Railroad Retirement Board: Trust Fund
Investment Practices
Scott Szymendera
Analyst in Disability Policy
May 17, 2012
The House Ways and Means Committee is making available this version of this Congressional Research Service
(CRS) report, with the cover date shown, for inclusion in its 2012 Green Book website. CRS works exclusively for the
U nited 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
Pr
epared 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
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 FY2011, the Trust’s annual returns averaged 7.2%. This is slightly below 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 and had slight loss of 0.1% in FY2011. As the
Trust’s investment portfolio has diversified over time, its administrative expenses have steadily
increased, to 36 basis points in FY2011, 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. 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.
Congressional Research Service
Railroad Retirement Board: Trust Fund Investment Practices
Contents
Background...................................................................................................................................... 5
History of the Trust.......................................................................................................................... 5
Structure of the Trust ....................................................................................................................... 6
Independence............................................................................................................................. 6
Goals.......................................................................................................................................... 6
Impact on Tier II Tax Rates ....................................................................................................... 6
Investment Guidelines ............................................................................................................... 7
Oversight ................................................................................................................................... 7
Accounting in the Federal Budget ............................................................................................. 8
Performance of the Trust.................................................................................................................. 9
Total RRB Assets....................................................................................................................... 9
Comparison to Benchmarks ...................................................................................................... 9
Administrative Expenses ......................................................................................................... 11
Figures
Figure 1. Trust Rates of Return Compared with Strategic Policy Benchmarks............................. 10
Tables
Table 1. Trust Target Asset Allocations and Ranges ........................................................................ 8
Table 2. Trust Expense Ratios........................................................................................................ 11
Acknowledgments ......................................................................................................................... 11
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
5
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 2011, January 2012,
Appendix F, http://www.rrb.gov/pdf/nrrit/reportFY2011.pdf. Hereafter cited as NRRIT, Annual Management Report
for Fiscal Year 2011.
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.
Congressional Research Service
6
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 target asset allocations developed by the Trust’s
investment staff in consultation with an independent investment advisory firm. 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.
The Trust’s target asset allocations change over time. For example, from FY2006 to FY2008, the
Trust began to move 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
The investment guidelines were changed again in September 2011 to reflect current market
expectations. These changes included continued movement away from fixed income investments
(from 27% of total investments in 2009 to 22% in 2011); the elimination of the opportunistic
investments category, which had a target allocation range of between 5% and 20% in 2009; and
the adoption of a cash category with a target allocation range of between 0% and 3%.8 The Trust’s
current investment guidelines are shown in detail in Table 1.
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
7 National Railroad Retirement Trust, Annual Management Report for Fiscal Year 2009, January 2010, p. 15,
http://www.rrb.gov/pdf/nrrit/reportFY2009.pdf.
8 NRRIT, Annual Management Report for Fiscal Year 2011, Appendix B.
Congressional Research Service
7
Railroad Retirement Board: Trust Fund Investment Practices
“is not adequate to support the RRB’s enforcement responsibility because such audits are not
intended to provide information about all areas of risk that could indicate the need for
enforcement action.” 9 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
as of September 20, 2011
Asset Class
Target Allocation (%)
Target Allocation Range (%)
Equity 54
45-61
Domestic 23
18-28
International 21
16-26
Private 10
2-15
Fixed Income
22
18-28
Domestic 13.5
9-18
International 8.5
5-15
Real Assets
15
2-22
Commodities 5
2-8
Real Estate
10
2-15
Other 9
5-20
Absolute Return
8
2-10
Cash 1
0-3
Source: National Railroad Retirement Investment Trust, Annual Management Report for Fiscal Year 2011, January
2012, 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.10 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.11 As a result, income and capital gains reduce outlays and the deficit, and
9 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.
10 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.
11 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,
(continued...)
Congressional Research Service
8
Railroad Retirement Board: Trust Fund Investment Practices
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.
Performance of the Trust
To date, the Trust’s average annual performance has fallen slightly short of the expectations of the
bill’s drafters. It was assumed that investments by the Trust would earn an average annual return
of 8.0%.12 From FY2003 to FY2011, the Trust’s annual returns have averaged 7.2%. However,
for the first half of the Trust’s existence, the Trust’s returns exceeded expectations. Prior to
FY2008, the average rate of return on Trust investments was 14.7% and the average rate of return
exceeded the expected rate of 8.0% through FY2010. The Trust had negative rates of return in
FY2008 and FY2009 but rebounded with an 11.2% rate of return in FY2010 followed by a
slightly negative rate of return of -0.1% in FY2011.13
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
FY2004.14 The Trust earned a total of $12.4 billion from its inception to the end of FY2011.15 As
of March 31, 2012, the Trust held $24.2 billion, and since inception $12.5 billion in earnings have
been used to pay RRB benefits.16
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. As of March 31, 2012, the value of total RRB assets was $25.5 billion, with $24.2
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 $4.8 billion.17
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 nine
(...continued)
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/40xx/doc4023/01-08-03-stocks.pdf.
12 H.Rept. 107-82 Part 1, p. 14.
13 NRRIT, Annual Management Report for Fiscal Year 2011, p. 7.
14 Ibid., p. 13.
15 Ibid.
16 National Railroad Retirement Investment Trust, Quarterly Update for the Period Ending March 31, 2012, April
2012, http://www.rrb.gov/pdf/nrrit/qrtlyupd033112.pdf.
17 Ibid.
Congressional Research Service
9
Railroad Retirement Board: Trust Fund Investment Practices
major asset classes in the Trust.18 For example, the current benchmark for the Trust’s investments
in domestic equities is the Russell 3000 Index.19
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, FY2009, and FY2011, 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 exceeded by the Trust’s rate of return of 11.2% and in FY2011 the benchmark
of 1.6% exceeded the Trust’s rate of return of -0.1%.
Figure 1. Trust Rates of Return Compared with Strategic Policy Benchmarks
FY2003 to FY2011
25%
20%
15%
10%
-0.1%
rn
5%
etu
R
0%
FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011
-5%
Rate of
-10%
-15%
-20%
-25%
Trust Actual
Trust Benchmark
Source: National Railroad Retirement Investment Trust, Annual Management Report for Fiscal Year 2011, January
2012, p. 7; and previous editions.
18 Benchmarks for each of the Trust’s asset classes are provided in NRRIT, Annual Management Report For Fiscal
Year 2011, Appendix B, http://www.rrb.gov/pdf/nrrit/appendicesFY2011.pdf.
19 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.
Congressional Research Service
10
Railroad Retirement Board: Trust Fund Investment Practices
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 low
compared with industry standards. In FY2012, the Trust’s expense ratio was 36 basis points
(expenses were 0.36% of average net assets).20 In comparison, in 2011, the average expense ratio
for all investors was 79 basis points for equity funds, 62 basis points for bond funds, 80 basis
points for hybrid funds, and 21 basis points for money market funds.21
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
2011 36
Source: National Railroad Retirement Investment Trust, Annual Management Report for Fiscal Year 2011,
January 2012, p. 19; and previous editions.
Acknowledgments
An earlier version of this report was prepared by Kathleen Romig.
20 NRRIT, Annual Management Report For Fiscal Year 2011, Independent Auditors’ Report, p.19.
21 Investment Company Institute, Trends in the Fees and Expenses of Mutual Funds, 20101 April 2012,
http://www.ici.org/pdf/per18-02.pdf.
Congressional Research Service
11