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Why Should I Take an AAI Buyout - Is the Pension Not Secure? 


The somewhat mixed-messaging coming from TRS is confusing for a lot of teachers and their families in Illinois. The buyout is painted as an excellent option for educators, but it leaves an uncomfortable question in the air: 

Is your pension safe if you choose to not opt for the TRS AAI buyout?  

To understand the answer to this question, it’s important to understand the history of the TRS pension plan, and what their current outlook is for covering pension obligations in the future. 

Where Does TRS Stand Now? 

Right now, TRS only has enough money to cover 40% of future pension obligations – yikes! That’s an intimidating statistic. The truth is that the program needs reform to make up for the funding deficit, but has run into a long list of road blocks over the past several years. One of their biggest problems is that the Illinois State Constitution clearly states: 

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired. 

Trustees have said that drastic changes need to be made to the TRS pension plan in order for it to remain viable long-term, but the state has struggled to come up with a solution that benefits both current plan participants and still protects future participants, as well.  

 

What’s Being Done to Fix This? 

In the past, TRS has held risky investments to try and grow their fund to make up for the funding deficit. Unfortunately, it’s a little late to try and correct the funding discrepancy with high-risk, high-reward investing strategies. TRS spokesman, Dave Urbanek says: 

TRS cannot invest its way out of this hole. [citing the $73 billion in unfunded liabilities for its 412,451 pension members] The unfunded liability was created by 80 years of insufficient funding by state government and can only be solved by continued, actuarially correct funding by the state of Illinois. 

In June of 2019, TRS had almost ¼ of their fund invested in private-equity and hedge funds, which have notoriously high fees. These fees can range between 2-3% per year. To compare, many more standard stock and bond strategies have fees that are 1% or less. So, not only do the investments have the potential to underperform according to benchmarks, but the fund is paying high fees by taking these big investment risks. Recently, TRS has changed their investing strategy again to try and work their way out of underfunding, but the likelihood it will have as meaningful of an impact as they hope is low. 

 

Buyout Benefit – Gain Control Over Your Pension 

One of the biggest benefits of electing to opt for the TRS AAI buyout is that you gain control over your pension now, rather than play the wait-and-see game as TRS tries to work through their funding problem.  

Not sure whether the AAI buyout is right for you? I’m happy to help. Reach out to me by clicking here, and we can walk through your different pension options, and how they fit into your plan. 

Next blog post in the series: I’ve Heard From Other Teachers That the TRS AAI Buyout is Less Money. Is That True?