than 'Stable'

Current Pension Topics
TRS Fixed-Return Fund Better Bet Than 'Stable'

The Teachers' Retirement System of the City of New York administers two retirement plans. The first is the Qualified (Defined Benefit) Pension Plan (QPP) under Section 401(a) of the Internal Revenue Code (IRC), and the other is the supplemental Tax-Deferred Annuity (Defined Contribution) Plan (TDA) under Section 403(b) of the IRC. For investment, the TRS offers a menu called Passport Funds. These funds are used by all TRS members who voluntarily invest in the TDA plan. The Passport Funds are also used for investment of the Annuity Savings accounts of members of Tiers 1 and 2 of the QPP. Five of the six Passport Funds are market-driven, which means that the funds' investment results are determined by independent investment markets and the free-market economy that directly impacts those markets. There is no correlation, however, between the investment markets and economic conditions on the one hand and the investment results of the sixth TRS Passport Fund, called the Fixed-Return Fund. That fund's fixed return is pre-determined by the New York State Legislature. The current 8.25-percent interest rate is good until June 30, 2009, at which time the Legislature will consider a possible adjustment. It may not be set below 7.0 percent. The contributions (principal) along with the declared interest rate are guaranteed by the full faith and credit of the State and City of New York. It is also a protected benefit under Article V, Section 7 of the Constitution of the State of New York.

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

Having said all that, since July 1, 1988, the return of the Fixed-Return Fund has been set at 8.25 percent. At this guaranteed rate, an investment doubles in value every 8.7 years. $10,000 invested in the Fund in 1988 is worth $46,000 today. Over the past 15 years, the Stable-Value Fund has returned 5.16 percent, while the Fixed-Return Fund returned 8.25 percent. In fact, for every year since 1992 the Stable-Value Fund has returned less than the Fixed-Return Fund.

Do your colleagues a favor. If you know of anyone who still has money in the TRS Stable-Value Fund, tell them they are guaranteed to lose money every single day they remain in it. Advise them to switch to the Fixed-Return Fund where they get a guaranteed higher return with no risk. It is a no-brainer. It is also no-brainer to invest at a guaranteed 8.25 percent when one notes that since 1926 a broad-based portfolio of equities, like the TRS Diversified Equity Fund, has returned about 10-11 percent.

The following comes from the TRS Web site:

"As you probably are aware, the stock and bond markets have experienced dramatic levels of volatility over recent weeks, and confidence in some of the country's largest financial institutions has been shaken. The U.S. government is taking actions to restore liquidity and confidence to the markets, but the results of these actions are unknown.

During this time, TRS has been monitoring the investment portfolios in our retirement plans. New York City Comptroller William Thompson noted last week that "retirees, beneficiaries, and City employees who are invested in the New York City Pension Funds should know that their money is safe and secure." Go to Comptroller's statement about the impact of Wall Street conditions on the City's economy. TRS' Pension Fund is well diversified across many asset classes and many securities, and, while there is some exposure to troubled financial services firms, these investments are relatively insignificant as a percentage of the total Pension Fund.

Each of TRS' Passport Funds — our lineup of investment options — has a specific investment objective that is narrower than the Pension Fund's, but each variable-return Fund does invest in a wide range of securities. The investment holdings with any of the troubled financial institutions, such as AIG or Lehman Brothers, ranges from zero to less than 1 percent of any of the individual funds. (Note: TRS' Socially Responsive Equity Fund is managed by a wholly owned subsidiary of Lehman Brothers Asset Management. However, Lehman Brothers Asset Management was not a party to the Lehman Brothers Holding Company bankruptcy filing.)

Please be aware that the performance of the variable-return Passport Funds — and virtually all investment vehicles — is affected by the ongoing turmoil in the capital markets. However, you can be assured that TRS and our advisors are closely monitoring our funds and their performance."