Railroad Retirement Board:
Trust Fund Investment Practices
Scott D. Szymendera
Analyst in Disability Policy
September 9, 2015
Congressional Research Service
7-5700
www.crs.gov
RS22782
Railroad Retirement Board: Trust Fund Investment Practices
Summary
Beginning in 2002, a significant portion of the assets of the Railroad Retirement Board (RRB) has
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;
hereinafter, 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 continues to be invested solely in U.S. government securities.
Congress structured the Trust to ensure 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 FY2014, the Trust’s annual returns averaged 8.7%, just slightly above the expectations of the
bill’s drafters, who assumed nominal annual returns of 8.0%. The economic downturn did not
spare the Trust, which lost 19.1% in FY2008, 0.7% in FY2009, and 0.1% in FY2011. However,
the Trust exceeded its own strategic policy benchmarks in FY2012, FY2013, and in FY2014 with
a FY2014 rate of return of 10.2%. As the Trust’s investment portfolio diversified over time, its
administrative expenses steadily increased, to 36 basis points in FY2011, but fell to 29 basis
points in FY2013 and remain low when compared with other mutual funds.
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 rates are set to automatically adjust as
needed. This tax adjustment does not require congressional action. The tier II tax rates increased
in 2013 and again in 2014.
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Railroad Retirement Board: Trust Fund Investment Practices
Contents
Background ..................................................................................................................................... 1
History of the Trust .......................................................................................................................... 1
Structure of the Trust ....................................................................................................................... 1
Independence............................................................................................................................. 1
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 ...................................................................................................... 6
Administrative Expenses ........................................................................................................... 7
Figures
Figure 1. Actual Trust Rates of Return Compared with Strategic Policy Benchmarks ................... 6
Tables
Table 1. Trust Target Asset Allocations and Ranges ........................................................................ 4
Table 2. Trust Expense Ratios ......................................................................................................... 7
Contacts
Author Contact Information ............................................................................................................ 7
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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; hereinafter, 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.
Structure of the Trust
Independence
Congress structured the Trust to be independent and to resist political interference. As such 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
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 Scott D. Szymendera CRS Report
RS22350.
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
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
Trust, the tier II tax rates have been lowered twice and increased 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 12.1% on employers
and 3.9% on employees. In 2013, the tax rates were raised to 12.6% and 4.4% on employers and
employees, respectively, and in 2014, the rates were raised to their current levels of 13.1% on
employers and 4.9% on employees. The statute requires that the tier II tax rate on employers
range between 8.2% and 22.1% and caps the tax rate on employees at 4.9%.
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 2014, January 2015,
http://www.rrb.gov/nrrit/ReportsTOC.asp. Hereinafter cited as NRRIT, Annual Management Report for Fiscal Year
2014.
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. Hereinafter cited as H.Rept. 107-82, part 1.
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Investment Guidelines
The assets in the Trust are invested in a diversified portfolio, both to minimize investment risk
and 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 investment guidelines were most recently changed in August 2014 and continued the
trend away from fixed income investments (from 22% of total investments in 2011 to 20% in
2014). 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. In 2008 the OIG argued that the annual financial audit
required “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 The OIG noted that there are fewer safeguards protecting the Trust than
7 National Railroad Retirement Investment 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 2013, Appendix B.
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.
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Railroad Retirement Board: Trust Fund Investment Practices
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.
In 2011 the OIG reiterated its concerns with the oversight of the Trust and stated,
The lack of NRRIT investment fund management accountability, transparency, and
stringent financial oversight can be precursors to fraud, waste and abuse. Within the
Federal agency spectrum there is no comparable example where Federal program assets
are completely outside the jurisdiction of a Federal agency’s appointed Inspector General.
However, the NRRIT fund which supports the Railroad Retirement program remains
outside the purview of those appointed to protect the interests of the program’s
beneficiaries and the tax-paying public.10
Table 1. Trust Target Asset Allocations and Ranges
(as of August 19, 2014)
Asset Class
Target Allocation (%)
Target Allocation Range (%)
Equity
54
Domestic
22
17-27
International
22
17-27
Private
10
5-15
Fixed Income
20
Domestic
13
9-17
International
7
4-10
Real Assets
15
Commodities
5
2-8
Real Estate
10
2-15
Other
11
Absolute Return
10
5-15
Cash
1
0-3
Source: National Railroad Retirement Investment Trust, Annual Management Report for Fiscal Year 2014, January
2015, p. 14.
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.11 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
10 Railroad Retirement Board, Office of the Inspector General, Office of the Inspector General’s Proposal to Improve
Business Efficiency at the Railroad Retirement Board, September 21, 2011, p. 5, http://www.rrb.gov/pdf/oig/
REPORTS/SR_092111.pdf.
11 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.
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Railroad Retirement Board: Trust Fund Investment Practices
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.12 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.
Performance of the Trust
To date, the Trust’s average annual performance has slightly exceeded the expectations of the
bill’s drafters, which assumed investments by the Trust would earn an average annual return of
8.0%.13 From FY2003 to FY2014, the Trust’s annual returns have averaged 8.7%. 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
(-19.1%) and FY2009 (-0.7%) but rebounded with an 11.2% rate of return in FY2010 followed by
a slightly negative rate of return of -0.1% in FY2011. The FY2012 rate of return of 16.4%
brought the average annual rate of return of the Trust above the expected level of 8.0% for the
first time since FY2010. The FY2014 rate of return was 10.2%.14
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
FY2004.15 The Trust earned a total of $21.4 billion from its inception to the end of FY2014.16 As
of June 30, 2015, the market value of the Trust’s managed assets was $26.2 billion, and since
inception $17.5 billion in earnings have been used to pay RRB benefits and administrative
expenses.17
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 June 30, 2015, the value of total RRB assets was $28 billion, with $26.2
billion held by the Trust and $1.8 billion held in reserve accounts at the Treasury Department. The
net increase in total RRB assets since the inception of the Trust is $7.1 billion.18
12 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/sites/default/files/cbofiles/ftpdocs/40xx/doc4023/01-08-03-stocks.pdf.
13 H.Rept. 107-82, Part 1, p. 14.
14 NRRIT, Annual Management Report for Fiscal Year 2014, p. 13.
15 Ibid., p. 10
16 Ibid.
17 National Railroad Retirement Investment Trust, Quarterly Update for the Period Ending June 30, 2015, July 2014,
http://www.rrb.gov/pdf/nrrit/qrtlyupd063015.pdf.
18 Ibid.
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Comparison to Benchmarks
The Trust’s annual 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 major asset classes in the Trust.19 For example, the current benchmark for the Trust’s
investments in domestic equities is the Russell 3000 Index.20
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 FY2014, the Trust’s rate of return of 10.2%
exceeded the benchmark of 9.6%.21
Figure 1. Actual Trust Rates of Return Compared with Strategic Policy Benchmarks
(FY2003 to FY2014)
25%
20%
15%
10%
-0.1%
5%
eturn
R
f
0%
o
3
4
5
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1
1
1
1
te
0
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0
0
0
0
a
-5%
2
2
2
2
2
2
2
2
2
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2
R
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
-10%
-15%
-20%
-25%
Trust Actual
Trust Benchmark
Source: National Railroad Retirement Investment Trust, Annual Management Report for Fiscal Year 2014, January
2015, p. 13; and previous editions.
19 Benchmarks for each of the Trust’s asset classes are provided in NRRIT, Annual Management Report for Fiscal Year
2014, Appendix B.
20 Additional information on the Russell 3000 Index is available on the website of Russell Investments at
http://www.russell.com/indexes/americas/indexes/fact-sheet.page?ic=US3000.
21 NRRIT, Annual Management Report for FY2014, p. 13.
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Administrative Expenses
The Trust’s administrative expenses steadily increased through FY2011 as its investment portfolio
diversified. However, as shown in Table 2, in FY2012 and FY2013, the Trust’s administrative
expense ratio decreased, mirroring a national trend of decreasing expense ratios for mutual and
money market funds. The Trust’s administrative expenses remain low compared with industry
standards. In FY2014, the Trust’s expense ratio was 29 basis points (expenses were 0.29% of
average net assets).22 In comparison, in 2013, the average expense ratio for all investors was 74
basis points for equity funds, 61 basis points for bond funds, 80 basis points for hybrid funds, and
17 basis points for money market funds.23
Table 2. Trust Expense Ratios
(FY2003-FY2014)
Fiscal Year
Basis Points
2003
2
2004
4
2005
9
2006
15
2007
24
2008
25
2009
26
2010
33
2011
36
2012
30
2013
29
2014
29
Source: National Railroad Retirement Investment Trust, Annual Management Report for Fiscal Year 2014, p. 17;
and previous editions.
Note: One basis point is equal to 1/100th of 1% of the average net assets of a fund. For example an expense
ratio of 29 basis points indicates that expenses were 0.29% of average net assets.
Author Contact Information
Scott D. Szymendera
Analyst in Disability Policy
sszymendera@crs.loc.gov, 7-0014
Insert Acknowledgments Here
22 NRRIT, Annual Management Report for Fiscal Year 2014, p. 17.
23 Investment Company Institute, Trends in the Fees and Expenses of Mutual Funds, 2013, May 2014,
http://www.ici.org/pdf/per20-02.pdf.
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