Current Pension Topics
Missing Options in TRS TDA

By JOEL L. FRANK

All public-sector employees in this state are very well-cared for when it comes to de minimis cost investing through voluntary salary-reduction retirement savings plans.

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.

The state's 457(b) plan is made available to state and local public employers, including school districts.

City employees, including the City School District of New York, are well-cared for by the Deferred Compensation 457(b) and 401(k) Plans of the City of New York (DCP).

Please let me know if you are working for a local government, including a school district, and do not have access to a de minimis cost supplemental retirement savings plan. If you are not sure what your costs are, please contact me and I will do the research and give you the facts.

Having said that, the Teachers' Retirement System of the City of New York is the only one of the eight public-sector retirement systems in the state that has ever administered a voluntary salary-reduction savings plan, and it has been a resounding failure. The plan goes by the name of Tax-Deferred Annuity (TDA). It began in 1970 with two investment options: A Fixed Annuity and a Variable A Annuity. No other choices for investment were added until 1983 when, at the behest of the Teachers union, the Stable Value Fund called Variable B Annuity was added. And this is how it has remained for the last 25 years.

While the Fixed and Variable A Annuity funds have always been managed by the trustees in full compliance with the state laws that created them, the same cannot be said for its management of the Variable B Annuity. The Variable B Annuity law (Chapter 735 of the Laws of New York, 1982) directs the Trustees to invest in "fixed income and equity securities". This, the Trustees have never done. For a quarter of a century the Trustees have purposefully ignored their statutory directive by managing the Variable B Annuity portfolio as a "stable value" fund.

Stable value investing is wholly dependent on collecting a stated rate of short-term interest from large corporate borrowers like insurance companies and banks. This makes the Variable B Annuity akin to investing in a money-market mutual fund. In fact, for each of the last 15 years, the investment return for Variable Annuity B has been less than 8.25 percent, the crediting rate on the Fixed Annuity since 1992. So who among us would invest in Variable Annuity B?

Against this backdrop, a Class Action lawsuit commenced in February 1997 against the TRS trustees alleging gross mismanagement of the Variable B Annuity. The case is now in the Court of Appeals, New York's highest court. As soon as a decision is reached, it will be analyzed by this columnist.

During the first year or so of the Bloomberg era, without any prodding by the Teachers union, the city made its DCP available to Department of Education employees. Over the past 6-7 years, while the Deferred Compensation Board was improving its 457(b) Plan by offering Pre-Arranged Portfolios, adding a companion 401(k) Plan and Roth features to its 401(k) and IRA Plans, the TRS trustees did nothing, except witnessing an exodus, as thousands of Teachers stopped their TDA contributions in favor of contributing to the DCP. Many more have, upon retirement or reaching age 59-1/2, rolled over their TDA balances to the DCP. Recognizing that they must clean up their act in a meaningful way or simply terminate the TDA Plan, making participant balances available for rollover treatment to the DCP, the trustees announced that over the next couple of months, three additional investment funds will be added to the TDA investment line-up. In addition to the Fixed Return Fund (formerly Fixed Annuity), Diversified Equity Fund (formerly Variable A Annuity) and Stable-Value Fund (formerly Variable B Annuity), there will be an International Equity Fund, an Inflation Protection Fund and a Socially Responsive Equity Fund.

On behalf of the Teachers of this city, I would like to thank Mayor Bloomberg for encouraging Teachers to contribute to the DCP and proving to the trustees what a little dose of friendly competition can achieve.

Having said all that, the new investment lineup should include a "balanced fund" comprised of stocks and bonds. It does not. Could it be that the trustees anticipate that the Court of Appeals will rule against them and direct them, as Chapter 735 of the laws of 1982 does, to manage the Variable B Annuity (Stable Value Fund) as a "balanced fund" comprised of "fixed income and equity securities"? Stay tuned.