Feature

TRA

IRAP

How the plan works

TRA is a defined benefit, or formula plan.  Assets are held collectively and invested by the State Board of Investment.  Your benefit is based on a formula that is based on the average of your highest consecutive five years of salary.  You get an annual retirement benefit at normal retirement age (the social security age for full retirement) that is equal to 1.9% of your high-5 average salary for each year of service.

You have your own individual account into which your contributions and your employer contributions are deposited.  You choose where to invest your money from a list of three vendors, each offering a variety of funds, such as stock account, bond account, fixed interest, etc.  Your retirement benefit is based on employer and employee contributions to your account, plus accumulated interest.

Contributions

5.5% employer/5.5% employee

6% employer/4.5% employee

Vesting

After 3 years.  If you do not vest you can withdraw your own contributions, (not the employer’s contributions) and interest on your contributions at the rate of 6%.

Both employer and employee contributions plus interest are immediately vested and belong to the employee.

Portability

Not very portable unless you go to work for another public employer within Minnesota.  If you change jobs and move to another state or to the private sector, you can leave your contributions with TRA and begin drawing a reduced benefit at age 55, or an unreduced benefit at age 65, but your high-5 salary will be the salary you earned before you moved,

so it will be eroded by inflation.  To offset this inflation erosion, TRA augments the benefit by 2.5% for each year it was deferred prior to retirement.         

If you withdraw before retirement you will get your own money back at 6% interest.  You will forfeit the employer’s share.                 

Very portable.  If you change jobs mid-career you can either withdraw all the proceeds of your account (employer and employee) and roll it into a IRA rollover, or transfer it to the pension plan of a new employer (if they allow it), or you can simply leave your money in the plan until you retire and it will grow at the rate of investment return.

Risk

The primary risk is that you would lose or change jobs mid-career, which can have a serious adverse affect on your retirement benefits.

A second kind of risk is that your salary could grow at a slow rate.  If this happens (and it happened in the last decade), “high-5” salaries increase slowly and therefore benefits grow slowly.  Finally, the flip side of risk is reward: while you are protected from the market going down, you will not directly benefit from higher than normal market returns.

You bear the risk of investment.  If you invest wisely you can benefit from this, but if you don’t, you bear the consequences at retirement.

Withdrawal Options at Retirement

You can only take your benefit in the form of a lifetime annuity (monthly income).  You can choose from a variety of annuity options offered by TRA, such as a single life annuity, joint and survivor annuities, etc.

Very flexible withdrawal options, including annuities, lump sum withdrawals, interest only withdrawals, periodic payments, or combinations of the above.

Post Retirement Cost of Living Adjustments (COLA’s)

TRAs post retirement COLA formula is based on the rate of return on the Post-Retirement Fund.  The increases have been averaging around 5.86% per year since 1980.  Future increases are expected to be around 2.5% per year.

IRAP members can leave their money invested and it will grow at the rate of investment return until it is withdrawn.  They can also purchase annuities with COLA’s.

Early Retirement Penalties

TRAs “normal” retirement age is tied to the social security retirement age, and is gradually increasing to age 66.  If you retire earlier than the normal retirement age, your retirement benefit is reduced about 4%, for each year you retire prior to the normal retirement age.  For instance, if you retire at age 55 your retirement benefit is only 55.1% of what it would be if you retired at age 66.

There are no early retirement penalties, but the earlier you retire the less money you will have accumulated in your retirement account.

Generalizations

TRA is attractive for employees who think they will work in TRA covered employment throughout their career and retire close to TRAs normal retirement age.  It is an attractive alternative to people who are risk adverse when it comes to investments.

IRAP is attractive to people who think they are likely to change employers prior to retirement or who retire early.  Its greatest attraction is its portability.  IRAP is also attractive to people who like flexibility in investment and retirement options and who are not risk adverse when it comes to investments.

TOTAL

RETURNS

AVERAGE ANNUAL TOTAL RETURNS

Expense Ratio

3-month Return

YTD

1 Year

5 Years

10 Years

CREF Equity Index Account

-2.08

3.03

9.14

3.12

8.23

0.41

CREF Global Equities Account

-2.00

4.73

15.60

4.77

6.61

0.50

CREF Growth Account

-5.84

-3.17

4.68

-2.41

4.16

0.50

CREF Stock Account

-1.76

4.33

12.56

4.47

8.01

0.46

Legg Mason Value Fund

-5.43

-4.59

3.72

3.62

14.55

0.69

Pennsylvania Mutual Fund

-5.22

6.12

16.40

12.95

14.19

0.90

T. Rowe Price International Growth & Income

0.96

11.24

28.25

12.75

--

0.99

Vanguard Developed Markets Index

0.81

10.19

26.81

9.90

--

0.21

Vanguard Institutional Index Fund

-1.44

2.71

8.62

2.50

8.38

0.05

Vanguard Mid Capitalization Index

-2.87

4.50

14.57

--

--

0.13

Vanguard Small Cap Index Fund

-4.72

6.94

13.92

9.07

--

0.13

Vanguard Strategic Equity Fund

-2.93

5.93

13.01

11.63

12.89

0.40

CREF Social Choice Account (#004)

-1.46

1.20

5.60

4.48

7.99

0.42

Dodge & Cox Balanced Fund

0.53

4.09

9.88

9.27

11.75

0.53

Vanguard Balanced Index Fund

-1.20

1.73

5.58

4.59

--

0.08

TIAA Real Estate Account

4.69

8.06

16.27

9.53

9.31

0.66

CREF Bond Market Account

-0.16

-0.81

-0.98

4.87

6.08

0.45

CREF Inflation-Linked Bond Account

0.36

-2.01

-2.03

6.57

--

0.47

Vanguard Total Bond Market Index Fund

-0.18

-0.89

-0.95

--

--

0.11

Western Asset Core Plus Bond Portfolio

0.24

0.02

-0.41

6.56

--

0.45

CREF Money Market Account

1.14

2.15

3.90

1.97

3.72

0.41

Vanguard Prime Money Market Fund

1.22

2.33

4.23

2.30

3.97

0.09

TIAA Traditional Account

--

--

4.25

6.25

6.77

--

Effective Date of Increase

January 1

Percentage of Post Fund Adjustment

Monthly Annuity

1989

$1,500

1990

4.0%

$1,560

1991

5.1%

$1,640

1992

4.3%

$1,710

1993

4.6%

$1,788

1994

6.0%

$1,896

1995

4.0%

$1,971

1996

6.4%

$2,098

1997

8.0%

$2,266

1998

10.1%

$2,495

1999

9.8%

$2,740

2000

11.14%

$3,045

2001

9.53%

$3,336