Secure Your Future
Temporary turbulence aside, your pension investments will grow over time
Sep 20, 2007 3:47 PM
During periods of investment market turbulence such as we have witnessed during recent months, it is only natural for some members to feel concern about the investments of the Teachers’ Retirement System. Reading news about the collapse of the subprime mortgage market (TRS does not invest in sub-prime mortgages or their derivatives), dramatic swings in the stock market and the lack of foresight by rating agencies makes one question whether retirement savings such as the pension fund and the variable funds belong anywhere other than the safest investment: Treasury bills!
It is true that investing in anything other than short term Treasury securities entails some risk. Even Treasury bonds with maturities longer than one year can incur market losses as yields move in the bond market (some of you may know that bond prices move inversely with changes in yields). Investors with very short time horizons probably should not take these risks. However, the pension fund is invested to provide lifetime incomes for all members in-service and retired. Even retirees have a multi-year investment horizon. Further, investors need to generate investment returns on savings in order to simply keep up with inflation. In short, the question is not whether it is prudent to continue investing in investment markets, which (as we see now and have seen many times over history) can be turbulent, but the most appropriate ways of doing so.
First, let’s look at this issue with some perspective. Over the past five years, including the turbulence this summer, the Russell 3000 Index (which is the benchmark for TRS stock investments) earned investors an average annual return of over 12 percent. This average annual return declines to over 6.4 percent when calculated over the last 10 years, because of the very poor returns in the stock market from 2000 to 2002. However, 90-day Treasury bills, the only investment which is generally considered to be free from market risk, generated a return to investors of less than 3 percent per year over the past five years and less than 4 percent per year over the past 10 years.
The Pension Fund invests in a wide variety of stocks and bonds with a small percentage of real estate and private equity.
The Fixed Fund is commingled with the Pension Fund and pays an 8.25 percent annual percentage yield which is guaranteed until June 30, 2009.
Variable A invests in a wide variety of stocks along with a small amount of bonds.
Variable B invests mostly in stable fixed-income investments, insured by some of the soundest insurance companies in America.
All of these funds invest in appropriate broadly diversified portfolios using experienced institutional investment managers and consultants who, in aggregate, invest the funds across thousands of securities. These managers’ performance data are measured monthly and meetings and discussions are held with these firms as part of the monitoring process. Because these portfolios are invested in the investment markets, we expect that there will be negative performance from time to time. But we also expect that over time these portfolios will significantly grow participants’ assets — and as you know they have done just that.
The investment markets reflect the aggregate of millions of individuals’ investment decisions. As such they are imperfect and tend to overweight recent events (e.g., assume that housing will continue to boom forever) and sometimes incorrectly assess risks. Nonetheless, over time, these markets allow investors to participate in the growth of the world’s economies — indeed, to foster that growth.
Only with hindsight will we be able to fully understand the long-term impact and lessons of this most recent period. Undoubtedly new and unexpected lessons remain to be learned and investors will once again have to be patient at some point in the future. It is not yet clear how long this period of market turbulence will endure, but history shows us clearly that investment markets, over time, reward long-term diversified investors for their patience.
You can rest assured that the teacher members of the TRS Board, working with their city colleagues in a collegial manner, will continue to invest your retirement money in a way to minimize risks — sorry, we cannot completely eliminate them — and get the highest returns from those parts of investment markets in which we invest.
Tax-deferred annuities
Have you started to contribute to a TDA? We will be getting a raise in October, so have you considered increasing your contribution?
A contribution of $100 per month to a TDA will reduce your take-home pay, depending on your tax bracket, by about $70 per month. But those contributions do add up. In 10 years at the current fixed annual rate of return (8.25 percent), your account balance would be more than $19,000 and at the long-term average annual rate of return of the Variable A program (10 percent) it will be more than $21,000. The future rate of return is not guaranteed for the fixed account after June 30, 2009, but the rate cannot be reduced below 7 percent (as mandated by the state constitution). Variable A results in the future may be different from the past.
If you have completed 10 years of credited service at TRS, your 3 percent contribution to the Qualified Pension Plan will stop. Financial experts advise that this is an excellent time to begin contributing or increasing your contribution to a TDA. You will not see a decline in your income and you will be adding to your retirement security. Go for it!
If you have prior service that you haven’t purchased, it’s smart to do so. You will reach your 10-year date sooner, and will free up additional income that may be invested in the TDA for a more secure retirement.
“Secure your future” is compiled and written by Mel Aaronson, Sandra March and Mona Romain, teacher-members of the NYC Teachers’ Retirement Board. For further information on items discussed, call your UFT borough office or the TRS. BRONX: 1-718-379-6200; BROOKLYN: 1-718-852-4900; MANHATTAN: 1-212-598-6800; QUEENS: 1-718-275-4400; STATEN ISLAND: 1-718-605-1400; Teachers’ Retirement System: 1-888-8NYC-TRS (692-877), www.trs.nyc.ny.us.
