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Competition Spurs TRS To Double Its Offerings

By JOEL FRANK

The degree and magnitude to which a competitor may fundamentally change your business is just stunning! As most of you know, the Teachers' Retirement System of the City of New York offers a supplemental pre-tax retirement savings plan under Section 403(b) of the Internal Revenue Code. This plan is commonly referred to as the Tax-Deferred Annuity or TDA Program. Section 403(b) also authorizes the Department of Education to offer no-load mutual funds as an alternative investment to the TDA program. For 40 years, however, mutual funds have never been offered to the K-12 crowd because the TRS demanded a 403(b) monopoly. In fact, for the first 35 of the past 40 years, the TRS has used its influence to be the only pre-tax retirement savings plan for the K-12 crowd. Those employees were locked out of the Deferred Compensation Plan (DCP) of the City 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.

In 2003 Mayor Michael Bloomberg threw the status quo a wicked curve ball. He overruled the TRS and Department of Education and invited, for the very first time, the competition into the public schools of this city. Over the past half-dozen years, thousands of public school employees have abandoned the TRS-TDA in favor of participating in the super-successful DCP. The TRS was caught flat-footed. It was and has remained in shock for the past six years. The TRS was confronted with a management crisis. It had to decide on a course of action. It knew that if it decided to remain in the TDA business it had to modernize its plant and equipment. It had to become, for the first time, competitive. This meant adding more investment funds to the three that it had been offering since 1983.

Effective July 1, 2008, the TRS-TDA will be doubling its investment lineup to six funds. The three current funds and three new ones will be known as the TRS Passport Funds. Where are we going - to the Caribbean? The new investment menu will be the following:

Fixed Return Fund - presently the Fixed Dollar Account; Diversified Equity Fund - presently the Variable A Fund; Stable Value Fund - presently the Variable B Fund; International Equity Fund; Inflation Protection Fund; Socially Responsive Fund.

Where and how should you invest? With the lavish guaranteed return of 8.25 percent of the Fixed Return Fund, one would have to be a fool to invest in the Stable Value Fund or the Inflation Protection Fund. Moreover, the 8.25-percent guarantee provides little incentive to invest in any of the three remaining equity funds (Diversified Equity Fund, the International Equity Fund and the Socially Responsive Fund). We all know that high interest rates causes an exodus from the stock market. Why invest in the stock market with considerable risk, hoping to achieve 10-12 percent returns, when you can get 8.25 percent guaranteed by the City and State of New York?

If you are totally risk-averse, you should use the TRS-TDA for all of your pre-tax retirement savings and invest all of your money in the 8.25 percent Fixed Return Fund. If you are willing to accept a moderate amount of risk invest 60 percent in the 2045 Fund of the DCP and 40 percent in the Fixed Return Fund of TRS-TDA. I recommend investing in the 2045 Fund for the equity portion of your investment because the TRS-TDA does not offer Pre-Arranged (Target Date) portfolios, a glaring Plan defect. Maybe they will before the next 35 years have past. I invite your questions on this important topic.