Railroad Retirement Board: Trust Fund
Investment Practices
Scott Szymendera
Analyst in Disability Policy
August 2, 2011
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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
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. 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.
The 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
time, its administrative expenses have steadily increased, to 33 basis points in FY2010, but
remain low compared with industry standards.
The Trust is 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. 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.
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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

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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.
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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-than-
expected 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 risk-
adjusted 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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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 (%)
Equity 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
Alternative Investments
15
2-22
Commodities 5
2-7
Real Estate
10
0-15
Opportunistic Investments
NA
5-20
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.
12 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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Figure 1. Trust Rates of Return Compared with Strategic Policy Benchmarks
FY2003 to FY2010
25%
20%
15%
10%
rn
5%
tu
Re
0%
e of
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
-5%
Rat
-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.
20 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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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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