COLUMBUS, Ohio - The first year of the Ohio State Teachers Retirement System's guaranteed-return investment option yielded an investment return 1,585 basis points short of its goal.
The Total Guaranteed Return Choice fund, which promises the system's 401(a) plan participants a 7.75% annual rate of return, returned -8.1% in the 12 months since the state teachers' 401(a) plan was launched July 1, 2001.
But officials maintain the option is performing well, especially in comparison with the equities markets. For the option's first fiscal year, which ended June 28, the Dow Jones industrial average was down 12%; the Russell 3000 index was down 17.2%; and the S&P 500 stock index was down 19.2%.
"It's working just the way we want it to," said Herb Dyer, executive director.
Despite the shortfall in return, plan administrators do not have an immediate problem. Any participant electing to place funds in the Total Guaranteed Return Choice must allow the money to stay in the option for five years. If, however, the guaranteed return has not been met in July 2006, the $50 billion defined benefit plan will be tapped to make up the difference.
Participants in the $76 million 401(a) plan have invested $10.8 million in the guaranteed-return option. There are approximately 2,000 participants in the plan, and Mr. Dyer estimates only 200 use the guaranteed-return option.
The Total Guaranteed Return Choice's asset allocation is a close copy of the system's $50 billion defined benefit plan. That allocation is: 45% domestic equity, 22% domestic fixed-income, 20% international equity, 10% real estate and 3% alternatives.
One consultant said the guaranteed return option creates risk for both the pension and defined contribution sides of the system.
"There is certainly some risk in guaranteeing a return.This could create additional funding issues for the defined benefit plan," said Stephen McElhaney, consultant with Mercer Human Resouce Consulting.