Since 1970 the Board of Trustees of the Teachers’ Retirement System of the City of New York has administered a Tax-Deferred 403(b) Annuity Plan (TDA) as a convenient way for TRS members to supplement their fixed dollar pensions.
With that said, TDA offers six investment choices. By far, the Fixed Return Fund is the most popular. Roughly 70 percent of TDA investment holdings is in the Fixed Return Fund.
What makes this fund so popular? The city guarantees the equivalent of stock-market returns, so the employee/retiree need not take on stock-market risk. UFT members are guaranteed 7-percent interest while all others are guaranteed 8.25 percent.
I’m always asked: Which fund is best? Regardless of your appetite for investment risk, I recommend that all TDA participants invest in the Fixed Return Fund.
While five of the six funds are equity funds, only two of the six have been on the investment menu for the past 30 years. They are the Fixed Return Fund and the Diversified Equity Fund. Let’s see what their accumulations have been after contributing $100 monthly for 30 years.
A UFT investor would have accumulated $135,089 in the Fixed Return Fund, while a non-UFT investor would have accumulated $147,696. Participation in the Diversified Equity Fund would have accumulated $140,547.
The age-old investment principle that those who take on greater risk are rewarded with greater returns has no application to this TDA Plan; at least for the past 30 years.
These accumulations were only possible because the city was willing to risk guaranteeing fixed returns. Why is the city so willing to do this? Why does the city offer five equity funds and at the same time remove the incentive to invest in them? There is no other employer in the nation, public or private, that guarantees stock market returns to its employees and retirees.
Of Note: Employers use life-insurance companies when they want to include a fixed-return option on their retirement plan’s investment menu. The business of taking on risk is the very essence of the life-insurance industry. The going rate on these fixed-return contracts is about 3 percent. But the City of New York knows all this.
Mid-year is a good time to review your rate of contributing to the Deferred Compensation 457(b) and 401(k) Plans of the City of New York. You may participate in both plans.
The regular contribution limit for each plan is $19,000. The age 50-and-over contribution limit for each plan is $25,000. The DAR Catch-up contribution limit is $19,000, but applies only to the 457(b) Plan.
Contributions may be made on a pre-tax or after-tax Roth basis. I’m a big fan of after-tax Roth investing. Your retirement security depends on your discipline to contribute, on a regular basis, all you can. Are you disciplined?
Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at email@example.com.
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