August 11 eBulletin

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Volume LXV Number 1

July/August/September 2011



The TACT Quarterly eBulletinJuly/August/September 2011 - Volume LXV Number 1

In this quarter’s TACT newsletter...

Letter from the Presidentby Peter Hugill

Executive Director’s Reportby Chuck Hempstead

The Legacy of TACT

Legislative Update

Faculty Salary Comparison

from THECB

2011 ORP Study

Fall Conference

GRF Contributions

Membership

Page 3

Page 5

Page 6

Page 7

Page 8

Page 9

Page 13

Page 14

Page 15

TACT Board of Directors

2011-2012

President

Peter Hugill

Texas A&M University

Past-President

Gary Coulton

University of Texas -

San Antonio

VP of Financial AffairsFrank Fair

Sam Houston State Universit

VP of Membership

Mark Gaus


VP of Legislative Affairs

Cindy Simpson


Directors At Large

Elizabeth Lewandowski

Midwestern State University

Allen Martin

University of Texas - Tyler

Debra Price


Executive Director

Chuck Hempstead

(512) 873-7404

Texas Association of College Teachers

5750 Balcones Dr., Suite 201 Austin, Texas 78731

[email protected]

[p] (512) 873-7404

[f] (512) 873-7423

Copyright © 2011 by the Texas Association of College Teachers. All rights reserved.

No part of this publication may be produced in any form without permission; Chuck Hempstead, Editor.

TACT

mailto:tact%40bizaustin.rr.com?subject=




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Cover Page

Index

Letter from thePresident

Executive Director’sReport

The Legacy of TACT

Legislative Update

Faculty SalaryComparison

2011 ORP Study

Fall Conference

GRF Contributions

Membership

CONTENTS

3

The TACT Quarterly eBulletinTexas Association of College TeachersDefending Academic Freedom

TACT

President’s Letter

by Peter HugillTACT President

By all accounts the State of Texas

is approaching a crisis in Higher Educa-

tion. No, not the problems being caused by the unwarranted and irresponsible

interference of the Governor and the

Texas Public Policy Foundation, though

those are certainly bad enough. But we

face a much more serious problem, and

it has been very clearly identied by the

Texas Association of Business. The State

is simply not graduating enough well-

educated students to fuel the high tech

economy it aspires to. By 2018 it is esti-

mated that 45% of all jobs in the UnitedStates will require a bachelor’s degree

and 65% of all new or replacement jobs

will require at least some college educa-

tion. In today’s Texas only just over 30%

of Texans hold an Associate’s degree or

better. Simply put, we are failing to edu-

cate enough Texans to ensure the State’s

continued prosperity.

We produce two things in higher

education: new knowledge and well-

educated students. And we need to go on

doing that to the very best of our abili-

ties. I think we generally do very well at

the rst, and we measure our ability to

do this ourselves and well in the number

of publications we produce and the grant

dollars we bring in. Our merit system,

tenure, is designed to focus on this. What

our reward system doesn’t do so well is

to focus on what business and the public

believe, with justice, we are paid to do:

produce students.

My intent here is not to be critica

of my colleagues, but to ask us to think

seriously about our professional respon-

sibilities. We measure research output

well, but we need to do better at measur-

ing our teaching. If we don’t, the odds

are that someone else, such as the TPPF,

will try and do it for us. We are all aware

that graduation rates are not what they

need to be in too many schools, and thattoo many students, for whatever reason,

take too long to graduate. We could, it is

true, x the problem by simply lowering

standards, the direction the TPPF “re-

forms” as well as some unscrupulous ad-

ministrators would push us towards. This

would be beneath us as professionals and

a dereliction of our duty to our students

and the people of Texas. So let us push

to take teaching even more seriously in

our annual evaluation process than we

currently do. Let us have a serious dialog

about how we might get graduation rates

up without losing quality.

Although I don’t always see eye-

to-eye with our State Commissioner of

Higher Education, Raymond Paredes, he

has some useful ideas. He helped keep in

place the Texas Grants for lower income





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Fall Conference

GRF Contributions

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CONTENTS

4


TACT

President’s Message(cont’d.)

students, a major TACT initiative this past legislative session, when many legisla-

tors wanted to end them. He also argues for more students taking 2+2 degrees in dual

admission programs, with students taking their rst two years at a community col-

lege before transferring to a senior institution. Such programs would not be for all,

but they would greatly help students from lower income families who need to work

and cannot either be in full-time residence at senior institutions or commute to them.

My own institution, Texas A&M, already has a dual admission program in place with

Blinn Community College and it seems to work well. Commissioner Paredes has

also proposed more intensive mentoring for at-risk students to reduce their drop-outrate, which seems to me an unimpeachable goal.

These are not problems anyone can x quickly, but they are problems that

will lead groups like TPPF to try and impose destructive quick xes upon us if we do

not respond to them. As professional educators we need to evaluate teaching as seri-

ously as we evaluate research, work to increase graduation rates, and resist adminis-

trators and outsiders who want to lower quality in favor of increased “productivity.”

If we do not do this as professionals, we will have irresponsible amateurs imposing

“seven breakthrough solutions” upon us.





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The Legacy of TACT

Legislative Update


2011 ORP Study

Fall Conference

GRF Contributions

Membership

CONTENTS

5


TACT

Executive Director’s Report:Laugh ‘till it hurts?

by Chuck HempsteadTACT Executive Director

Ya gotta’ love dark political

humor, like when the Education Gover-

nor’s self-appointed higher ed reformers

produce “Seven Breakthrough Solutions”and the business lobbyist calls them the

“Seven Deadly Sins.” And the chief

author works for weeks at UT System

before earning his $70,000 buy-out. Oh

well, institutional research was nice

while it lasted.

When the conservatives rail that

professors should teach more and publish

less, I guess they aren’t addressing the

third leg of the academic stool - public

service. Is that still a good thing?

Remember when we used to say

public universities went from state sup-

ported to state assisted to state located?

What now, state regulated? State lam-

basted?

TACT claims legislative victory

when the Texas Grant scholarship pro-gram was reduced “only” ten percent,

after the early draft bill called for a 50

percent cut. And guns on campus? Stud-

ies showed that 85 percent of faculty

opposed changing the gun law, and we

were only assured success on that one in

the eleventh hour, despite that bill spon-

sors in both chambers claimed voting

majorities as co-sponsors.

University appropriations were

reduced by $1 billion as enrollments rise,

but at least we were successful in bot-

tling up the proposal to siphon some of what’s left for outcome-based funding.

This proposal would reward institutions

for hitting quantitative benchmarks such

as degrees awarded in a timely fashion

or historically underserved populations

admitted. TACT is still waiting for the

qualitative benchmarks to be measured,

like the increased happiness and societal

contributions of former students who had

enhancing personal interactions during

their years on campus. I know you so-

ciologists wrote your dissertations about

this, but we’re told that research doesn’t

count unless it’s read by more than 250

people.

Which brings our irreverent

review of the 2011 TACT Legislative

Agenda to faculty salaries. Don’t think

we helped you in a big way on that one.

I can only hope that you are enjoyingyour fat property tax reduction four years

ago that was to be replaced by the under-

performing business margins tax. Or the

federal stimulus infusion (with borrowed

money) two years ago that prevented this

pain from occurring then.

Tea (Party), anyone?





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The Legacy of TACT

Legislative Update


2011 ORP Study

Fall Conference

GRF Contributions

Membership

CONTENTS

6


TACT

This Fall, we’re celebrating the Legacy of TACT:

a history of legislative advocacy, faculty camaraderie, and reliable benets.

Visit our History page at www.tact.org/history to learn more

about TACT’s efforts over the last 60 years.

TACTTube has launched and is hosting a variety of TACT-related videos.

Visit TACTTube today and subscribe!


http://www.tact.org/history

http://www.youtube.com/user/TACTTube

http://www.youtube.com/user/TACTTube

http://www.tact.org/history




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Legislative Update


2011 ORP Study

Fall Conference

GRF Contributions

Membership

CONTENTS

7


TACT

TACTLegislative Update

Below is a partial list of Legislation from the 82nd Session of interest to col-

lege professors in Texas. TACT will continue to keep you informed via our online

Legislative Tracker, our new member benet to help streamline the process of keep-

ing college teachers in-the-know.

• HB 9 - Relating to student success-based funding for and reporting regarding

public institutions of higher education

• HB 33 - Relating to schedule of classes and textbook affordability – requires

textbook information to be included in class schedule

• HB 3577 - Relating to eligibility requirements for the Texas Educational

Opportunity Grant

• SB 28 - Relating to eligibility for a TEXAS grant and to the administration of

the TEXAS grant program

• SB 29 - Relating to the eligibility of certain postdoctoral fellows and graduate

students to participate in health benet programs at public institutions of higher

education

For a more comprehensive list of bills that passed, see the report here.


http://www.tact.org/legislative

http://www.hempsteadassociates.com/HigherEdLeg.pdf

http://www.hempsteadassociates.com/HigherEdLeg.pdf

http://www.tact.org/legislative




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CONTENTS

8


TACT

Average Faculty Salary Comparison - Texas Public Universities and Ten Most Populous StatesFiscal Year 2011

Professor AssociateProfessor

AssistantProfessor

Instructor Lecturer Total -Includes All

Faculty

Total -Excludes Non-Ranked Faculty

History

Professor AssociateProfessor

AssistantProfessor

Instructor TotalFaculty

Texas Total Faculty Weighted Average Compared to Ten States

Texas 111,482 76,942 67,311 45,568 51,125 78,395 78,891California 117,087 81,227 72,132 60,392 62,617 93,400 93,343

Florida 108,755 76,155 66,001 48,034 57,491 77,965 78,552

Georgia 103,278 73,191 62,703 43,347 48,852 74,505 74,601

Illinois 109,609 76,129 67,746 40,449 44,840 78,631 78,617

Michigan 115,890 80,908 68,317 46,961 51,296 85,296 86,084

New Jersey 134,090 95,351 77,303 51,452 59,384 101,736 101,945

New York 117,120 85,887 70,694 57,101 60,569 88,815 88,815

North Carolina 111,209 78,771 67,120 57,503 46,612 79,332 81,642

Ohio 110,172 77,730 65,868 43,341 47,415 81,139 81,520

Pennsylvania 118,930 84,879 68,512 49,985 49,562 83,304 83,819

10 States Average 114,911 80,839 68,545 47,111 54,982 84,852 85,366

National Average 108,212 77,386 65,612 45,424 51,698 79,783 80,127

Texas 111,482 76,942 67,311 45,568 78,395 -8%FY 2011

Ten States 114,911 80,839 68,545 47,111 84,852

Texas 111,944 77,044 67,057 45,251 78,505 -7%FY 2010

Ten States 113,763 79,931 67,607 46,400 84,126

Texas 109,235 75,467 66,140 44,338 76,981 -6%FY 2009

Ten States 111,625 78,713 66,359 45,383 82,250

Texas 104,518 72,612 63,795 43,484 74,076 -7%FY 2008

Ten States 107,935 75,943 64,057 43,918 79,596

Texas 99,683 69,646 61,159 41,943 71,608 -6%FY 2007

Ten States 102,752 72,593 60,982 42,488 76,197

Texas 95,970 67,173 59,187 40,118 69,118 -6%FY 2006

Ten States 98,610 69,918 58,704 40,674 73,622

Texas 91,529 64,400 56,026 39,512 66,582 -7%FY 2005

Ten States 95,517 67,974 56,921 39,427 71,896

Texas 86,130 60,914 53,190 37,869 63,449 -10%FY 2004

Ten States 93,668 66,703 55,508 38,300 70,824

Texas 85,405 60,450 52,051 36,948 62,671 -10%FY 2003

Ten States 91,244 65,689 54,395 37,860 69,565

Texas 84,449 58,942 50,468 34,783 61,965 -7%FY 2002

Ten States 87,164 63,076 51,895 37,262 66,623

Texas 76,192 54,026 45,742 34,195 57,352 -9%FY 2000

Ten States 80,563 58,990 48,008 34,361 62,782

Texas 70,350 50,310 42,520 32,470 53,360 -9%FY 1998

Ten States 73,830 54,660 44,720 32,490 58,620

Texas 63,660 39,988 39,085 29,176 48,490 -13%FY 1996

Ten States 69,101 51,608 42,697 30,789 55,499

Source: AAUP Survey, Includes all public 1, 2, and 3 institutions reporting to AAUP (27 of 38 in Texas). Salaries adjusted tostandard nine month salary. Report excludes data where institutions reported one individual for a given institution.

THECB May 2011

Below is a table from The Higher Education Coordinating Board website, outlining

the Average Salaries of the Ten Most Populous States for Fiscal Year 2011. In the last

two years, the percentage gap between Texas and other populous states has steadily

grown and is trending toward the 10% gap of 2003-2004.

Faculty Salary Comparison 2011from THECB


http://www.thecb.state.tx.us/

http://www.thecb.state.tx.us/




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CONTENTS

9


TACT

TEXAS ASSOCIATION

OF COLLEGE TEACHERS

TEXAS COMMUNITY COLLEGE

TEACHERS ASSOCIATION

2011 Analysis of Possibilities

for ORP/TDAThe Texas Optional Retirement Program (ORP)

s designed for full time faculty at state supportednstitutions of higher education. Created by the Texasegislature in 1967, it is offered as an alternative toarticipation in the Teacher Retirement System of exas (TRS). Upon employment at an institution, anmployee is given 90 days to choose whether to investis or her retirement fund in ORP or TRS. This choices irrevocable. Therefore, new employees are urged to

ake this decision carefully.

The Teacher Retirement System is for all personsho choose not to be in ORP or are not eligible forRP. TRS is a “dened benet” program, in which the

mployee’s retirement benet is 2.3 percent of averagealary in the highest three years (ve years for newer

mployees under recent provisions), multiplied by theumber of years of participation. The vesting period forRS is ve years. (If an employee does not vest, thetate’s monies are returned.) A “Rule of 80” (when theombination of age plus years of service entitles TRSembers to retire without penalty) applies for those

ired before September 1, 2007, but change thereafteror new hires, imposing a minimum age of 60 for anunreduced” annuity.

Historically the majority of new faculty membersave participated in ORP, though TRSas gained in popularity in recent years.he state will contribute the constitu-

ional minimum contribution of 6 percentf salary next year. The employee con-ribution has been 6.65 percent for overwenty years. The TRS Web site is www.rs.state.tx.us.

For ORP, a “dened contribution”rogram, there is a contribution of upo 15.15 percent of salary placed into aetirement plan. This is the sum of themployee’s contribution (6.65 percentf gross salary), local supplements, andhe state’s contribution (historically from.0 to 8.5 percent). The retirement sav-ngs plan is self-directed, and the vestingeriod is one year and one day. The re-irement benet is based on contributionsnd earnings on those contributions.

A law passed in 2011 by the Texas Legislature al-lows institutions participating in the Optional Retire-ment Program to supplement the state contribution of 6 percent of salary for all participants by 2.5 percent,regardless of when they were hired.

Whether the choice is ORP or TRS, most employ-ees are eligible to place additional pre-tax contribu-tions into a Tax Deferred Account (TDA). A TDA is asupplemental investment that may be made in additionto the mandatory program. TDAs receive no statecontribution.

An important federal overhaul of retirement ruleswas included in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This lawraised the limits of pre-tax contributions to deferredcompensation plans, and also provided for “catch upcontributions” for participants over 50. The law alsorepealed the Maximum Exclusion Allowance, a com-plex formula that limited the tax-advantaged treatmentof combined contributions to deferred compensationprograms. Higher education employees should seek theadvice of a nancial advisor to learn how any changesmay affect retirement planning.

Most companies have incorporated TDA loanprovisions into their policies or custodialagreements under the Tax Equity and Fis-cal Responsibility Act of 1982. The IRSand each rm have guidelines that must befollowed or the loan could be considered awithdrawal or premature distribution andsubject to tax and ten percent penalties. Forspecic information, the investor shouldcontact representatives of the company.

All performance figures quoted inthis study are net of all administrative ormanagement fees for the years mentioned.Net performance is a good starting placefor comparison. Neither low nor highexpenses and charges assure the bestinvestment. Is an investment that has again of ten percent and charges only onepercent per year (nine percent net) betterthan an investment that has a gain of 30percent and charges three percent per year

Editor’s Note: For thethirty-seventh consecutiveyear, this analysis has beenmade available to membersof the Texas Association ofCollege Teachers and theTexas Community CollegeTeachers Association toassist in retirement plan-ning. The staff of the twoassociations remain grate-ful for the efforts of FrankL. Wright, who managedthe project for most of its

history, and to the profes-sionals of the ORP/TDAcompanies who cooper-ated in making this servicepossible.

No investment decisionshould be based solely ondata reported in this analy-sis. Past performance doesnot guarantee future suc-cess.

Convenient links

to the most

popular ORP

carriers in Texashigher education

are now

available at

www.tact.org.

TACT





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CONTENTS

10


TACT

A 2

3

2

1

?(27 percent net)? Historical investment performancedoes not and cannot guarantee future results. However,many individuals will use past performance to assist inthe decision process. Flexibility and portability shouldalso be considered.

As an investor, it is important to analyze front endcharges (which reduce the amount of money that goesto work immediately), and contingent deferral charges(which tend to limit exibility and the portability of theinvestments). In order to maximize potential gains in thefuture through new products or innovations, exibilityand the allowance of change are important factors.

Fixed Accounts

Fixed accounts are traditionally investments in the“general accounts” of an insurance company. Theseaccounts function similar to a bank’s Certicate of Deposit. The dollars on deposit are “lent” to the insur-ance company. The insurance company agrees to repayboth principal and a contractually-guaranteed minimuminterest rate. Most companies pay the current interestrate, which is normally higher than the contractualminimum. This rate may change daily, monthly, quar-terly, or annually. The current rate of interest is derivedfrom the company’s earnings, and is set by the boardof directors. The actual formula for the current interestrate varies from rm to rm. It is often an unknown anddiscretionary formula, subject to change.

Other types of xed accounts offer more specic in-formation regarding their yields. They may offer a ratebased upon a pool of specic underlying assets such asgovernment bonds, treasuries, or other securities. Theseare sometimes called Market Value Adjusted accounts.Only when a rm will disclose and contractuallyguarantee the formula can investors be assured of theinterest crediting method for their contract. While mostinsurance companies work on an old banking principle,

paying policyholders two percent less than the companyearns on its investments, the choice of formulas is stillat the discretion of the company’s board.

Insurance companies credit or pay interest in manydifferent methods. A widely used method is to “band”interest rates. As money is received by the company thecurrent interest rate is applied. The current interest ratecan be guaranteed for any period of time. However, asthe rate changes, monies received from that point for-ward would be considered a new band and credited atthe new rate. The old money, or band, may continue toearn the former rate of interest for the specied periodof time. Once that time has elapsed, a new rate may beapplied to that band. Over time, the contract may havemany bands of different rates. Some rms band for ayear and then the dollars drop into a pool or portfolio.The current rate paid on the pool or portfolio may behigher than the initial band. If the rates are quoted on aportfolio basis, the dollars earn the stated interest rate

when deposited.To attract new participants, many companies will

increase or enhance third quarter current rate declara-tions, when companies receive the lowest contributionsof the year. Not all companies engage in this practice;however, one should be aware that this strategy is usedto entice participation in certain programs.

Another tool to entice participation is the “two-tier”crediting process. This process enhances the rate fordollars that are annuitized at retirement, and creditsless interest to those wishing a cash option. Annu-

ity contracts have twphases, accumulatioand distribution. Annuitization is a distributiophase. By utilizing thidistribution process, participant can buy a“income stream.” Thinsurance company wiguarantee, accordinto the contract choicmade, to provide aincome the annuitancannot outlive. Otheoptions can include

receiving money for a set period of time, or even anincome stream for the spouse upon the annuitant’death (known as joint and last survivor option) or an

other mutually-agreed combination. The loss of exibility and liquidity for the dollars annuitized is assuredsince the purchase of an income for life guarantees thaccumulation in the account to be with the insuranccompany for a very long time.

When comparing interest rates, be careful of thmanipulations that companies may use to “enhancetheir contracts. The highest interest rate is not necessarily the best bargain. Since interest rates have declineda number of companies will pay a rst-year bonuthereby enticing a move to that company. Howeverthe enhanced rst-year rate can be at the expense othe renewal rate.

Not all enhancements to contracts are negative. Sombonus contracts truly provide a positive enhancemento earning potential. Annuitization is necessary tsome people’s nancial planning, but is typically norecommended for all accumulations. Keep in mind, thrms currently available for ORP and TDA are focused

upon creating competitive products for accumulationsAt retirement, shopping for the best annuitization ratis a very prudent decision. In addition to checkinwith one’s current rms, there are several companiethat specialize in the distribution phase (annuitization). At retirement, all accumulations in both ORP anTDA accounts become 403(b)s. 403(b) is the section othe Internal Revenue Code that allows for these retirement programs. Therefore, all dollars could be comingled. By placing a larger sum on deposit, one coulpurchase a higher income stream, but do not forget tshop because it is a lifelong decision.

Most xed contracts, like CDs, will have a penaltfor early withdrawal. The term for this is surrender owithdrawal penalty. This charge is usually assessed onpayments made to the contract that have not been “ondeposit” for a specied period of time.

Finally, it is important to consider ratings of rmif the dollars are invested in the xed side of any contract. Since the money is guaranteed by the insuranccompany, solvency of the rm should be a factor foconsideration. When placing assets in a xed accounutilizing two or even three different rating services iconsidered prudent. (See Table 1.)

Each rating service (such as A.M. Best, Standard anPoor’s, Duff and Phelps, and Moody’s) has a differenarea of expertise and specic evaluation criteria. Somof those areas include solvency and claims-paying ability. However, be advised that even these rating serviceare not infallible. In the past, several companies hav

What will be my nancial

needs at retirement, and

should I supplement my

ORP with other

investments such as a tax

deferred account?

What is the likelihood of

a good return throughout

the term of my

investment?

Is it diversied enough to

ensure stability?

What are the outside

rating rms’ evaluations

of the carrier? Does the

company have soundness

and experience to fulll

its contract and provide

good management?

Formulating

the

Decision

For a comprehensive

overview of the rules

and rate histories of

TRS and ORP, provided

annually by the Texas

Higher Education

Coordinating Board,

visit www.thecb.state.

tx.us/reports.





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11


TACT

ORP/TDA Analysis A 3

6

5 4

been placed into “receivership” despite having highratings by these services. Texas does have a guaran-tee program. This program offers protection of up to$100,000 of account value with each company.

Mutual Funds

Mutual funds are available for ORP and TDA depos-its. An investment company or a mutual fund is eithera corporation or a trust in which investors pool theirfunds and invest them in a wide variety of securities.An investment company or mutual fund is engaged inthe business of investing in securities, managing fundsfor people more effectively than individuals ordinarilycould for themselves. A fund operates as a single largeaccount that is owned by many shareholders. Today,there are more mutual fund choices available thancompanies listed on the New York Stock Exchange. Asthe world economy continues to grow, opportunities forinvesting beyond our shores become increasingly viableoptions. Additionally, most funds are now grouped in“families” that offer a broad array of funds within one

package or company.Here is a brief description of the kinds of invest-

ments available.

1. Money Market Funds invest in securities thatmature in less than one year. These funds can be com-posed of one or more of the following: Treasury bills,certicates of deposit, commercial paper, EurodollarCDs, and notes. The objective is to maintain a constantshare value while producing a return slightly abovebank money market funds.

2. Bond Funds can come in many varieties, includ-ing a government bond fund, a corporate bond fund,high yield bond fund, or others. Typically, the invest-ment criterion requires that any holding purchased bea bond.

3. Stock Funds can be classied in three categories.Equity-Income Funds focus on income, with capital ap-preciation as a secondary concern. Growth and IncomeFunds attempt to produce both capital appreciation and

current income. Growth Funds seek capital apprecia-tion rst while current income is a distant secondaryconcern.

4. Balanced Funds are also called “total return”funds. The objective is to provide total returns throughgrowth and income. The fund typically purchasesstocks, bonds, and convertible securities. Weighting of each asset class will depend upon the manager’s percep-tion of the market, interest rates, and risk levels.

5. International (Global) Equity Funds consist of two types. International or Foreign Funds may onlyinvest in stocks of foreign companies. Global Funds caninvest in both foreign and U.S. stocks. The objective of either category is growth of capital.

6. Aggressive Growth (Small Company) Funds aremutual funds that focus strictly on appreciation, withno concern about generating income.

7. Special Funds are grouped in two categories:Metal Funds and Non-Diversied Funds. A metal fund

purchases metals in one or more ways: bullion, goldstocks, and mining stocks. Non-Diversied Funds aredened by the Securities and Exchange Commissionas holding more than ve percent of the funds’ totalholdings in the security of one company. These fundscan also be industry specic.

The above denitions have been modied fromthose found in the Certied Fund Specialists guide.

Each mutual fund comes with a prospectus, whichmust be provided to the investor before purchase. Thisprospectus will provide information such as the nameand credentials of the fund manager, the goals and ob-

jectives of the specic fund, and information regardingfees and other expenses. It will also describe the limita-tions placed on the manager. All funds instruct the in-vestor to “read the prospectus carefully before investingor sending any money.” Unfortunately, the prospectusis written in such technical terminology, most peoplewould have difculty interpreting its contents.

All mutual funds have fees, including so-called“no-load” funds. The investor ultimately pays theseexpenses, which include marketing, research, adminis-trative support, reports, fund managers, and other costs.Accepting the fact that there is “no free lunch,” whatcharges should one review before investing?

The investment advisor or advisors, making thedaily decisions—to buy, sell, or hold the investmentsof the fund—must be paid. The research and overhead

costs for administering the fund must also be paid.These are usually described as “investment advisoryexpenses” or “management fees.” It is always best tond out what the management fees are, since the feeamount can affect the performance of the fund. Whileone does not want to make this an overriding concern,an investor needs to be comfortable and understandthe fees assessed. Generally, net performance, notinternal cost, is the most important factor to considerwhen investing.

There are three pricing strategies for mutual funds.A-share mutual funds are front-loaded funds. Thecost to invest will usually range from zero percent forMoney Market Funds to more than ve percent forInternational Funds. The load immediately reduces theamount going to work. These funds will typically bepresented by a salesperson who receives a commissionto represent that company.

B-share mutual funds are sometimes known as no-load with a contingent deferred sales charge. These

shares have an early withdrawal penalty if the amountdoes not remain on deposit for a specied period of time. These funds typically have higher managementfees than the A-shares and are often clones of an A-share fund.

C- and D-share mutual funds are no load in, and if held for a period of time (up to one year), no load out.These are deemed no-service or self-service funds. Thisclass of funds can be brought to the investor in twoways. The old line of funds has no sales force; trans-action are made using a toll-free phone number. Thenew line of funds uses salespersons that may or maynot receive an up front commission. The managementfees will probably be higher than B-shares, thereforeone should check the prospectus. More families willbegin offering C- and D-shares.

Another fee that may be assessed is a 12-b-1 fee,named after a federal government rule. This fee paysfor distribution costs, including advertising and dealer

compensation. The 12-b-1 fee may provide a venue foruse, compensating a professional to work with an inves-tor in the design of an investment plan. The professionalwill be paid based upon the amount invested and theperformance of the account. If applicable, this fee willbe found in the prospectus.

It has long been the subject of much discussionwhether paying an up front charge is best or if it is

What are the expenses

involved with the

program? Do transfer

fees, surrender charges,

and other costs permit

exibility as my invest -

ment needs change?

Is my contract surrender

able for cash value, in

whole or in part, after

leaving covered employ-

ment for ORP, and af-

ter I turn 591 / 2 for TDA?

Does it allow lump sum

withdrawals in lieu of an-

nuitization at retirement?

Do I have sufcient

choices between xed and

variable types of

investments and can I

shift between them easily

and without cost?





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The Legacy of TACT

Legislative Update


2011 ORP Study

Fall Conference

GRF Contributions

Membership

CONTENTS

12


TACT

A 4

7

preferable to have a contingent charge. One positionholds that if the investment is for the long term (tenyears) it will be better to pay up front charges, sincethis will make the annual management or investmentcharge signicantly lower. However, this argumentdoes not take into consideration personal, economic,or product changes. The original investment chosentoday may not be the best investment for an individualin the future.

Variable Annuities

Variable annuities can be described as a combinationof xed annuities and mutual funds with a twist. Vari-able annuity contracts are life insurance contracts thathave as few as one or as many as 30 variable investmentoptions. These options are referred to as sub-accounts.The sub-accounts are, by law, separate accounts. Thevariable choices offered differ from the xed account inthat the investor, not the insurance company, absorbs the

investment risk. There are no guarantees. The money isnever commingled in the insurance company’s generalaccount. All earnings or losses are tied to investmentperformance of the underlying account.

Many variable annuity contracts have xed ac-counts. Research shows that almost 60 percent of as-sets in variable annuity contracts are in xed accounts.While this may be prudent for a particular investor, thediscussion provided in the xed annuity section applieshere. In some cases, the xed portions of these contractsare not as competitive as a xed only contract. Variableannuities are by design variable investments.

The variable annuity is a product that is constantlyevolving. The horizontal integration of these contractsis an innovation that seems to be growing. Previously,all programs were vertically integrated. Management,marketing, administration, and sales were all performedby the same company. In the late 1980s, several rms

began adding external fund managers to the proprietaryfunds offered in the contract. Today, an investor caneven cross fund families in one contract.

Remembering that the variable annuity contract isoffered by an insurance company may assist an inves-tor with the following discussion regarding fees. Theexpense risk and mortality charge are fees assessed inmost variable annuities. The expense charge guaranteesfrom the date a contract is signed that the charges formanagement and annual contractual charges will not in-crease for the life of that contract. The mortality chargeis unique to variable annuities. Mortality charges areguarantees by the insurance company that in the eventof death, heirs will receive either the contributions(deposits) or the face value of the contract, whicheveris greater.

Today, several contracts have expanded the mortal-ity feature. This is called a “stepped-up death benet.”If available, the contract will increase the amount in-vested at a certain rate (e.g., ve percent per year) or ata contract anniversary date (e.g., the fth contract year).This value is the new “oor” that the heirs will receive.This can be a very attractive feature for older facultyinvesting in stock accounts late in their careers. Anotherfee assessed by the variable annuity is the investmentadvisory fee and, if applicable, a 12-b-1 fee.

The surrender or withdrawal structure of the vari-able annuity is very similar to B-share Mutual Funds(no-load with a contingent deferred sales charge). Mostcontracts will not have front end charges, but will havesurrender charges. These charges may be level (say,

three percent for three years, then dropping to zeroreducing (say, six percent the rst year, then reducinone percent per year), or level for a certain period otime then declining (say, six percent the rst two yearsthen declining each year to zero). This penalty may bassessed upon each contribution. This type of surrendecharge is called a “rolling surrender charge.” The penalty can also be based upon contract years. This typof surrender charge is called a “non-rolling surrendecharge.” If dollars are moved to another rm beforthe time period for surrender charges has elapsed, thcontributions can be penalized for early withdrawaUnlike mutual funds, most companies allow a tepercent free withdrawal, allowing a transfer to anotherm. This ten percent free withdrawal is usually not cumulative privilege.

Another feature offered by variable annuities idollar cost averaging. This allows an investor to placa systematic transfer of a specic amount each mont

from one sub-account to another. Theoretically, if thinvestor purchases shares over a period of time wheprices are high and low, the cost per share will be lesexpensive in the long term using dollar cost averagingThe availability of this option could be an additionafeature to consider.

Additional Options

A recent innovation in ORP and TDA investmenproducts is the trust. This option allows the investoto design a very personal investment. Unlike investinin one family with limited options, through the trusarrangement the investor can mix different funds ancross family lines. The ability to select the top performers, or specic asset classes from several mutuafund families, is a powerful investment tool. Currentlythis option is available for fund use only (not multiplvariable annuities) through several different trust pro

grams.Another innovation is on the money managemen

side. Texas law, under the section of law that createORP, allows the use of independent professional invesment advisors. The fee for this service can vary, bumay not exceed two percent annually. The recognitioby the investment community that this service can bprovided to faculty has added a new dimension to ORand TDA accounts.

Money management has many schools of thoughThere are extremes. At one extreme are the institutionainvestors who typically use asset class selection witsystematic rebalancing. At the other extreme are thmarket timers. This theory purports the ability to takadvantage of upswings while limiting the downsideOf course, most theories and services fall betweethese extremes.

Summary

As with all cash accumulation plans, investmenperformance may vary. There are no guarantees. Thistudy should not be the sole basis for investmendecisions. The nal decision regarding retiremeninvestments should remain between the investor anthe investment professional, when utilized. A properldesigned program can be developed to enhance performance and maximize gains given the investor’s ristolerance level. ✩

Are my company’s

reporting and servicing

policies sufcient for my

needs?

8 Have I checked my com-

pany’s Web site for the

most current

information?





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Austin, TX 78731

[email protected]

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[f] (512) 873-7423

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The Legacy of TACT

Legislative Update


2011 ORP Study

Fall Conference

GRF Contributions

Membership

CONTENTS

13


TACT

Please join us!

TACT

Fall Conference

October 28-29, 2011

Crowne Plaza Hotel

Austin, Texas

Hotel Reservations: 1.800.227.6963

Participate in Friday morning legislative visits to

the Capitol. Support fellow colleagues as they

speak to current trends in higher education.

Network with members during evening social hour

and banquet. Vote on important TACT items.

Registration is only $40!Call today at 512.873.7404 to register!

RSVP by Thursday, October 27, 2011

Texas Association of

College Teachers





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[p] (512) 873-7404

[f] (512) 873-7423

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The Legacy of TACT

Legislative Update


2011 ORP Study

Fall Conference

GRF Contributions

Membership

CONTENTS

14


TACT

The James M. Puckett, Ph. D.Government Relations Fund

The TACT Dr. James M. Puckett, Ph.D. Government Relations Fund is a result of optional

contributions made by those committed to TACT’s public affairs program. It is not used

for candidate contributions, but for activities that will increase awareness of TACT among

opinion leaders of public policy. Your contribution will assist in TACT’s legislative efforts

to improve Texas higher education. All expenditures are approved in advance by TACT’s

President, President-elect and Legislative Committee Chair.

Click Here to Contribute!

Thank you to the following contributorsAllen Burrs

Jill Carrington

Gary Coulton

Maria DeShazo

Bob Harmel

Chuck Hempstead

Peter Hugill

Harvey Johnson

Joe Kemble

Hsun-Ming Lee

Allen Martin

Debra PriceAndrea Williams


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Austin, TX 78731

[email protected]

[p] (512) 873-7404

[f] (512) 873-7423

Cover Page

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The Legacy of TACT

Legislative Update


2011 ORP Study

Fall Conference

GRF Contributions

Membership

CONTENTS


TACT

Visit www.tact.org, and

join TACT Today!

Please note the recent changes in our membership rates through the end of this

membership year.

• $158 Regular Membership. Professional staff, full-time faculty, librarians,

administrators and other professionals. Includes Educators’ Professional

Liability Insurance starting 11/1/2011 and ending 10/31/2012.

• $113 Afliate Membership. Administrative assistants, retired faculty, part-

time faculty, graduate students, subscription members and libraries. IncludesEducators’ Professional Liability Insurance starting 11/1/2011 and ending

10/31/2012.

• $250 Annual Business Membership.

Renew your TACT membership online by visiting “Join TACT”

or renew over the phone by calling (512) 873-7404.

New Membership Rates!


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