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By Phil Beavers
WEAC's Member Services Specialist
Dec. 29 is deadline to enroll
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If the Wisconsin Supreme Court upholds the applicable portion of the 1999 Wisconsin Act 11, the Variable Trust Fund will be opened to new elections as of January 1, 2001. In response to numerous requests, following is selected information provided by the Wisconsin Retirement System, my interpretation of the information, and a recommendation for members.
Wisconsin Retirement System:
The Variable Trust Fund is invested primarily in common stocks. These are currently the same stocks that are in the Fixed Trust Fund. On December 31 of each year, variable investment gains (or losses) are credited to participating active and inactive member accounts, and variable adjustments are paid to all participating annuitants, based on the results of the Variable Trust Fund. The high investment earnings of the Variable Trust Fund over the past decade have generated considerable interest in reopening the Variable Trust Fund to new enrollments.
However, those participating in the Variable Trust Fund must be prepared for the possibility that poor stock market performances could result in investment losses. The higher potential return of the Variable Trust Fund is matched by the greater potential risk it involves; the value of your Variable Trust Fund account could decrease when the stock market declines.
Unlike Fixed Trust annuities – which are guaranteed never to be less than the initial fixed monthly amount – a variable annuity may decrease to less than the initial monthly amount. In 1994, Variable Trust Fund annuitants experienced a 4% decrease in their Variable Trust Fund annuities and a 14% decrease in 1990.
Phil Beavers:
Approximately 60% of Fixed Trust Fund is in the same common stocks that are in the Variable Trust Fund. The credited performance difference over the years between the Fixed and the Variable trust funds is misleading since the variable investment gains are credited each year, whereas, the fixed investments gains are not.
Wisconsin Retirement System:
Act 11 provides for a one-time $4 billion transfer from the Transaction Amortization Account (TAA) to the three reserves (Annuity, Employer and Employee Reserves) of the Trust Fund. While this transfer will not affect the variable interest rate for 1999, it will create a higher effective rate for the fixed fund. The higher fixed effective rate resulting from the TAA transfer will result in a smaller difference between the investment returns of the Variable and Fixed Funds. The smaller difference in investment returns is likely to generate lower increases in existing variable participants' variable excess balances than they would have experienced without the special one-time TAA transfer. The lower a participant's variable excess balance, the lower the amount that will be added to that participant's monthly formula retirement benefit if he or she retires with a formula annuity.
Phil Beavers:
$4 billion of the unrealized investment gains from the Fixed Trust Fund common stocks will transfer from the TAA Account back into the Fixed Trust Fund. The affect would be an increase in the stated fixed rate of return in 1999 from 13.5% to about 23.5%.
Wisconsin Retirement System:
Act 11 also distributes the remaining TAA balance over a five-year period and replaces it with a Market Recognition Account (MRA). Twenty percent of the TAA balance as valued at the end of 1999 (after the $4 billion transfer) would be paid out each year over a five-year period, and investment gains/losses after 1999 would be credited instead to the new MRA. The change to the MRA and the phase-out of the TAA over the five-year period will result in higher fixed effective rate interest credited to active and eligible inactive members, and higher fixed dividends for annuitants for the next five years (e.g., higher than these rates would have been if the TAA were not being eliminated and the MRA established). Again, higher fixed effective rates resulting from the TAA phase-out will result in a smaller difference between the Variable and Fixed Funds. The smaller difference in funds is likely to generate lower increases in existing variable participants' variable excess balances than these participants would have experienced without the elimination of the TAA.
Phil Beavers:
Approximately $10 billion more will move into the Fixed Trust Fund over the next five years from the TAA Account. The resulting effect would be a 4% to 5% higher fixed performance rate than otherwise would have been credited with a smaller difference between the Variable and Fixed Trust Funds. The advantage of being in the Variable Trust Fund will be greatly diminished.
Wisconsin Retirement System:
What happens if you elect variable participation? If you make this election, 50% of all your future Wisconsin Retirement System (WRS) employee required and additional contributions will be deposited in the Variable Trust Fund. The other 50% will be invested in the Fixed Trust Fund. Existing contribution balances may not be transferred to the Variable Trust Fund. Your election to participate in the Variable Trust Fund is permanent and will continue as long as you are employed in a position covered by the WRS or until:
Phil Beavers: