Secure Your Future
TDA participation a smart move
Oct 15, 2009 1:31 PM
October historically has been an important month for the Tax-Deferred Annuity, so we thought at this time we should write a little about it.
In November 2007, the stock market was at a very high point in its history, and March 2009 was a recent historical low point. Much has happened since then in the stock market. The economy is showing signs of improving. Some economists are saying the recession is over, some are saying it is not over but is close to being over, and some are still pessimists and saying the economy may sink further. We will have to wait to find out.
Unemployment is climbing and some are saying the federal bailout program is failing. It is ironic that one of the reasons that unemployment is climbing is that most Americans who want to retire cannot retire. They have no defined-benefit pension and their defined-contribution savings accounts have been so badly diminished that they cannot afford to retire and will not be able to afford to until their investment accounts grow back to where they were.
This decrease in retirements has blocked promotions at work and taken away the need to hire replacements. On the other hand, the number of Teachers’ Retirement System members who retired this July was over 200, more than last July despite the economy — a strong reason for us to defend our defined-benefit pension vigorously.
We also know that if it were not for provisions of the bailout program, the employment situation at the Department of Education would have been disastrous. Before the bailout, there was talk that up to 15,000 UFT members would be laid off.
The DOE would have attempted to violate the terms of our contract regarding layoffs, and chaos would have reigned in schools as inexperienced school leaders with no guidance from the DOE would have had no idea how to cope.
At that point, the part of President Obama’s plan that provided federal funds for school districts to retain employees came into play. No UFTer was laid off and, because of the UFT’s actions, school cuts — which were still substantial — were not as draconian as they could have been.
All of this economic unrest should cause us to think hard about participation in the TDA program. First, it is almost a no-brainer that, after providing for an emergency fund of about six or seven months of expenses (more if your Cumulative Absence Reserve has few days, fewer if your CAR has many days), you should start thinking about additional tax-favored savings to provide for a better lifestyle in retirement than living on only your pension and Social Security.
In 2008, about 64 percent of those eligible participated in the TDA, including about 19 percent of 20- to 24-year-old members, and about 81 percent of those 55 or older.
Reasons for participation include:
- current and deferred tax savings;
- six easy-to-understand investment choices;
- automatic savings deducted directly from salary; and
- low investment and administrative fees.
TDA investment programs available
Fixed Dollar Annuity Fund — Contributions are invested commingled with the pension fund in a widely diversified portfolio of assets. The crediting rate is currently 8¼ percent but, because of the economic and interest rate climate, the rate will be reduced to 7 percent when enabling legislation is passed.
We have five investment choices that have no guaranteed rate of return but earn the returns of the financial instruments in which they are invested. The five investments are:
The Diversified Equity Fund — This fund is invested in a broadly diversified portfolio of domestic and international stocks (in developed countries). The objective is to achieve a rate comparable to the return of the broad stock market.
The Stable Value Fund — This fund is invested in a mixture of stable value instruments such as “wrapped” portfolios of high-quality bonds (the wrap is provided by a highly rated insurance company to protect the value of the portfolio) and part of the portfolio is invested in Guaranteed Investment Contracts (GICs) issued by highly rated insurance companies; there are no stocks in this portfolio. The objective is to preserve capital and provide a steady rate of return.
The International Equity Fund — This fund invests primarily in the stocks of non-U.S. companies located in the developed countries of the world. The fund is invested together with the assets in the International Sector of the Diversified Equity Fund. The objective is to provide long-term capital growth and to achieve a rate of return equivalent to the return of the non-U.S.-developed equity markets.
The Inflation Protection Fund — It invests in multiple asset classes such as fixed-income securities like Treasury Inflation- Protected Securities (TIPS), commodities, real estate, mortgage-related securities, stocks and others. The objective is to provide, over a full market cycle, a real rate of return in excess of inflation.
The Socially Responsive Equity Fund — This fund invests in an actively managed portfolio of large and middle-size U.S. and non-U.S. companies. These companies show leadership in such areas as:
- environmental concerns;
- work force diversity;
- progressive employment and workplace practices; and
- public health.
This fund avoids companies that derive substantial income from tobacco, alcohol, weapons, etc. The objective of the fund is to achieve, over a full market cycle, positive long-term growth and to earn a rate of return comparable to the return of the broader equity market while reflecting social priorities.
There is no guarantee that these funds will meet their objectives. For more information on any of the funds, contact TRS.
Below are the results of the investment programs for periods ending June 30, 2009. Performance is annualized for periods greater than one year. Results in the future are not guaranteed to match results of the past.
TDA investment changes
For in-service members, and retirees with deferred TDA accounts, investment changes can be made quarterly in multiples
Total Return (%) |
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| 3 Months | 1 Year | 5 Years | 10 Years | |
| Fixed Dollar Annuity | — | 8.25 | 8.25 | 8.25 |
| (Diversified Equity Fund) | 17.2 | (27.2) | (1.2) | (0.65) |
| Russell 3000 | 16.8 | (26.6) | (1.8) | (1.46) |
| (Stable Value fund) | 0.82 | 3.57 | 3.87 | 4.34 |
| 90-day Treasury Bills | 0.05 | 0.95 | 3.17 | 3.23 |
| 2-Year Treasury Notes | (0.12) | 5.71 | 4.3 | 4.71 |
| (International Equity Fund) | 19.5 | (23.9) | — | — |
| MSCI EAFE | 25.9 | (31.0) | (2.3) | 1.18 |
| (Inflation-Protected Fund) | 10.09 | (6.62) | — | — |
| CPI for All Urban Consumers (Seasonally Adjusted) |
1.69 | (0.33) | 2.75 | 2.68 |
| (Socially Responsive Equity Fund) | 10.3 | (19.2) | — | — |
| Standard & Poor’s 500 | 15.9 | (26.2) | (2.24) | (2.22) |
Periods ending June 30, 2009 |
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