Your Big Decision

by David Preston

As a new faculty member, you are required to make a big decision that will impact your financial future for the rest of your life.   Specifically, you must decide what kind of retirement program you want to select.  You basically have two options:

• The first option is the Texas State Teacher Retirement System, commonly called TRS.  
• The second option is the Texas Optional Retirement Plan, commonly called ORP. 

The TRS program is available to all employees of public schools and publicly supported higher education institutions in Texas.  Employees in public schools do not have a choice; they must participate in TRS as their retirement program.  Also, non-contractual employees in publicly supported colleges and universities are only allowed to participate in TRS.  College faculty and administration have the option to choose either TRS or ORP.   Each of these two options offers some advantages and some disadvantages.  Neither option is perfect for everyone.  In the final analysis, you should think about your individual circumstances and pick the option that best fits your specific needs and life plans. 

In this document, we (the DCCFA Welfare and Benefits Committee) will try to list some important advantages and disadvantages for each option and suggest some situations in which each option offers the best solution for your situation.  Sources of additional information will be suggested in this document.  This document has been prepared by the Welfare and Benefits Committee of the Dallas County College Faculty Association, also known as the DCCFA.   The DCCFA wants to help new faculty members get established in the colleges and have a rewarding experience as a faculty member in the Dallas County Community College District.

Most important to you is the fact that once you have made your retirement choice, you are stuck with it!   If, in a few years, you wish that you had made a different choice, you will not be able to change your decision.  Therefore, you should spend the necessary time now to give serious consideration to your retirement decision.    You only have 90 days from the time you begin your employment as a faculty member to make your choice.  The default is TRS.  That means if you do not make a selection, the State of Texas will put you into TRS, and after the initial 90 day period is over, you will be stuck in TRS for ever.   As you will learn from reading this document, in some cases TRS is a good choice and in other situations it is a bad choice.   Please spend the time to think through this issue now.

Who is better off in TRS?

If you have worked for several years in a job that included your participation in TRS, you will probably be better off staying in TRS.  The longer you have paid into TRS, the more you are going to get hurt by pulling out and starting with ORP.  You need to understand why this is true.  When you participate in TRS, you pay in money that is deducted from your monthly pay, and your employer contributes additional money to the retirement fund for you.  If you choose to select ORP, then you must sign a paper that in effect waives any benefits from TRS.  You will be allowed to withdraw all the money that you have paid into the fund, but the State of Texas keeps all the money your employer has paid into TRS for your retirement.  The more years you have paid in, the more of your employer’s contribution is lost to you.  You never see the money that your employer has contributed to TRS until you retire and begin drawing a pension, and even then you will not get any of your employer’s contribution unless you live a long time.

Consider an example.  Mrs. X has worked for ten years in the local high school teaching Spanish.  During those ten years, she went to graduate school for several summers and completed her master’s degree in Spanish.  When a job came open in the community college, she was hired to teach Spanish.  With ten years in TRS she is much better off staying in TRS. 

In the case of Mrs. X, the situation is clear.  She would be starting out from scratch if she elected ORP and would lose a significant amount of her retirement if she changed.  The question is just how much time can a person have in TRS and still reasonably make the change to ORP.  Generally, the rule of thumb is that a person should not make a change if he or she has paid into TRS more than three years.  In some instances, making the change to ORP may be a bad idea even if you have only two or three years paid in to TRS.  The main consideration is:  are there other advantages to TRS that apply to you and your life situation?  

A person who is not interested in the study of financial and economic issues is probably better off choosing TRS.  If you choose TRS, your retirement money is managed for you, and you do not have to make any decisions except: “When do I want to retire?”   If you choose ORP, you will have many decisions to make on a regular basis.  First, you will need to select which company you want to hire to handle your money for you.  Later in this document, this issue will be explored in more detail.  The issue is complicated.  Once you have selected a company, you will need to make other choices based on the options offered by that company which can be even more complicated.   If you make good decisions, you will have a good retirement.  If you make bad decisions, you will probably wind up with much less money than a person who has elected TRS.  Each year, ORP participants need to evaluate their choices and make adjustments.  This takes a certain amount of time and skill.  Do you have a lot of confidence in your ability to manage your money well and are you willing to devote the time needed to do it well?  Later in this document, we will provide you with advice on how to make these decisions.  Reading that material will give you a good idea of how complicated the process is and the amount of time you need to commit to the process.  Do you want to spend time each year in updating your decisions about your retirement money?  If not, you may be better off in TRS than ORP.   Some faculty who had a lot of money in ORP during the period of late 2000 and 2001 when there was a big drop in the stock market were too busy to keep up with the performance of their ORP accounts and lost a lot of their retirement money.  Do not let this happen to you.  Most companies offer options such as bond funds and money market funds that can be used when you want to protect your money from a falling stock market, but you are the one who must make the decision to make such moves.  If you select ORP make sure you stay alert to what your retirement money is doing.  If you do not want to do devote the time to study and manage your money, select TRS.

People who are married and do not have a prenuptial agreement that protects their retirement assets from the Texas community property law are often much better off after a divorce if they are in TRS than ORP.    In most cases, people who are in ORP will probably lose much more of their retirement money in a divorce than persons who are in TRS.  Dallas County has a high divorce rate.  Given the reality of a high divorce rate, many people could profit greatly from TRS.

In order to understand about why you are better in a divorce if you are in TRS, you need to understand how the community property law applies in case of a divorce.  In Texas, half of every penny you earn in salary or wages automatically belongs to your spouse. Texas does permit prenuptial agreements that will allow you to maintain separate estates, but unless you have such a prenuptial agreement your pension funds are subject to this community property law.  When you get a divorce, the financial settlement process begins by making a list of all assets.  What you have in retirement accounts will normally be included in this list of community property.  If you are in ORP, you will need to write a letter to the company that handles your ORP money and explain that you are getting a divorce and request a statement of your retirement assets to be used in the divorce proceedings.  If you are in TRS, you will need to send the same kind of letter to TRS. There is a bid difference in the kind of response you will get back.  Your ORP company will send a statement that includes all the assets which includes all the money you have contributed and the money that your employer has contributed.  TRS will only report the assets that have accumulated from your contributions.  Legally, your employer’s contributions do not belong to you; that money belongs to the State of Texas.  When the courts divide up the community property assets, only a small portion of  your retirement is considered community property if you are in TRS.  People who divorce and are in ORP end up losing much more of their retirement in a divorce than people who are in TRS.  The faculty who have been hurt the most in a divorce are those who have a spouse who is in TRS.  When the court looks at the list of community property assets, the retirement assets of the spouse who is in TRS is shown as having a small fraction of the total, but the spouse who is in ORP appears to have a much larger asset base.    In such cases, the spouse who is in TRS usually gets to keep all of his or her retirement, and the spouse who is in ORP usually winds up having to give up a large portion of his or her retirement in the divorce.  On paper, it looks like the spouse who is in ORP has much greater assets; this is true even though the two people have both contributed the same amount of money to their retirement programs.

A word of caution is appropriate for those who do elect ORP.   If you are single and have your retirement money in ORP and marry take precautions to protect your retirement.  First, you would be better off to have a prenuptial contract drawn that specifically excludes your retirement from any divorce settlement.  Second, beginning with the first payment to your ORP funds after your marriage, make sure that your new contributions are put into a new account.  That way the money you accumulated before your marriage is not commingled with the contributions your contributions that were made after you are married.  This should be done with any TSA or TDA funds also.

As a new faculty member, you will be subjected to many sales people from ORP companies who are trying to sell you on the idea of investing your retirement money with them.  They will tell you the advantages of ORP, and there are some good ones, but they will never tell you that you will get taken for a big loss if you are in ORP and get a divorce.   The DCCFA wants you to know the whole truth.  Probably, no one else will tell you about these things until long after you have made an irrevocable decision.   The sales people from the ORP companies know about this, but they will normally avoid telling you the truth.

TRS is what is called a defined benefit retirement program.  ORP is what is called a cash accumulation retirement program.  If you live for a very long time, you can normally expect to come out ahead in a defined benefit retirement program.  In TRS once you retire, your monthly pension is set.  No matter how long you live you will continue to be paid that monthly pension.  Persons who live to be very old can expect to draw out all the money they have paid into TRS and all the money their employer has paid into TRS for them plus all the interest all that money has earned over the years plus a whole lot more. The pension continues till the retiree dies.  In TRS, you can never out live your money. At the time of death, the TRS pays a small death benefit which is enough to cover a funeral and the cost of probating a will if there is no challenge to the will in probate plus a little extra.   Of course, the down side of this is that inflation can cause the monthly pension from TRS to get smaller and smaller in terms of real purchasing power.  If inflation in the future is small the way it was in the 1990 and the early 2000s, inflation will not be a problem.  In the early 2000s, we actually experienced a slight period of deflation for a short time.  The U. S. dollar was very strong and foreign manufactured goods became less expensive for a while. 

If you are going to live to be very old and the inflation rate is mild, you are probably better off if you are in TRS.  No one knows for sure how long they will live.  The best predictor is reflected in the life histories of your ancestors.  If your ancestors all lived to pass 100, you will probably live to be quite old.  If all of your ancestors all died in their youth, you can expect to live a short life.  Of course you need to adjust that projection for the cause of death.  If your ancestors died young because of things like war, gun shot wounds, and automobile accidents, you should not necessarily expect to die young.  If you are a woman, you should expect to live longer than if you are a man.   Therefore, women may be able to benefit more from TRS than men.    Also, no one knows how bad inflation will be in the future.   If inflation remains low, TRS will be a good place to be.

If inflation is high, people in ORP who make the appropriate adjustments, may do much better, but this requires a lot of sophistication about investment management that some people do not have.  In the section titled “Who is better off in ORP”, we will explain some strategies that you can use to help you to out maneuver inflation problems in ORP and TSA investments.  In addition to sophistication in the area of investments, actively managing your own money will require some time to study general economic trends and to keep up with your specific investments.  These options that allow you to manage your retirement money so that you can keep up with inflation are not available to people who are in TRS.   In some instances, during inflationary times, TRS has had the money to give retirees cost of living raises.  This may no longer be the case. 

During the years 2000, 2001, and 2002, the stock market had a big drop.   Many faculty who were in ORP failed to move their money out of stock market investments and lost a big portion of their retirement.   These people will be forced to delay their retirement for many years.  People in TRS are a little bit better off but not as much as they may think.  The professional managers at TRS did not do much better then some of the faculty in ORP.  TRS has indicated that due to the losses in the 2000-2003 period, they expect that they will not be able to afford any cost of living adjustments for at least 20 years.  Young faculty who are coming on board now are going to retire so far in the future, that it is impossible to predict how well the TRS investments will be performing at the time of their retirements 30 to 40 years in the future.  We wish that we had a crystal ball and could predict these things in the future for you, but we cannot.

If your family has a history of certain kinds of illness that cause mental problems such as Alzheimer’s disease or strokes, you should probably select TRS.  Since many of the advantages of ORP only valid if you can actively manage your money, and since mental disability makes alert asset management impossible, such persons are better off in TRS. We have had faculty who have been forced into retirement due to Alzheimer’s disease.  Certainly, such persons are better off in TRS.  Any one who is diagnosed with a disease that is known to reduce their mental ability to manage their money should find a competent person who they can trust and arrange for a general power of attorney. While you are still able to function, you should file copies of the power of attorney with all financial institutions that have any of your money on deposit.  These would include banks, credit unions, insurance companies, brokerage firms, etc.   The problem is that certain firms will only accept a general power of attorney if it contains certain provisions. If you file the power of attorney while you still have normal mental functions, they will respond immediately and inform you of any changes they require.  If the person whom you have designated in your power of attorney waits till after you are no longer competent to file the paper work with the institution, and the power of attorney is rejected, you will be in serious trouble.  Since you will no longer be mentally competent to sign a new one, you will be forced to go to court and be declared mentally incompetent and have a guardian appointed.  This can be expensive especially if it is contested by some of your heirs.    For example Chase Bank will not accept a power of attorney unless it contains a “hold harmless” clause.  Most other institutions do not require this clause, and most attorneys will not include this clause unless you specifically know to ask for it. 

People who have a high level of trust in the Texas legislature may be inclined toward TRS.  TRS is sitting on a very big pot of money.  From time to time, when the State of Texas has needed money, some legislators have cast their eyes over on the TRS assets and have suggested that the state borrow from that fund.  So far this has not happened because there are so many public school teachers and employees that they have had the political clout to scare off the politicians who have cast their eyes on the TRS assets.  If the legislature decides to borrow funds from TRS, there is no way they can be forced to pay it back, and retirement benefits may be reduced.  Not only are there so very many public school employees who would vote against a politician who damaged the TRS money, but there are a significant numbers of voters in higher education who would oppose such an appropriation of funds. 

Participants in ORP have not always been treated well by the Texas Legislature. In 1969, when the ORP was established, the Texas Legislature included a guarantee program.  Basically, it specified that if one of the companies that hold and mange ORP money goes bankrupt, then the other companies would be required to help make up the loss to the participants in the defunct companies program.  The companies who sold ORP plans in the fall of 1969 made a big issue of this guarantee as part of their sales pitches.  There were one or two companies that did get in trouble and the guarantee was implemented.  Then the insurance industry began to realize that this was not something they liked and began to quietly lobby for the repeal of the guarantee.  In the late 1980s the guarantee was repealed by the legislature.  This legislative move by the insurance industry was managed so quietly that no one in ORP even knew about it until after it had passed the legislature and had been signed into law by the governor.  The way most faculty heard about the loss of the guarantee was that many of the sales people from ORP companies came around with a new sales pitch.  Basically the ORP sales people began to tell faculty that they needed to diversify their retirement funds by beginning to deposit their retirement with a different company to help compensate for the loss of the guarantee.  Clearly, the legislature had made ORP less attractive, but faculty had made an irrevocable choice, and the legislation that revoked the guarantee program did not include any provision for faculty to revert back to TRS. 

Today, the legislature is not trusted by the participants in ORP.  Can the legislature be trusted to take better care with TRS assets?  That is a decision you must make.  Do you believe that the clout of so many public school people will be sufficient to intimidate the legislature into taking good care of TRS money?  Here is something to think about along that line.  The most powerful lobby group among public school teachers is the Texas State Teacher’s Association (TSTA).  It is the Texas affiliate of the National Education Association also known as the NEA.  Ever since the ORP was passed in the Texas Legislature, the TSTA has had a formal goal of repealing ORP and forcing all higher education faculty and administrators at publicly supported colleges and universities back into TRS.  Some years they have put out a very serious campaign to accomplish this goal, and in other years they have only given token support to the goal of repeal of ORP.  In every session of the Texas Legislature they have failed to repeal ORP.  The faculty organizations associated with publicly supported higher education have resisted the TSTA efforts every time they have made a push to repeal ORP.  These organizations include but are not limited to the DCCFA (Dallas County College Faculty Association), TCCTA (Texas Community College Teachers Association), TACT (Texas Association of College Teachers), the AAUP (American Association of University Professors), and the Texas Federation of Teachers (the Texas AFL-CIO affiliated faculty organization that contains both college faculty and public school faculty in Texas).  Of course the opposition to the repeal of ORP was not limited to faculty organizations.  The repeal of ORP was resisted by the lobby efforts of the insurance industry and the financial institutions that are quite powerful in Texas.  After watching the TSTA fail to repeal ORP, how much faith can we have in their ability to protect TRS assets for us?  This is an important judgment you must make for your self.   On several occasions, TSTA has tried to organize community college faculty.  When they have been confronted with the issue of their official stand on ORP, they have withdrawn their organizing efforts with out attracting any participants in community colleges.

To summarize, persons who do not want to be bothered with actively managing their retirement program, persons who already have several years in TRS benefits accumulated before beginning their career at the college, people who are likely to divorce and do not have a prenuptial agreement to protect their retirement assets from the Texas community property law, people who expect to live to be very old, people who have a family history that includes medical conditions which can effect one’s mental capacity such Alzheimer’s disease or strokes, people who have a high level of trust that the Texas legislature will continue to support the TRS pension funds and assets, and those people who believe that we will have a minimum of inflation in the years following their retirement should be inclined to select TRS over ORP.  If you fall into all of these categories, you should select TRS and do not need to read any further.  Almost no one will fit into all of these categories and should look into the question of who is better off in ORP.

Who is better off in ORP?

A person who plans to stay with the community college for only a very few years is normally much better off if he or she selects ORP.  To be vested in TRS and qualify to draw at least a minimal pension, you must remain employed and pay into TRS for a minimum of five years.  Back in 1969, when ORP was first created TRS required a much longer vesting period, but changes in Federal laws have forced TRS to reduce their minimum vesting period to only five years.  ORP funds are vested after only one year and one day.  Today, many faculty in Dallas County are hired under the Visiting Scholar program which is a temporary position of normally only two years.  In two years, a visiting scholar will have completed the vesting requirement and may keep all of his or her ORP retirement funds.  Unless a visiting scholar is eventually hired in a permanent position in the DCCCD or is eventually hired some where else in Texas in a publicly supported institution, the employer’s contributions will be lost.  This will not apply to new faculty who come into their job with as much as three years in TRS because the two years as a visiting scholar will be sufficient to bring them up to the five year vesting requirement.

Faculty who think that they have a good chance of moving out of the State of Texas are much more likely to benefit from participating in ORP.   If you change employers to an employer out of the State of Texas, you will not be able to participate in TRS, and if you have not been in TRS long enough to get vested, you will lose your employer’s contribution.  If you move out of Texas, you will be able to take your ORP with you if you have completed the one year and one day requirement which even visiting scholars will normally achieve.

People who are interested in financial issues and like to actively manage all of their own affairs are certainly going to be more comfortable in ORP than TRS.  As mentioned earlier in this document, active management of your retirement will require some time and energy, but who does not think that his or her financial future is not worth spending time on?  If you want to have more control over your own financial future and are willing to devote some extra time, you should select ORP.  You do not have to be an expert in financial management, but you do need to invest some time to study the issues.

People who want more flexibility in their financial affairs should definitely select ORP.  ORP offers many, many options in terms of how you can manage your funds.  How much flexibility you have depends to some extent on which company you select.  Unfortunately, some ORP companies do not offer much flexibility at all.  In fact, some companies are so bad that you might as well be in TRS if you select them to handle your money.  Before you commit to an ORP carrier, you should schedule an interview with their rep and ask some questions to determine how much flexibility they will offer you in their contracts. 

At this point, you should consider some of the flexibility issues associated with the carriers and their contracts.  The very most important issue associated with ORP contracts is the question of “Can I move my money out of this company if I want move it to another company?”  The reason this is so important is that some times an ORP company can get into trouble and some even have gone completely bankrupt.  Since the State of Texas has repealed the guarantee, you could lose all of the money you have deposited with a bankrupt company.  At the fist sign that a company is in trouble, you should move your money out to another company.  If the contract you have with the company does not allow you to move, you are in trouble. 

Another reason you may want to withdraw your funds and move to another company is that the company you are invested in does not have the kind of investment opportunities that are appropriate for the changing economic times.  This issue will be explored later in this document.

Be sure you explore this issue of your ability to withdraw your funds with your sales rep before you commit your money to such a company.  There are several little tricks they play on you.  Some are so bad that their contracts specify up front that you may not ever take your money out except when you retire and take a monthly pension.  This is essentially the same thing that TRS does to you, but it may be less reliable because the amount of pension that you can draw at retirement is dependent on their annuity rates at the time you retire and you may not know what that will be till you are ready to retire.  If the company is bankrupt by the time you retire, the pension you with draw may be zero.  If you put your money with one of these companies, you are going to be stuck for good and would probably be better off in TRS.

One trick that they play on you is to penalize you if you take your money out.  Some contracts will specify that you will be charged some kind of penalty if you take your money out before you retire.  The companies with a withdrawal penalty is not quite as bad as the ORP companies that will not let you take your money out at all, but these companies should be avoided because a faculty member may choose a company that does not include any withdrawal penalty at all.  Some times this provision is called a backend load.  You never have to pay the backend load unless you take your money out of the company.

Another trick is to only allow you to withdraw a certain percentage of your assets each year.  At one time VALIC had more clients in the DCCCD than any other ORP carrier. VALIC has one contract which would only allow a client to take out 20 percent of his or her money each year; thus, after you retire, you may get all your money out over a five year period, but if you want to with draw your money before you retire so you can move it to another company, you are restricted to taking out only 20 per cent of what you have on deposit that year.  This means that you always must leave 80 percent of your money with the company after making an annual withdrawal.  This also means that you will effectively never be able to get all of your money out until five years after you retire. Not all of VALIC’s contracts include this onerous rule.   Some of VALIC’s contracts have a front end load.  This means that you wind up paying a big penalty when you first deposit you funds with the company.  In these contracts, you lose a big chunk of your money no matter what you do or do not do.  These front end load funds usually let you withdraw your money any time you want to because they have already charged you the penalty, but why select a company with a front end load when there are companies that do not have such penalties?  Several companies do charge these so called loads either at the front end or the back end and are better avoided.

TIAA-CREF has a contract option called the “Traditional” contract.  In this contract, you are required to spread your withdrawals out over a ten year period.  TIAA-CREF has some other options that are more liberal.  That is an improvement over their previous rules.  At one time in the past, TIAA-CREF would not allow any kind of withdrawal at all except to take a pension when you retire.   At the time this document was being drafted, the list produced by the DCCCD HR office did include a local address for TIAA-CREF but not a local phone number.  In 2004, the local office phone number for TIAA-CREF in Irving, TX was 1-800-842-2006 and their national office was 1-800-842-2776.  Most of the other companies on the DCCCD list had a local office phone number.
 
You may wonder where you can get information about the companies.  First, you can get a list of the companies that are approved to do business in the DCCCD from your campus HR office.  This list will usually contain the name and phone number of their local agent.  Not all companies that do business in the State of Texas are going to be on the approved list for the DCCCD.  The board of trustees must approve each company that wants to do business in the district.  Begin by getting a list from the HR office on your campus.

The TCCTA(Texas Community College Teachers Association) and the TACT (Texas Association of College Teachers) conduct an annual review of the companies that do business in Texas and publish a report.  These are very large state-wide organizations and they have the resources to collect and evaluate information about the companies.  Some times this is called the TACT report because when this study started many years ago it was first produced by TACT.  Later TCCTA has participated in a joint venture with TACT to produce the report.  TACT is an organization of faculty at four-year colleges and universities.  TCCTA is primarily an organization of faculty and administrators at two-year community and technical colleges.  If you join TCCTA, you will receive a publication titled the Messenger.  Normally the ORP report is included in the September issue of the TCCTA Messenger.  In order to get the September Messenger, you should join TCCTA when you first come to work in August if you are starting to work in the fall semester.  You can join TCCTA by going to their web site at http://www.TCCTA.org or signing up with the TCCTA rep on your campus.  Please keep in mind that all the companies that all the companies listed in the report may not be available in the DCCCD.  TCCTA is a good source of helpful information about retirement offerings, and it is updated each year.  The organization helps to lobby for the benefit of community colleges with the Texas Legislature in Austin. 

If you are starting to work in the spring semester, you should be able to access the TACT report on the web at: http://www.TCCTA.org/publications/ORP-Study-04.html. This specific internet URL was the path to the 2004 version of the report and the report in subsequent years may change; therefore, you may have to go to the http://www.TCCTA.org web site and dig around to find the current report. If you are going to have your money in ORP, you should check out the report each year when it is published and consider the information carefully.  After a careful study, you may decide to make some changes. The Texas ORP law allows you to change your ORP carrier once each year.  You should consult the TCCTA Messenger each year to update information about your ORP company. 

There are other sources of helpful information.  Since many of the companies that offer ORP services, you may want to consult companies that rate insurance companies.  The best know rating service is A. M. Best.  They have a web site at http://www.ambest.com. A. M. Best publishes ratings of most insurance companies.  There are critics of A. M. Best.  You will find a web site that will inform you of the problems associated with the Best ratings which you can access at www.ambest.org.  This site is not operated by the company, but it does share a lot of information that contains cautions about the Best ratings.  Be sure and look at this web site before you take the A. M. Best rating too seriously.  The main criticism of A. M. Best and several of the other rating companies is that they are paid by the companies they rate, and in some instances companies that have been rated with high ratings have suddenly gone bankrupt.  Best has been accused of grade inflation.  What would you think of a professor who gave nearly all A’s to his or her students?  Other companies that are also well known and publish ratings are Moodys which can be accessed at http://www.moodys.com and Standard and Poors which can be accessed at www.standardandpoors.com.  These companies also are paid by the companies they rate.  Never make your decision based on these ratings alone.

Another source of ratings that is much more independent and does not accept any money from the companies that are being rated is Weiss Ratings.  Unlike the other companies that are listed above, there has never been a company that was rated highly by Weiss that has ever declared bankruptcy.  You can access information about Weiss via the internet from http://www.weissratings.com.  There is just one little problem with Weiss.  Since they do not accept any money from the companies they rate, they will charge you for their information.  Weiss will sell you a report on any company they rate.  These reports are helpful and not expensive.  You are advised to purchase a Weiss rating for any company before you commit a year of your retirement money.  Also, as part of your annual review,  you should acquire the Weiss rating report on the companies with which you currently have money deposited.  In order to reduce the expense, you can share reports with your colleagues or take turns purchasing the reports with others who have retirement money deposited with the firms you use.  You can access the Weiss reports on the internet and print hard copies which can easily be copied with a photo copier.

When you interview a sales person from an ORP company, you should ask them for their rating from A. M. Best, Moodys, Standard and Poors, etc.  You might ask them if they know of any other services that rate the company.  Since these rating companies usually rate their customers with good ratings the sales person will be proud to give you the ratings.  Next, ask the sales person for their current Weiss rating.  If they do not know it or will not tell you what it is, be sure and check it out before signing up with that company.  Weiss suggests that you not put your retirement with any company that has less than a B+ rating.  Some of the companies that do business with the DCCCD employees have less than a B+ rating with Weiss.  Remember, you are going to depend on this company to provide for you in your old age.  Be sure that you do not commit your money to a company that will not be there for you in your old age.  Do your home work; check the ratings (especially Weiss) and read the ORP report from TCCTA each year.

The fact that in the case of some contracts withdrawing your money from TIAA-CREF could be a little distressing because in a recent check  (early 2004) TIAA-CREF’s Weiss rating had dropped to B which is below the minimum of B+ recommended by Weiss.  If you are interested in TIAA-CREF or any other insurance based ORP program, you should get a current rating from Weiss ratings.  These ratings do change over time.  Keeping up with the ratings of ORP companies is like shooting at a moving target.  It changes frequently.   Participants in ORP or TSA/TDA programs are advised to check the ratings of their companies annually.

The DCCFA publishes a news letter several times a year called the Advance.  The Welfare and Benefits Committee will normally include an article in the Advance with updates about ORP companies or tips regarding handling your ORP money.  You are invited to join the DCCFA and you will be given a copy of the Advance each time it is published.  This source of information will be specific to companies that are operating in the DCCCD.

The issue of flexibility is some what restricted by the fact that your ORP retirement plan is administered under section 403B of the Internal Revenue Code, but it offers some important advantages and options.  Before you proceed into ORP, you need to understand the basics of 403B.  Under section 403B, your contributions to your retirement program are tax sheltered.  That means that you do not pay income tax on that part of your salary that goes into your ORP account.  As long as you keep the money in a tax sheltered account, you do not pay income tax on the interest or other earnings that accumulate. You do begin to pay taxes on this money when you retire and begin to withdraw the money to support your retirement, but the assumption is that you will be in a lower tax bracket at that time.  All ORP money is normally put into a 403B account.  403B accounts limit you to basically two kinds of investments.  These are annuity funds offered by insurance companies and mutual funds offered by mutual fund companies.  You should be able to get a Weiss rating on any insurance company that participates in ORP.    Many kinds of excellent investment vehicles are not available to 403B participants.  The Internal Revenue Code does offer one exception.

Back in 1969, when ORP was first made available, ORP offered the faculty member the advantage of tax sheltering his or her retirement contributions, and people who were in TRS were not able to tax shelter their contributions.  That meant that people who were in TRS were contributing after tax money to their retirement, and people who went into ORP were contributing pretax money into their ORP accounts.  ORP participants were given an immediate tax break that TRS participants did not get.  This made ORP much more attractive than TRS.  After a few years, that all changed, and faculty who elected to participate in TRS were able to tax shelter their contributions the same way ORP participants did.  That means that now ORP is not so much better than TRS as it was when ORP was first implemented in 1969.  

After you have passed the age of 59 and ½, the Federal law allows you to transfer your 403B money into what is called a “roll over IRA.”  The roll over IRA (Individual Retirement Account) offers you many advantages and one disadvantage.  The great advantage of the roll over IRA is that you can be much more flexible in terms of how you invest your money than if you leave it in a 403B account.  Also, this roll over is not a “taxable event” and your money remains tax sheltered.  For example, in an IRA you can invest in individual stock shares.  Your money is still tax sheltered.  

The disadvantage in being in an IRA is that you must begin to take minimum withdrawals from your account after you pass the age of 70 and ½ even if you have not yet retired.  These withdrawals are subject to income tax.  If you are still working full time, these withdrawals will throw you into a high income tax bracket.   If you do not choose to work past 70 and ½, this will not be a problem.    The problem is that some ORP companies will not allow you to perform this roll over.  Therefore, when you are interviewing a sales rep from an ORP carrier, be sure and ask the sales person if the company allows you to move your money to a roll over IRA after age 59 and ½.  Some companies do not even offer roll over IRAs and will not permit you to make this change.   If they say “no”, then they do not offer you one of the most flexible options that the law makes available to you.  If the company is going to lock you into such an inflexible contract, you might as well be in TRS.  Remember, TRS will not let you move your money into a roll over IRA and ORP will.

The federal law allows you to move your money from one fund in a company to another fund in the same company with out paying any income tax on the transfer.  Also, the law allows you to move your money from one company to another without paying any income tax, but some companies can make this into a problem for you.  Before you select a company make sure the company will allow you to move your money to another company.   TRS will not allow you to transfer your money out at all.

Next, ask how they handle such transfers.  For example, some companies will not send the money directly to another company.  They insist on sending the money directly to you, and then you can forward the check to what ever company you want to use.  This can cause a problem.  If your ORP company sends the money directly to you, they must report to the IRS that they have sent you the money.  The IRS automatically assumes that you owe taxes on this money and flags your account.   When you file your annual income tax return, the IRS computers will find a conflict in your reported taxable income and the taxable income in their data base.  This discovery will trigger an IRS audit.  You will have to take the receipt from your new ORP carrier down to the IRS and prove that you did deposit the money with in 45 days after it was taken out of the original company.   If you held the money over 45 days, the money you withdrew becomes taxable and you will owe income tax on that money.  Since the IRS assumes that you are some kind of tax evader, they will likely ask you to produce receipts for all the other items you have listed on your income tax return.   This is a way that some ORP companies punish you for transferring your money out of their company.  That is why you should find out how the company handles transfers out of the company before you deposit your retirement money with them.  If the money is transferred directly to another company, then the withdrawal is not reported to the IRS.   In 1969 and the early 70s, Southwestern Life signed up a lot of DCCCD faculty in their ORP program.  They had a policy of only sending withdrawals to the participant and not to another company.  Faculty who withdrew from Southwestern Life were subjected to this kind of greeting from the IRS in the early 70s.  Southwestern Life is no longer even listed in the DCCCD’s official list of approved ORP companies, but you should always check to see if the company you are considering will use this or some other technique to punish you for moving your money.

You should be sure and get the current list of ORP participants.  From time to time new companies are added to the list and some old companies like Southwestern Life are deleted. 

Flexibility is important.  When you select a company to handle your ORP retirement funds, be sure and select a company that has several options and make sure that the company’s contract allows you to move your money from one fund to another.  The main reason is that our economy is cyclical.  During certain periods stocks do well.  During other periods most stock market investments will cause you to lose a lot of your retirement money.  To illustrate the need for flexibility in your ORP account, the history of major financial trends will be reviewed for the period from 1969 when ORP started to the time this document was drafted in 2004.

A little review of investing history since ORP began in 1969

When you look at the options available make sure that your company offers an option that allows you to invest in the stock market as well as some non stock market options. During the period from 1969 to 1982 the stock market did not do well at all.  People who had money in the stock market during this period did not make money.   In fact, many faculty who put money in to stock market based products during this period actually lost a lot of their retirement.  During this period most companies offered both fixed and variable accounts.  The variable accounts floated with the stock market and the fixed accounts paid a fixed rate of interest.  Especially during the early 1970s, the stock market performed miserably, and faculty who had put money into those variable accounts saw much of their retirement money evaporate.   On the whole, the fixed accounts did much better during that period. 

One problem with the fixed accounts was that during the late 70s the economy was plagued by double-digit inflation.  People who had their retirement money in fixed accounts watched as the money became less and less valuable as it was eaten up by inflation.  New money that was deposited into fixed ORP accounts did earn higher interest rates that did help compensate for the high level of inflation, but the ORP companies developed a dirty little trick called “banding” which meant that old money continued a low interest rate while only new money could earn the current rate.  If you asked a sales rep what interest rate they paid on their fixed accounts, they would all quote the current rate.  They would not even tell you what rate was being paid on old money if you asked.  This got so bad that the Texas Coordinating Board passed a rule that all companies that used “banding” had to send participants a quarterly statement showing what rate was used for each band in their accounts.    If you are considering putting your money into a fixed account, you should be sure and ask the sales if the company uses “banding.”  If they say yes, then ask to see their statement which shows how the rates are banded.  Compare this with other companies that band their interest.

For most of the period from 1982 to 2000, the stock market performed well, and the stock market did especially well in the late 1990s.  In the early 1990s there was a brief recession, but it did not last long.  In fact, the late 1990s was one of the most prosperous times in the history of the stock market.  Faculty who had their retirement assets in common stocks saw their assets grow significantly during that period. The truth is that the stock market runs in cycles.  There have been periods of prosperity in the stock market and periods of great loss in the stock market.  The trick is to be in the stock market during periods of prosperity and to move into other instruments during times when the stock market is not doing well. 

If you want to learn more about the history of the stock market and how cycles work read the book titled:  Stock Cycles, by Michael A. Alexander, Ph.D. The ISBN is 0-595-13242-1.  This book was written in 1999. The author predicted that the stock market would peak out begin to crash in March of 2000, and that is exactly what the stock market did.  Dr. Alexander attempts to predict the stock market’s behavior for the next 20 years.  If you are interested in knowing more about stock market behavior, get this little book and read it.

One of the worst times to be in the stock market was 1973 and 1974.  A lot of retirement money was lost by ORP participants during that period.  Also, in the latter part of 2000, 2001, and 2002, people who stayed in the stock market lost a lot of their retirement money.  Some faculty who stuck it out in the stock market lost so much money that they will have to delay their retirement plans.   In 2003, the stock market had a rally.  Stock market participants made some money in that year, but that 2003 rally did not even come close to making up for the big losses of the pervious three years.   The point of this history lesson is that you must choose a plan that has some options other than just stock market participation and you must have the option of moving your money from one type of fund to another.

During the period of 2000 to 2003, some people made a lot of money in their ORP accounts.  Those people moved out of common stock investments into bond funds some time in 2000.  The period of 2000 to 2003 was characterized by a recession.  In a recession, the stock market goes down and unemployment goes up.   The Federal Reserve Bank tries to fight recessions.  The main tool the Fed uses to fight recessions is to lower interest rates.  During that recession, the Fed lowered interest rates again and again.  That is a typical response for the Federal Reserve Bank in times of recession; it is always what the Fed will try to do in a recession.   When interest rates go down, bonds go up in value.

The basic rule that controls the market price of bonds is that bond values go up when interest rates fall, and the market price of bonds goes down when interest rates go up. The faculty members who had put their money into bond funds during that period from 2000 forward saw their assets go up while others were losing their retirement funds that were invested in the stock market.  This was predictable.  When the Federal Reserve is faced with a recession, their main weapon is to reduce interest rates.  There are certain signs that the Fed will respond by lowering interest rates before they actually do it.  Rising unemployment rates is one important indicator.    Make sure that what ever company you select has a bond fund you can move into when a recession is coming.   Many ORP companies do offer the option of a bond fund.  Be sure that you do give yourself the option of a bond fund.

The scope of this document is not sufficient to elaborate adequately on the subject of bond behavior beyond this simple explanation.  If you want to learn more about bond investing read The Bond Book by Annette Thau.  The ISBN is 0-07-135862-5.  If you read Ms Thau’s book, you will have a lot of information about bond investing.

There are a lot of different kinds of bond funds.  Two major types are municipal bond funds and general bond funds.  Municipal bond funds are tax exempt.   Never use a municipal bond fund if it is part of your 403B.  Municipal bonds pay lower interest than other bonds because the interest income they pay is tax exempt.  You do not need tax exempt bonds because your ORP money is already tax sheltered and you do not pay income tax on that interest.  Your non municipal bond funds are always much better for an ORP investment.  If you have some money outside of your ORP or any tax sheltered, and you are in a high income tax bracket, and you want to invest in a bond fund, municipal bonds may be your best choice.

The low interest rates contributed to the stock market rally in 2003.  In 2004, the Fed began to raise rates just a little.  This raise in interest rates and high energy prices has taken the wind out of the rally in 2003 and has caused the stock market to mostly go sideways in 2004.  If interest rates continue to go up, bonds will eventually begin to lose value.  2004 is a good time to bail out of bond funds.  This document was drafted during the fourth quarter of 2004.  As of the third quarter of 2004, bonds have out-performed the stock market.  The only major exception to this rule is energy stocks.

The economic slowdown in 2004 has been driven by several factors.  One factor was increasing interest rates imposed by the Federal Reserve.  The Federal Reserve Bank can only control short term rates and not long term rates.  Bonds are long term securities.  An increase in short-term interest rates does not always translate into an immediate increase in long-term interest rates, but if the Federal Reserve Bank continues to increase short term interest rates, eventually long term rates will follow.  The failure of long term rates to increase immediately after an increase in short term rates can be seen in 2004.  Home loans have increased a little bit, but the interest rates for home loans are still relatively low. 

Historically speaking, rising interest rates and rising energy prices have not produced a prosperous stock market.  Where do you go with your money?   When you are not sure where you want to go with your money, and you want a place to park your money in a safe place while you try to study the situation, an excellent option is to use a money market fund.   Many ORP companies do offer money market funds.   In a good money market fund, you will not lose any money, but you will not make a big killing either.  A money market fund is a good place to temporarily park your money when you need to take a short breather to determine which way the wind is blowing and study the economic trends.  In a period when the Fed is gradually raising interest rates, money market funds will gradually begin to pay higher and higher interest and their earnings will increase slightly. 

A good money market fund has some other uses.  For example, when you get close to retirement, you should begin to manage your ORP funds more conservatively.  If you take a big loss in your retirement funds when you are old, you do not have time to recover before you need to use those retirement funds.  Therefore, older people are advised to manage their funds more conservatively.  One way to manage your retirement funds more conservatively is to allocate a larger portion of your funds to a money market fund. 

If you want a high level of safety, the best money market funds are treasury only money market funds.  Treasury only money market funds are 100 percent invested in short term US government securities.  By short term we normally mean that no security has a maturity greater than 120 days.  In contrast, bond funds hold securities that have much longer terms than money market funds.  The longer terms associated with bonds make the bond funds subject to a loss of market value when interest rates are going up.  Even during the Civil War, the US government never failed to pay its obligations.   Make sure that your ORP company offers a money market fund, and if safety is an important make sure that it is a treasury only money market fund.  

Money market funds are dangerous from one perspective.  If inflation becomes high the value of the money in a money market fund will not keep up with inflation, and you will get hurt by leaving your money in money market funds for an extended period.  You need to look for some other options to use in periods of inflation.

During the period of 2000 to 2002 we actually had some experience with some deflation. The US dollar was so strong that imports became less expensive, but in 2004 we are seeing some signs that inflation is beginning to return.   The problem is that most stocks do not do well in times of inflation.  We had high inflation in the 1970s.  The stock market did not perform well during that period.  Bonds did not do well either.  More recently, the US dollar has fallen in exchange with other world currencies and most imported products have become more expensive.  When inflation appears, the standard method used by the Federal Reserve to fight inflation is increased interest rates.  The Fed has already started that process of raising interest rates in 2004.  Higher interest rates tend to cause bond funds to decline.  

In order to answer the question of “where can we go in times of inflation?”, we need to look back at the history of the period of 1969 to 1982.  What investments did well back then?   Few investments did well back in the 1970s.  Only hard assets and commodity based investments did well.  A house purchased in 1973 typically more than doubled in value by 1982.  During that period of the 1970s, we saw gold jump up to over $800 per ounce.
 
Why did we see high inflation in the 1970s?  It was at least partly a result of the Viet Nam war.  LBJ’s policy of “Guns and Butter” resulted in big federal deficits.  This led to a period of inflation in the 1970s.  In this era, the economy was so bad that a new term was coined:  “stagflation.”  One can not help but wonder if the War on Terror will lead us down the same economic path as the Viet Nam war.  Only time will tell for sure, we are already seeing big federal deficits. In the early 1970s, we saw gasoline prices take a big jump up, and in some periods there was a shortage of gasoline with long lines at filling stations.  We have seen big increases in fuel prices in 2004.  Increased energy prices can contribute to inflation.  If fuel costs more, every thing that is shipped from place to place will cost more because the cost of shipping will have to be factored into the retail prices.  Factories require energy such as electricity and natural gas.  If these energy costs go up, the management of the factory must charge more for the items they sell in order to cover their operating costs. 

Implications from historical observations:

If we are faced with inflation period like we had in the 1970s, we need to look for hard assets to investment our money in.  You can not purchase houses or gold bullion with your 403B money.  Investments appropriate to a stagflation economy hard to find in most 403B offerings.   There are hard asset mutual funds available, but they are not as common in 403B accounts as bond funds, money market funds, common stock funds, etc.   When you talk to a sales person from an ORP carrier, ask the sales person what they offer in terms of opportunities to invest in hard assets.   This will of course change from time to time.   ORP companies frequently add new options.   Watch for the articles from your Welfare and Benefits Committee in the Advance.  When we find a good hard assets fund or commodity based offering in a 403B plan we will report on that finding in the Advance. The possibility of repeating an economy characterized by “stagflation” is sufficient to justify selecting a company that either has a hard assets fund or a company that will definitely let you withdraw your finds and move to a different company with no restrictions or penalties or with out having to suffer long delays.

If you are not able to find a satisfactory offering in terms of a hard assets fund, there is one other option that can give you some of the same advantages.  Some mutual fund companies offer industry specific mutual funds.  These industry specific funds own common stocks of several companies that are all in the same industry.   Certain industries tend to profit from rising values of hard assets and commodities.  For example, Fidelity is a mutual fund company that offers ORP to DCCCD participants.  It has a long list of industry specific funds that are all called Fidelity Select funds.  A few of these Fidelity Select funds target businesses that are inclined to profit from the rising value of hard assets and commodities.  Gold mining companies profit from the rising value of gold because a mining company’s remain about the same regardless of the price of gold, but when the price of gold goes up, the profit of a gold mining company goes up.  Fidelity has a select fund called the Fidelity Select Gold Fund (FSAGX). 

Sometimes the gains in these commodity related funds can be significant.  Another example of a select fund that might profit from rising hard assets is the Fidelity Select Natural Gas fund (FSNGX) or Fidelity Select Energy (FSENX).  The letters in parentheses represent the official symbols used to identify these products.  As of November of 2004, the Fidelity Select Natural Gas fund had grown 49.76 percent during the last 12 month period, and the Fidelity Select Energy Fund had grown 41.53 percent. Also, the Fidelity Select Energy Services Fund (FSESX) had grown 40.74 percent.  These are examples of industry specific mutual funds that have prospered from the rise in commodity prices that can cause inflation. 

If you want more information go to http://www.fidelity.com or email their rep at Steve.Worthen@fmr.com.  Unfortunately, the sheet that the DCCCD’s HR offices hand out does not contain this email address.  Email addresses are included for many other company reps.

No matter what ORP company you select, you should at least have the option of selecting investment options that allow you to maximize your earnings during a variety of economic circumstances.  You should be able to select common stock funds that are appropriate for prosperous times, a bond fund that will let you take advantage of falling interest rates in a recession, a money market fund that will allow you to protect your money during periods of uncertainty while you take time to make a decision about where you want to move, and some kind of hard assets or commodity based investment opportunity in case we are faced with stagflation again.  History has taught us that economic circumstances change and we need a set of investment options that will allow us to make an appropriate adjustment to changing economic conditions. 
 
Other Considerations in selecting an ORP company:

When you select your ORP company, you should be sure that the company offers good service.  Can you phone a local rep who will answer your questions?  Can you access your account over the Internet and keep up with how well your funds are performing?
If you can access your account over the Internet, can you make changes directly yourself such as transferring money from one fund to another or do you have to phone a representative?  Is there a special charge for making changes in your account?  Do they delay the process by making you sign a form every time you make a change in your account and require you to mail it by snail mail?

All ORP companies charge an administrative fee for handling and servicing your account.  Some companies charge more than others.  Before making a final choice on selecting your company, you should be sure and find out how much you will have to pay in fees.  If you find several companies that are other wise equally good, you should consider how much you will pay in service fees to help you make your final decision, but do not let the fee structure be the only basis of your decision.

Do not forget to select a company that is financially sound especially if it is an insurance company.

Other Options:

In addition to TRS and ORP, faculty have the option of tax sheltering additional contributions to their retirement funds.  These types of programs are often called TSA or TDA funds.  These letters stand for Tax Sheltered Accounts or Tax Deferred Accounts.
Actually TDA may be a more accurate term because the truth is that the taxes are not permanently sheltered.  The taxes are merely deferred until the faculty member retires and begins to take money out of his or her retirement account.  When money is taken out of a TDA or a TSA account, income tax must be paid to the IRS.  This is true of money that is received from an ORP fund or TRS for that matter.

These TDA or TSA funds must be deposited with a private company.  TRS does not allow the individual faculty member to make additional deposits to their TRS funds.  All the companies that offer ORP accounts also offer TSA or TDA accounts.  When a faculty member selects a company to handle his or her TDA/TSA account, all the same considerations should be applied as in the selection of an ORP company.    Make sure the company is safe.  Make sure that appropriate options are available for a variety of economic conditions.  Make sure that you will be allowed to roll your money into a roll over IRA after age 59 and ½.  Make sure that you have the ability to withdraw your money from the company if you are no longer satisfied with them for some reason with out any of the difficulties that have been specified in relation to ORP companies.

Some differences between ORP and TDA/TSA investing should be understood.  First, with ORP your employer adds additional money to your contribution.  Second, your employer does not add additional money to your TDA/TSA. 

When you contribute money to a TDA/TSA, your income tax liability is reduced for the year in which you make the contribution.  That means that your take home pay will not go down as much as your TDA/TSA contribution.  The money remains tax sheltered as long as you do not withdraw it.

If you are in ORP, you do not have to use the same company for your TSA/TDA as your ORP, but it may be more convenient to deal with only one company.   On the other hand, if your ORP company goes bankrupt, you will have your TSA/TDA money to fall back on in your old age if it is in a completely different company. 

If you are in TRS, you may put additional money into a TSA/TDA.  If you do put money into a TSA/TDA offering, you are faced with the same issues that are faced by those who are in ORP.  You must select a company and then select the most appropriate option from those offered by your company.  All the same advice that applies to selecting an ORP company will apply to selecting your TSA/TDA company.   You will need to select the type of option that is offered by your TSA/TDA company.  Again all the advice that applied to selecting the kind of fund to invest in with ORP applies in your TDA/TSA funds.  Try to get as much flexibility in your TSA/TDA as possible.   The main difference for a person in TRS is that if they make a bad decision regarding their investments in their TDA/TSA choices they still have their TRS pension to fall back on.

TSA versus ROTH and IRA

In the past, we have always been advised by financial advisors to put any money that we can put into our retirement investments into our 403B first, and if we can afford to put in some additional money above the max that we can put into 403B to look into a Roth or Traditional IRA.  That may not be the best advice today.  In some instances, faculty may be better putting retirement funds into a ROTH instead of a 403B TSA. 

In past years 403B and 401K plans enjoyed certain protections that were not available to funds in IRAs.  For example, if you are subjected to a judgment from a law suit or were forced into bankruptcy, your 403B and 401K funds were protected in ways that your IRAs were not.  Early in 2005 congress amended the law to extend some of those protections to IRAs up to a maximum of $1,000,000.00.  The new law was challenged in court, and the case went to the U. S. Supreme Court.   The U. S. Supreme Court has ruled that the new law is constitutional, and IRAs are now able to enjoy the same protection as 403B accounts up to $1,000,000.00.   Prior to this court decision which was issued at the end of the Spring 2005 semester, your retirement funds were safer in a 403B than in an IRA.

Today, unless you have more than $1,000,000.00 in your ROTH or traditional IRA, your money enjoys the same legal protection that your 403B funds.  This makes ROTH and traditional IRAs much more competitive with 403B investments than they have been in the past.  ROTH and traditional IRAs have always offered some advantages that have not been available in our 403B accounts.  First of all, if you decide to put some money into a 403B account, you must select one of the companies that are on the approved list with the DCCCD.  Some excellent ROTH and traditional IRA investment options exist that are not on the DCCCD’s approved list.  More important, once you have put your money into a ROTH or traditional IRA account, you may select investment options that are not available in the 403B context.  I will give you an example.  In the last year or two years, royalty trust investments have out performed both stocks and bonds.   In many ROTH and traditional IRAs, you have the option of investing in royalty trusts.   In 403B accounts, you may not elect to invest your money into royalty trusts.  In recent years, bond investments have performed better than stock market funds because of falling interest rates.  In periods of rising interest rates, bonds tend to perform poorly.  If the Federal Reserve Bank continues to raise interest rates, we may see bond investments lose value.  If this happens, bond investors who have their money in bond funds will get hurt.  Bond investors who have their investments in individual bonds instead of bond funds will eventually get all their money back when the individual bonds mature.  403B accounts do not permit the investor to invest in individual bonds, but ROTH and traditional IRAs do permit investors to purchase individual bonds.  The fact that both ROTH and traditional IRA offer more and better options has always made them some what more attractive than 403B accounts.

ROTH retirement funds may offer the best advantage for long term gains.  If you put money into a ROTH account, you must use after tax money.   While the money is on deposit in a ROTH account, it is not subject to income tax, and more important, it will not be taxed when you withdraw it..  The interest and capital gains are never taxed.  In contrast, your 403B funds allow you to deposit pretax funds which are not taxed while they are in the account, but are taxed when you take the money out.  At the present time, federal income tax rates are at an historic low; therefore, using pretax funds is not such a big advantage.   Also, the federal deficit is at a historic high point.  The federal government is being funded by borrowing money that will have to be paid back in future years.  That means that in future years income tax rates will have to be much higher to pay off the debt.  Given that reality, investing pretax dollars today and paying income tax on the money when you take it out in the future may not be a good deal at all.  In contrast, depositing money in a ROTH that has had the tax paid on it while income tax rates are low and allowing us to make tax free with drawls in future years when the rates are higher offers an attractive advantage. 

Old faculty (those over the age of 59 and ½) have the option of rolling their TSA money (which is sheltered under 403B) over into a traditional IRA.   Such rollovers are not defined as taxable events by the IRS.  Now that IRA money enjoys the same legal protection as 403B money, all old faculty are advised to seriously consider such rollovers this year.  Currently the federal law does not allow young faculty (those under the age of 59 and ½) to participate in such rollovers.  Currently, DCCCD policy does not allow faculty to roll their ORP (which is sheltered under 403B) into an IRA until after they retire.  The TRS does not ever allow any such rollovers regardless or your age or retirement status.

The importance of flexibility, examples:

When you are beginning your career as a faculty member, you do not know what circumstances you will face when you are ready to retire in 30 to 40 or more years.
Consider some possible scenarios.

Dr. P is a professor close to retirement.  He becomes ill, and visits his physician.  After some tests, the physician tells Dr. P that he only has eight months to live.  Dr. P retires immediately.  If he is in TRS, he will draw pension checks for eight months, and after he is dead his family will get a small death benefit payment.  All that money that he and his employer have paid in for so long will become the property of TRS.  If he had been in an ORP plan that required him to annuitize his retirement (which means he is forced to take a pension with his retirement money), he would suffer the same fate but without the small death benefit payment to his heirs after his death.  On the other hand, if Dr. P had been in a flexible ORP plan, he could have transferred his money to a roll over IRA and with drawn what ever he needed to cover his living and medical expenses and income taxes from his IRA fund, and he would have been able to leave most of the money to his heirs. 

Mrs. M has recently retired from teaching music at the community college.  She was in an ORP plan that required her to annuitize her ORP money when she retired and take a pension.  This requirement was imposed by a provision in the company’s contract.   After she had been retired for a few years, a period of inflation began to appear in the economy.  The cost of every thing went up.  At first, she had been comfortable living on her pension, but since she was locked into a fixed income, she gradually observed that covering her living expenses became more difficult.

Miss R taught English at the same community college and retired at the same time as Mrs. M.    Miss R had her retirement money in a much more flexible ORP plan.  As soon as she retired, Miss R rolled her ORP money into a self directed IRA.  At first, she used the money to purchase shares in REITs (real estate investment trusts) which paid a high rate of interest.  She was able to withdraw only the interest and live on it.  When the period of inflation began Miss R sold all of her shares in REITs.  Since the REITs had appreciated in value, she sold the REIT shares for more than she paid for them.  She did not owe any capital gains tax on the REIT shares because the money was still tax sheltered in the IRA.  Since she anticipated that the inflation was expected to be related to an increase in energy prices, she used the money to purchase shares in Canadian Royalty Trusts that owned oil and gas wells and paid an average dividend of between 13 and 16 percent annually in monthly payments.  Since periods of domestic inflation are often related to a drop in the exchange rate of the U. S. dollar, and the dividends on the royalty trusts are paid in Canadian currency, each month Miss R saw her monthly income increase at least as fast as the inflation.  When she first purchased the Canadian royalty trust shares in 2003, $1.00 US could buy 1.58 Canadian dollars.  By November of 2004, 1.19 Canadian dollars would exchange into $1.00 US.  During these two years, Miss R saw her income go up much faster than inflation.  Miss R had a much better retirement because she had selected an ORP program that was flexible enough to allow her to roll her money over into an IRA, and she managed it well. 

Mr. A was a retired French professor.  He had his retirement money in a roll over IRA. After being diagnosed with Alzheimer’s disease, he used the money in his IRA to purchase annuity contracts with four different companies that had B+ or better Weiss ratings.  He arranged for the monthly pension payments to be deposited into his checking account electronically.  An attorney drew up a power of attorney that gave a trusted nephew access to all of Mr. A’s bank accounts and financial assets.  The nephew took control of managing all of Mr. A’s affairs while the old gentleman was still able to function.  Also, the attorney drew up a living will and a medical power attorney giving the nephew control over all of Mr. A’s medical decisions. 

The above examples illustrate how important flexibility is to your retirement decisions.  You never know what will happen in the future.  If you have a lot of flexible options, you can make the best adjustments to a variety of circumstances.

Social Security Considerations:

If you have paid into social security before you came to work as a faculty member with the DCCCD, you are going to be deprived of most, or in some cases, all of your social security pension benefits.  Congress has passed laws that deal with what they call the problem of double dipping.   People who draw a pension from a public institution like the DCCCD are guilty of double dipping if they also draw social security.   It matters very little if you select TRS or ORP.  

If you want more information about this issue, go to your computer and open your web browser and go to http://www.socialsecurity.gov\pubs\10045.html and read up on this issue.  If you have worked and paid into social security for 30 years or more, you are exempt from the double dipping law and can draw from both social security and either ORP or TRS funds.  Otherwise there is only one very little exception.  If you reach the age where you are eligible to draw social security and are still working, you can draw the social security until you retire.  When you retire, social security stops paying. 

ORP participants who have paid in to social security for ten years or more may enjoy a very slight advantage over participants in TRS.   In TRS, how much you draw in terms of your pension is based on the average of the highest three years of your earnings.   Normally, that will be the last three you work.  TRS participants will find that their pensions are much better if they teach all the extra service and summer school possible during their last three years.  ORP participants are under no such pressure.  How much you can draw in ORP is determined by how much you have accumulated.  The longer you work the more you accumulate in your ORP account.  Extra service and summer school income will not help much.

Reporting:

All ORP and TSA companies send their participants periodic reports that inform the participants about how their retirement investments are performing.  The coordinating board rules require that the companies send at least quarterly reports.  Some companies do better than that; they send monthly reports.  When you interview a sales rep from an ORP or TSA company, be sure and ask him or her, if the company they represent sends quarterly or monthly reports.  Be sure and keep those documents on file for future reference. 

Internet Access:

Many of the companies that offer ORP or TRS accounts provide their customers with Internet access.  Different companies offer different services via the Internet.  Some companies allow customers to check each day to see how their accounts are doing.  Others provide detailed histories and graphs for each fund.  Some will allow customers to access the current prospectus for each fund.  In many cases, customers can check each month to see if their new contributions have been added to their account and determine the exact date of posting of new contributions.  The best companies will provide all of the above services via the Internet plus will allow customers to use the Internet to make changes and move money from one fund to another.  Be sure to ask your salesman what Internet services are offered by his company. 

Conclusion: 

New faculty members have two choices:  either TRS or ORP.  Each option offers some advantages and some disadvantages.  Each person must look carefully at their own life circumstances and needs to determine which option is best for them selves.  This document has been provided by a service by the Welfare and Benefits Committee of the DCCFA as a free service to assist you in this choice.  The DCCFA wants to help you get a good start in your career in the DCCCD. 

In future years, the DCCFA will be revising this document.  Some revisions will be necessary because of changes in the laws.  Other revisions will be made as a result of suggestions from faculty who use this document.  If you have any input on how to improve this document, please share this information with your DCCFA Welfare and Benefits representative on your campus.

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Last Updated: October 12, 2006