Order Code RS22782
January 2, 2008
Railroad Retirement Board:
Trust Fund Investment Practices
Kathleen Romig
Social Science Analyst
Domestic Social Policy Division
Summary
Starting in 2002, a significant portion of Railroad Retirement Board (RRB) assetsRailroad Retirement Board: Trust Fund
Investment Practices
Scott Szymendera
Analyst in Disability Policy
August 2, 2011
The House Ways and Means Committee is making available this version of this Congressional Research Service
(CRS) report, with the cover date shown above, for inclusion in its 2011 Green Book website. CRS works
exclusively for the United States Congress, providing policy and legal analysis to Committees and Members of
both the House and Senate, regardless of party affiliation.
Congressional Research Service
RS22782
CRS Report for Congress
Prepared for Members and Committees of Congress
Railroad Retirement Board: Trust Fund Investment Practices
Summary
Beginning in 2002, a significant portion of the assets of the Railroad Retirement Board (RRB)
have been invested in private stocks, bonds, and other investments. Prior to the Railroad
Retirement and Survivors’ Improvement Act of 2001 (P.L. 107-90), surplus railroad
retirement retirement
assets could only be invested in U.S. government securities — —just as the
Social Security trust
funds must be invested. The 2001 act established the National
Railroad Retirement Investment
Trust (NRRIT; hereafter, the Trust) to manage and invest part
of the RRB’s assets in the same
way that the assets of private-sector and most state and
local government pension plans are
invested. The remainder of RRB’s assets continue
to be invested solely in U.S. government
securities.
Congress structured the Trust to assure independence of investment decisions and
limit political
interference. It also aimed to increase railroad retirement system funding,
add enhanced benefits,
potentially reduce taxes, and protect system financing in case of
market downturns. The Trust’s
assets are invested in a diversified portfolio, both to
minimize investment risk and to avoid
disproportionate influence over an industry or
firm. The Trust’s assets are included in the federal budget firm. Since the Trust is a
nongovernmental agency,
it is not subject to the same oversight as federal agencies.
However, the act requires an annual
management report to Congress.
To date, the Trust’s performance has exceededThe Trust’s investments have generally followed the markets’ recent performance. From FY2003
to FY2010, the Trust’s annual returns averaged 8.1%. This matches the expectations of the bill’s
drafters, who assumed nominal annual returns of 8.0%. The recent economic downturn did not
spare the Trust, which lost 19.1% in FY2008 and 0.7% in FY2009. However, the trust rebounded
with a 11.2% rate of return in FY2010. As the Trust’s investment portfolio has diversified over
%. From FY2003 to FY2006, the
Trust’s annual returns averaged 14%. The Trust’s rates of return compare favorably to
its benchmarks and to those of defined benefit pension funds. As the Trust’s investment
portfolio has diversified over time, its administrative expenses have steadily increased
(to 15, to 33 basis points in FY2006) but remain very FY2010, but
remain low compared to industry standards.
The with industry standards.
The Trust is designed to maintain four to six years’ worth of benefits in case of lower-thanexpected returns. In order to maintain this balance, the tier II tax is set to automatically adjust to
maintain the fund balance at four to six years. This tax adjustment would not require
congressional action. No tax increase is scheduled at the time of this writing.
The goal of this report is to inform readers about the Trust, which is of particular
interest to
policymakers exploring the option of collective investment of the Social
Security trust funds or
establishing other private investment funds within the federal
government. The report will not be updated.
CRS-2
Background
The Railroad Retirement Act (45 U.S.C. § 231) authorizes retirement, survivor, and
disability benefits for railroad workers and their families.1 The Railroad Retirement
Board (RRB), an independent federal agency, administers these benefits. Workers
covered by the RRB include those employed by railroads engaged in interstate commerce
and related subsidiaries, railroad associations, and railroad labor organizations. These
benefits are earned by railroad workers and their families in lieu of Social Security.
RRB Benefits. Railroad retirement benefits are divided into two tiers. Tier I
benefits are generally computed using the Social Security benefit formula, on the basis
of earnings covered by either program. In some cases, RRB tier I benefits can be higher
than comparable Social Security benefits. For example, RRB beneficiaries may receive
unreduced tier I retirement benefits as early as age 60 if they have at least 30 years of
railroad service; Social Security beneficiaries may receive unreduced retirement benefits
only when they reach their full retirement ages (currently rising from age 65 to 67). RRB
tier II benefits are similar to private pension benefits and are based only on railroad work.2
History of the Trust
Starting in 2002, a significant portion of railroad retirement assets have been
invested in private stocks, bonds, and other investments. Prior to the Railroad Retirement
and Survivors’ Improvement Act of 2001 (P.L. 107-90), surplus railroad retirement assets
could only be invested in U.S. government securities — just as the Social Security trust
funds must be invested.3 The 2001 act established the National Railroad Retirement
Investment Trust to manage and invest assets in the Railroad Retirement Account in the
same way that the assets of private-sector retirement plans are invested.4 The Railroad
Retirement Account is used to fund RRB tier II benefits and supplemental annuities. This
account is also used to pay for tier I benefits that are higher than equivalent Social
Security benefits, such as early retirement benefits for railroad employees with at least 30
years of railroad service. Assets in the Social Security Equivalent Benefits Account
(which is used for RRB tier I benefits that are equivalent to Social Security benefits)
continue to be invested solely in U.S. government bonds, as required by law.
1
For more explanation of RRB, see CRS Report RS22350, Railroad Retirement Board:
Retirement, Survivor, Disability, Unemployment, and Sickness Benefits, by Kathleen Romig.
This report focuses only on the retirement, survivor, and disability benefits authorized by the
Railroad Retirement Act. The RRB also administers unemployment and sickness benefits.
2
Railroad employers also finance a supplemental annuity program for certain railroad employees
hired before October 1981. General revenues finance a vested dual benefit for certain railroad
employees who were eligible for benefits before 1975.
3
The Social Security trust funds may not be invested in private markets. For more information
on current practices, see CRS Report RS20607, Social Security: Trust Fund Investment Practices,
by Dawn Nuschler. For more information on investing Social Security in private markets, see
CRS Report RL30571, Social Security Reform: The Issue of Individual Versus Collective
Investment for Retirement, by David S. Koitz.
4
See also Railroad Retirement Board, National Railroad Retirement Investment Trust, at
[http://www.rrb.gov/mep/nrrit.asp] for background information on the Trust.
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Structure of the Trust
Independence. Congress structured the Trust to be independent and to resist
political interference. The Trust is independent of the Railroad Retirement Board (RRB)
and is not part of the federal government. It has no responsibilities for administering RRB
benefits. The Trustees of the Trust are required to act solely in the interest of the RRB and
the participants in the railroad retirement system. The fiduciary rules governing the
Trustees are similar to those required by the law that governs the private pension system,
the Employee Retirement Income Security Act (ERISA).5
The board of the Trust is made up of seven Trustees who have expertise in managing
financial investments and pension plans. Three of the Trustees are selected by railroad
labor unions, three by railroad management, and one by the other six Trustees. Each of
the Trustees’ terms is three years. The Trustees hire a professional staff to handle day-today operations of the Trust and independent investment managers to invest the assets of
the Trust according to the investment guidelines established by the Trustees.
Each investment manager may control no more than 10% of the Trust’s assets. Each
manager must vote all proxies he or she holds in the Trust’s portfolio in the sole interest
of railroad retirement participants and beneficiaries, in accordance with written guidelines
provided by the Trust. Votes must also be recorded and provided to the Trust upon
request. Finally, all investment managers must certify each year that all proxies have been
voted in the sole interest of railroad retirement participants and beneficiaries.6
Goals. Congress designed the Trust to increase RRB funding. Investing railroad
retirement funds in private markets was expected to yield higher average annual returns
than investing solely in government securities. The higher returns were intended to pay
for the enhanced benefits that were established in the act and to potentially reduce future
tax rates for railroad employers and employees.7
The Trust is also designed to maintain four to six years’ worth of benefits in case of
lower-than-expected returns. In order to maintain this balance, the tier II tax is set to
automatically adjust to maintain the fund balance at four to six years. This tax adjustment
would not require congressional action.
Investment Guidelines. The assets in the Trust are invested in a diversified
portfolio, both to minimize investment risk and also to avoid disproportionate influence
over a particular industry or firm. The investment guidelines adopted by Trustees include
a target asset allocation developed by the Trust’s investment staff in consultation with an
independent investment advisory firm. As shown in detail in Table 1, the target
allocation to equity (i.e., stock) is 55%. The target allocation to fixed income (i.e., bonds
5
See CRS Report 95-926, Regulating Private Pensions: A Brief Summary of ERISA, by Patrick
Purcell.
6
For more, see the National Railroad Retirement Investment Trust, National Railroad Retirement
Investment Trust Annual Management Report for Fiscal Year 2006, Appendix F, available at
[http://www.rrb.gov/pdf/nrrit/appendicesFY2006.pdf].
7
H.Rept. 107-082, Railroad Retirement Survivor’s Improvement Act of 2001.
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and cash) is 35%. Finally, the target allocation to alternative investments is 10%. Outside
investment managers hired by the Trust invest the assets according to these guidelines.
The resulting investment performance is monitored by the Trustees and the Trust’s Chief
Investment Officer.
Table 1. Trust Target Asset Allocation, FY2006
Asset Class
Equity
Domestic
International
Private
Fixed Income
Alternative Investments
Commodities
Real Estate
Allocation (%)
55
30
20
5
35
10
5
5
Source: NRRIT, National Railroad Retirement
Investment Trust Annual Management Report, FY2006.
Oversight. Since the Trust is an independent nongovernmental agency, it is not
subject to the same oversight as federal agencies. However, the RRB has the authority
to bring a civil action to enforce provisions of the act. The act outlines specific reporting
requirements, including an annual management report to Congress. This report must
include a statement of financial position, a statement of cash flows, a statement on
internal accounting and administrative control systems, and any other information
necessary to inform Congress about the operations and financial condition of the Trust.
The financial statements must be audited by independent public accountants. A copy of
the annual report and audit must be submitted to the President, the RRB, and the Director
of the Office of Management and Budget (OMB).
Accounting in the Federal Budget. As required in the 2001 act, purchases and
sales by the Trust initially produce no direct budgetary cost or income.8 The law did not
prescribe the treatment of unrealized capital gains and losses on the Trust’s investments.
The Congressional Budget Office (CBO) and OMB agreed that any capital loss or gain
resulting from changes in market prices would be recognized in the year in which the
price change occurs, and interest payments and dividends would be recorded as offsetting
receipts.9 As a result, income and capital gains reduce outlays and the deficit, and losses
increase them. This reflects the change in real economic resources available to the
8
For budgetary purposes, purchases by the Trust are not considered outlays, but as an exchange
of assets of equal value; redemptions are not considered offsetting receipts. This differs from
long-standing budgetary rules, which usually treat an investment in nonfederal securities as the
purchase of an asset, recording both an obligation and an outlay equal to the purchase price
during the year of the purchase.
9
For more information on accounting for government investment in private markets, see
Congressional Budget Office, Evaluating and Accounting for Federal Investment in Corporate
Stocks and Other Private Securities, January 2003, available at [http://www.cbo.gov/ftpdoc.cfm
?index=4023&type=0].
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government as the value of the Trust changes. As for future performance, both CBO and
OMB use risk-adjusted rate of return assumptions — that is, they assume that the Trust’s
investments will earn the Treasury bond rate.
Performance of the Trust
To date, the Trust’s performance has exceeded the expectations of the bill’s drafters.
It was assumed that investments by the Trust would earn an average annual return of
8%.10 (Figures in this report are not adjusted for inflation, i.e., in nominal terms.) From
FY2003-FY2006, the Trust’s annual returns have averaged 14%. Railroad retirement
funds have been invested through the Trust starting in September 2002. A total of $21.3
billion has been transferred to the Trust, mostly during its first two fiscal years. By
September 30, 2007, the Trust had grown to $32.7 billion, in addition to $5.0 billion in
earnings that were used to pay RRB benefits. The Trust earned a total of $16.4 billion
from its inception to the end of FY2007.11
Comparison to Benchmarks. The Trust’s rates of return compare favorably to
its benchmarks. A benchmark is a standard used for comparison when measuring
investment performance and is typically a market index (e.g., Standard & Poor’s 500
Index). As shown in Figure 1, in FY2003-FY2005, the performance of the Trust
exceeded its benchmarks. In FY2006, the Trust’s performance was slightly lower than
its benchmarks. The Trust’s performance is also comparable to that of defined benefit
pension funds.12
10
H.Rept. 107-082.
11
NRRIT, National Railroad Retirement Investment Trust Quarterly Update for the Period
Ending September 30, 2007, at [http://www.rrb.gov/pdf/nrrit/qrtlyupd093007.pdf].
12
3For example, the Milliman annual pension funding study shows the weighted average returns
of 100 large defined benefit pension funds at private firms by calendar year (as opposed to fiscal
year). Among this sample of firms, average annual returns were 19.2% in 2003, 13.3% in 2004,
14.0% in 2005, and 9.8% in 2006. (See Milliman, Inc., 2007 Pension Funding Study, at
[http://www.milliman.com/expertise/employee-benefits/products-tools/pension-funding-study
/index.php].)
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Figure 1. Trust Rates of Return:
Benchmarks Compared to Actual Returns
Source: NRRIT, National Railroad Retirement Investment Trust
Annual Management Reports, FY2003-FY2006.
Administrative Expenses. The Trust’s administrative expenses have steadily
increased as its investment portfolio has diversified over time, as shown in Table 2.
However, administrative expenses remain very low compared to industry standards. In
FY2006, the Trust’s expense ratio was 15 basis points (i.e, expenses were 0.15% of
average net assets).13 In comparison, the average institutional investor paid an expense
ratio of 66 basis points in 2006, more than four times higher than the Trust.14
Table 2. Trust Expense Ratios, FY2003-FY2006
Fiscal Year
2006
2005
2004
2003
Expense Ratio (%)
0.15
0.09
0.04
0.02
Source: NRRIT, National Railroad Retirement Investment Trust Annual
Management Reports, FY2003-FY2006.
13
NRRIT, National Railroad Retirement Investment Trust Annual Management Report for Fiscal
Year 2006, at [http://www.rrb.gov/pdf/nrrit/reportFY2006.pdf].
14
Morningstar Fund Investor, “Fund Fees Are Coming Down,” May 21, 2007, by Russel Kinnel
at [http://ibd.morningstar.com/article/article.asp?CN=aol828&id=194298]. government.
Congressional Research Service
Railroad Retirement Board: Trust Fund Investment Practices
Contents
Background...................................................................................................................................... 1
History of the Trust.......................................................................................................................... 1
Structure of the Trust ....................................................................................................................... 2
Independence............................................................................................................................. 2
Goals.......................................................................................................................................... 2
Impact on Tier II Tax Rates ....................................................................................................... 2
Investment Guidelines ............................................................................................................... 3
Oversight ................................................................................................................................... 3
Accounting in the Federal Budget ............................................................................................. 4
Performance of the Trust.................................................................................................................. 5
Total RRB Assets....................................................................................................................... 5
Comparison to Benchmarks ...................................................................................................... 5
Administrative Expenses ........................................................................................................... 6
Figures
Figure 1. Trust Rates of Return Compared with Strategic Policy Benchmarks............................... 6
Tables
Table 1. Trust Target Asset Allocations and Ranges, FY2010 ......................................................... 4
Table 2. Trust Expense Ratios.......................................................................................................... 8
Acknowledgments ........................................................................................................................... 8
Congressional Research Service
Railroad Retirement Board: Trust Fund Investment Practices
Background
The Railroad Retirement Act authorizes retirement, survivor, and disability benefits for railroad
workers and their families.1 The Railroad Retirement Board (RRB), an independent federal
agency, administers these benefits. Workers covered by the RRB include those employed by
railroads engaged in interstate commerce and related subsidiaries, railroad associations, and
railroad labor organizations. These benefits are earned by railroad workers and their families in
lieu of Social Security.
Railroad retirement benefits are divided into two tiers. Tier I benefits are generally computed
using the Social Security benefit formula, on the basis of earnings covered by either program. In
some cases, RRB tier I benefits can be higher than comparable Social Security benefits. For
example, RRB beneficiaries may receive unreduced tier I retirement benefits as early as 60 years
old if they have at least 30 years of railroad service; Social Security beneficiaries may receive
unreduced retirement benefits only when they reach their full retirement ages, currently rising
from age 65 to 67. RRB tier II benefits are similar to private pension benefits and are based only
on railroad work.2
History of the Trust
Beginning in 2002, a significant portion of railroad retirement assets have been invested in
private stocks, bonds, and other investments. Prior to the Railroad Retirement and Survivors’
Improvement Act of 2001, P.L. 107-90, surplus railroad retirement assets could only be invested
in U.S. government securities—just as the Social Security trust funds must be invested.3 The 2001
act established the National Railroad Retirement Investment Trust (NRRIT; hereafter, the Trust)
to manage and invest assets in the Railroad Retirement Account in the same way that the assets of
private-sector retirement plans are invested. The Railroad Retirement Account is used to fund
RRB tier II benefits and supplemental annuities. This account is also used to pay for tier I benefits
that are higher than equivalent Social Security benefits, such as early retirement benefits for
railroad employees with at least 30 years of railroad service. Assets in the Social Security
Equivalent Benefits Account, which is used for RRB tier I benefits that are equivalent to Social
Security benefits, continue to be invested solely in U.S. government bonds, as required by law.
1
45 U.S.C. § 231 et seq. For additional information on the RRB, see CRS Report RS22350, Railroad Retirement
Board: Retirement, Survivor, Disability, Unemployment, and Sickness Benefits, by Alison M. Shelton.
2
Railroad employers also finance a supplemental annuity program for certain railroad employees hired before October
1981. General revenues finance a vested dual benefit for certain railroad employees who were eligible for benefits
before 1975.
3
The Social Security trust funds may not be invested in private markets. For additional information on current
practices, see CRS Report RS20607, Social Security: Trust Fund Investment Practices, by Dawn Nuschler.
Congressional Research Service
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Railroad Retirement Board: Trust Fund Investment Practices
Structure of the Trust
Independence
Congress structured the Trust to be independent and to resist political interference and the Trust is
independent of the RRB and is not part of the federal government. It has no responsibilities for
administering RRB benefits. The Trustees of the Trust are required to act solely in the interest of
the RRB and the participants in the railroad retirement system. The fiduciary rules governing the
Trustees are similar to those required by the law that governs the private pension system, the
Employee Retirement Income Security Act (ERISA).4
The board of the Trust is made up of seven Trustees who have expertise in managing financial
investments and pension plans. Three of the Trustees are selected by railroad labor unions, three
by railroad management, and one by the other six Trustees. Each of the Trustees’ terms is three
years. The Trustees hire a professional staff to handle day-to-day operations of the Trust and
independent investment managers to invest the assets of the Trust according to the investment
guidelines established by the Trustees.
Each investment manager may control no more than 10% of the Trust’s assets. Each manager
must vote all proxies he or she holds in the Trust’s portfolio in the sole interest of railroad
retirement participants and beneficiaries, in accordance with written guidelines provided by the
Trust. Votes must also be recorded and provided to the Trust upon request. Finally, all investment
managers must certify each year that all proxies have been voted in the sole interest of railroad
retirement participants and beneficiaries.5
Goals
Congress designed the Trust to increase RRB funding. Investing railroad retirement funds in
private markets was expected to yield higher average annual returns than investing solely in
government securities. The higher returns were intended to pay for the enhanced benefits that
were established in the act and to potentially reduce future tax rates for railroad employers and
employees.6
Impact on Tier II Tax Rates
The Trust is also designed to maintain four to six years’ worth of benefits in case of lower-thanexpected returns. To maintain this balance, the tier II tax is set to automatically adjust to maintain
the fund balance at four to six years without congressional action. Since the inception of the
4
For additional information on ERISA, see CRS Report 95-926, Regulating Private Pensions: A Brief Summary of
ERISA, by Patrick Purcell.
5
National Railroad Retirement Investment Trust, Annual Management Report for Fiscal Year 2010, January 2011,
Appendix F, http://www.rrb.gov/pdf/nrrit/convltrsFY2010.pdf. Hereafter cited as NRRIT, Annual Management Report
for Fiscal Year 2010.
6
U.S. Congress, House Committee on Transportation and Infrastructure, Railroad Retirement and Survivors
Improvement Act of 2001, Report to accompany H.R. 1140, 107th Cong., 1st sess., May 24, 2001, H.Rept. 107-82 Part 1
(Washington: GPO, 2001), pp. 14-15. Hereafter cited as H.Rept. 107-82 Part 1.
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Railroad Retirement Board: Trust Fund Investment Practices
Trust, the tier II tax rates have never increased and have been lowered twice. In 2005, the tier II
tax rate on employers was automatically lowered from 13.1% to 12.6% and the tax rate on
employees was lowered from 4.9% to 4.4%. Tier II tax rates were lowered again in 2007 to their
current levels of 12.1% on employers and 3.9% on employees. The statute requires that the tier II
tax rate on employers range between 8.2% and 22.1% caps the tax rate on employees at 4.9%.
Investment Guidelines
The assets in the Trust are invested in a diversified portfolio, both to minimize investment risk
and also to avoid disproportionate influence over a particular industry or firm. The investment
guidelines adopted by the Trustees include a target asset allocation developed by the Trust’s
investment staff in consultation with an independent investment advisory firm.
These targets change over time. For example, from FY2006 to FY2008, the Trust moved away
from fixed income investments (from 35% of total investments in FY2006 to 27% in FY2008)
and toward private equity (from 5% to 10%) and real estate (from 5% to 10%). The Trust’s
adoption of a more aggressive investment strategy coincided with market downturns. In 2009, the
Trust adjusted its target allocation ranges, but not its individual target allocations, to provide for
greater flexibility during periods of market volatility.7
As shown in detail in Table 1, in FY2010 the target allocation to equity (i.e., stock) was 58%.
The target allocation to fixed income (i.e., bonds and cash) was 27%. The target allocation to
alternative investments was 15%. The target allocation ranges include between 5% and 20% for
opportunistic investments. Opportunistic investments, including cash, are investments which do
not fit into the existing asset classes but which are believed to offer the Trust attractive riskadjusted investment returns or otherwise help the Trust achieve its strategic investment goals.
Outside investment managers hired by the Trust invest the assets according to these guidelines.
The resulting investment performance is monitored by the Trustees and the Trust’s Chief
Investment Officer.
Oversight
Because the Trust is an independent nongovernmental agency, it is not subject to the same
oversight as federal agencies. The act outlines specific reporting requirements, including an
annual management report to Congress. The report must include a statement of financial position,
a statement of cash flows, a statement on internal accounting and administrative control systems,
and any other information necessary to inform Congress about the operations and financial
condition of the Trust. The financial statements must be audited by independent public
accountants. A copy of the annual report and audit must be submitted to the President, the RRB,
and the Director of the Office of Management and Budget (OMB). The RRB has the authority to
bring a civil action to enforce provisions of the act.
However, the RRB Office of Inspector General (OIG) has expressed concern about the
effectiveness of the oversight of the Trust. The OIG argues that the annual financial audit required
“is not adequate to support the RRB’s enforcement responsibility because such audits are not
7
National Railroad Retirement Trust, Annual Management Report for Fiscal Year 2009, January 2010, p. 15,
http://www.rrb.gov/pdf/nrrit/reportFY2009.pdf.
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Railroad Retirement Board: Trust Fund Investment Practices
intended to provide information about all areas of risk that could indicate the need for
enforcement action.” 8 There are fewer safeguards protecting the Trust than there are for the
retirement investments of federal government and private sector workers. For example, there is
no requirement for performance audits of the Trust, which would assess program effectiveness,
economy and efficiency, internal control, and compliance with the law.
Table 1. Trust Target Asset Allocations and Ranges, FY2010
Asset Class
Target Allocation (%)
Target Allocation Range (%)
58
35-75
Domestic
26
20-33
International
22
15-27
Private
10
0-15
Fixed Income
27
15-40
Domestic
17
11-25
International
10
4-15
15
2-22
Commodities
5
2-7
Real Estate
10
0-15
NA
5-20
Equity
Alternative Investments
Opportunistic Investments
Source: National Railroad Retirement Investment Trust, Annual Management Report for Fiscal Year 2010, January
2011, p. 17.
Accounting in the Federal Budget
As required in the 2001 act, purchases and sales by the Trust initially produce no direct budgetary
cost or income.9 The law did not prescribe the treatment of unrealized capital gains and losses on
the Trust’s investments. The Congressional Budget Office (CBO) and OMB agreed that any
capital loss or gain resulting from changes in market prices would be recognized in the year in
which the price change occurs, and interest payments and dividends would be recorded as
offsetting receipts.10 As a result, income and capital gains reduce outlays and the deficit, and
losses increase them. This reflects the change in real economic resources available to the
government as the value of the Trust changes. As for future performance, both CBO and OMB
use risk-adjusted rate of return assumptions—that is, they assume that the Trust’s investments
will earn the Treasury bond rate.
8
Railroad Retirement Board, Office of Inspector General, Statement of Concern: National Railroad Retirement
Investment Trust Lack of Provision for Performance Audits, March 31, 2008, http://www.rrb.gov/pdf/oig/REPORTS/
nrritStatement.pdf.
9
For budgetary purposes, purchases by the Trust are not considered outlays, but as an exchange of assets of equal
value; redemptions are not considered offsetting receipts. This differs from long-standing budgetary rules, which
usually treat an investment in nonfederal securities as the purchase of an asset, recording both an obligation and an
outlay equal to the purchase price during the year of the purchase.
10
For more information on accounting for government investment in private markets, see Congressional Budget Office,
Evaluating and Accounting for Federal Investment in Corporate Stocks and Other Private Securities, January 2003,
http://www.cbo.gov/ftpdoc.cfm?index=4023&type=0.
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Railroad Retirement Board: Trust Fund Investment Practices
Performance of the Trust
To date, the Trust’s average annual performance has matched the expectations of the bill’s
drafters. It was assumed that investments by the Trust would earn an average annual return of
8.0%.11 From FY2003 to FY2010, the Trust’s annual returns have averaged 8.1%. Prior to
FY2008, the average rate of return on Trust investments was 14.7%. The Trust had negative rates
of return in FY2008 and FY2009 but rebounded with an 11.2% rate of return in FY2010.12 Since
railroad retirement funds were first invested through the Trust in September 2002, a total of $21.3
billion has been transferred to the Trust, with no transfers taking place after the end of FY2004.13
The Trust earned a total of $12.4 billion from its inception to the end of FY2010.14 As of March
31, 2010, the Trust held $25.3 billion, and since inception $10.8 billion in earnings have been
used to pay RRB benefits.15
Total RRB Assets
At the inception of the Trust in February 2002, the value of the total assets of the RRB, including
assets in the Trust and assets held in reserve in accounts at the Department of the Treasury was
$20.7 billion. At the end of FY2010, the value of total RRB assets was $25.1 billion, with $23.8
billion held by the Trust and $1.3 billion held in reserve accounts at the Treasury Department. The
net increase in total RRB assets since the inception of the Trust is $4.4 billion.16
Comparison to Benchmarks
The Trust’s rates of return have generally compared favorably to its benchmarks. A benchmark is
a standard used for comparison when measuring investment performance and the NRRIT
strategic policy benchmark is based on a series of benchmarks corresponding to each of the eight
major asset classes in the Trust.17 For example, the current benchmark for the Trust’s investments
in domestic equities is the Russell 3000 Index.18
As shown in Figure 1 in FY2003 through FY2005, the performance of the Trust exceeded its
strategic policy benchmarks. In FY2006 and FY2007, the Trust’s performance was roughly equal
to its benchmarks, whereas in FY2008 and FY2009, the Trust’s investments had lower returns
than its strategic policy benchmarks. In FY2010, the strategic policy benchmark rate of return of
9.9% was exceed by the Trust’s rate of return of 11.2%.
11
H.Rept. 107-82 Part 1, p. 14.
NRRIT, Annual Management Report for Fiscal Year 2010, p. 7.
13
Ibid., p. 13.
14
Ibid., p. 13.
15
National Railroad Retirement Investment Trust, Quarterly Update for the Period Ending March 31, 2011, April
2011, http://www.rrb.gov/pdf/nrrit/qrtlyupd033111.pdf.
16
NRRIT, Annual Management Report For Fiscal Year 2010, pp. 7-8.
17
Benchmarks for each of the Trust’s asset classes are provided in NRRIT, Annual Management Report For Fiscal
Year 2010, Appendix B, p. 2, http://www.rrb.gov/pdf/nrrit/appendicesFY2010.pdf.
18
Additional information on the Russell 3000 Index is available on the website of Russell Investments at
http://www.russell.com/indexes/data/fact_sheets/us/russell_3000_index.asp.
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Railroad Retirement Board: Trust Fund Investment Practices
Figure 1. Trust Rates of Return Compared with Strategic Policy Benchmarks
FY2003 to FY2010
25%
20%
15%
Rate of Return
10%
5%
0%
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
-5%
-10%
-15%
-20%
-25%
Trust Actual
Trust Benchmark
Source: Data for “Trust Actual” and “Trust Benchmark” taken from National Railroad Retirement Investment
Trust, Annual Management Report for Fiscal Year 2010, January 2011; and previous editions.
Administrative Expenses
The Trust’s administrative expenses have steadily increased as its investment portfolio has
diversified over time, as shown in
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Railroad Retirement Board: Trust Fund Investment Practices
Table 2. However, administrative expenses remain low compared with industry standards. In
FY2010, the Trust’s expense ratio was 33 basis points (expenses were 0.33% of average net
assets).19 In comparison, in 2010, the average expense ratio for all investors was 95 basis points
for stock funds, 72 basis points for bond funds, and 26 basis points for money market funds.20
19
NRRIT, Annual Management Report For Fiscal Year 2010, Independent Auditors’ Report, p.18.
Investment Company Institute, Trends in the Fees and Expenses of Mutual Funds, 2010, March 2011,
http://www.ici.org/pdf/per17-02.pdf.
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Railroad Retirement Board: Trust Fund Investment Practices
Table 2. Trust Expense Ratios
FY2003 to FY2010
Fiscal Year
Basis Points
2003
2
2004
4
2005
9
2006
15
2007
24
2008
25
2009
26
2010
33
Source: National Railroad Retirement Investment Trust, Annual Management Report for Fiscal Year 2010,
January 2011; and previous editions.
Acknowledgments
An earlier version of this report was prepared by Kathleen Romig.
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