Current Pension Topics
What TRS TDA Changes Mean

By JOEL L. FRANK

Q.: Over the recent Christmas/New Year's break, a few Teachers were discussing the benefits of Revenue Ruling 90-24 issued by the Internal Revenue Service in 1990. These Teachers seemed to be very upset that the ruling will no longer allow them to transfer, at will, their Teachers' Retirement System Tax-Deferred Annuity balances to no-load mutual funds. Is this true, and could you please shed some light on the subject?

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 .

A.S.

A.: Yes, it is true. The TRS TDA Plan is authorized by Section 403(b) of the Internal Revenue Code. It offers only one investment alternative to its fixed interest-rate option. The investment fund goes by the name of Variable Annuity A, an all-common stock fund. Transfer of funds between these two options may not be made in a lump-sum but only over a year's time in monthly increments. Such a rule is in clear violation of Federal/state securities laws. Attorney General Cuomo: Do you hear me?

Having said that, for the past 17 years, thanks to Revenue Ruling 90-24, a TRS TDA participant (active or retired) was able to make tax-free transfers of all or part of his/her TRS TDA account balance to outside-of-plan investments so long as the investment was authorized by Section 403(b) of the Internal Revenue Code. Plan sponsor/employer approval was not required. Many took advantage of the ruling by transferring their TDA balances to no-load mutual fund families like The Vanguard Group. By so doing, they removed themselves from the terribly restrictive and predatory rules of the TRS TDA Plan and gained an investment menu that consisted of dozens of investment alternatives.

Those days are over! Under final Section 403(b) regulations, as issued by the Internal Revenue Service, the Department of Education as plan sponsor/employer must adopt a written TDA Plan and the plan must list all the funds that are available for pre-tax investing via a salary-reduction agreement. Participant-initiated lump-sum transfers/exchanges could then be made, at will, among the approved investment funds. Lump-sum transfers to an outside-of-plan investment fund may only be allowed by express written approval of the plan sponsor/employer. So in order for a participant to invest in mutual funds, such funds must be approved by the Department of Education's TDA Plan.

Under the old Section 403(b) regulations, Department of Education involvement was limited to simply entering into a salary-reduction agreement with the participant and remitting the salary reduction to the investment provider (TRS) for investment pursuant to the instructions of the employee. This has all changed. The new and final regulations require, for the first time, material involvement on the part of the Department of Education as plan sponsor/employer. Only time will tell if such involvement results in giving Teachers what they clearly deserve: a 403(b) investment lineup that includes no-load mutual funds. For more than 20 years the Department of Education has offered, for 403(b) investing, no-load mutual funds (T. Rowe Price) to those employees who are not members of the TRS. Employees who are members of TRS deserve nothing less. Randi Weingarten: Do you hear me?