General Information


Active MembersRetirees & BeneficiariesEmployersGeneral Information


Investments in Plain English

Investments in Plain English

Welcome to Investments in Plain English

In today’s financial climate, many members want a better understanding of the TRS trust fund related to their pension payments.  The following is a plain English explanation of commonly used investment terms.  Members are invited to use the following glossary to help them understand the financial markets and how the TRS investment team manages the trust fund.  TRS welcome feedback and the suggestion of any other terms to be added in coming weeks.  Please email TRS at: ChalkTalk@trs.state.tx.us.

Glossary of Terms

Actuary

An actuary is a professional trained to quantify risk and uncertainty. Actuaries are critical to pension funds like TRS because they help TRS plan its financial needs on short-term and long-term bases, using sophisticated quantitative models. For example, actuaries help life insurance companies set prices for their products.

Asset Allocation

An investment strategy that aims to balance risk and reward by allotting a portfolio into various asset classes according to certain goals, risk tolerance and timing considerations. Two years ago, the TRS initiated a new investment philosophy seeking to further diversify TRS investments in order to improve returns while also effectively managing risk. As part of this evolving strategy approved by the TRS Board of Trustees, the TRS investment team shifted money away from the stock market and into areas such as U.S. treasury bonds, inflation-protected notes, and private investments such as private equity, real estate, and infrastructure funds, providing some shelter from swings in the stock market.

Bear Market/ Bull Market

A bear market is a declining market in which the market prices of many stocks decrease for an extended period. A bull market is a market in which market prices of most stocks are increasing for an extended period.

Defined Benefit Plan

A defined benefit plan is a retirement plan, such as a pension fund, where the amount of the retirement benefit paid is determined under a formula. In a public plan like TRS, the benefit formula is established by law. TRS, like nearly all public pension funds, is a defined benefit plan. Active employees participating in the plan, or plan members, who qualify for retirement under the terms of the plan, are eligible to receive monthly benefits. The monthly benefit, or annuity, is "defined" by the formula governing the benefit plan, including any selection of plan options, and is not limited by the amount of member contributions to his or her retirement account. Retirement plans such as 401(k) and 403(b) plans are called defined contribution plans. Because TRS is a defined benefit plan, it is designed to be pre-funded based on long planning horizons – generally more than 40 years. In contrast to a defined benefit plan annuity, which is usually paid monthly for life, a 401(k) or 403(b) plan retiree bears the risk that the assets in the self-managed plan will be depleted before the person dies.

Fiduciary

A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the exclusive benefit of the other person (the "beneficiary") rather than for his or her own benefit. A fiduciary may not consider his or her own interests when making decisions intended to benefit others as beneficiaries. At TRS, the Board of Trustees has a fiduciary duty to TRS members and retirees to make prudent decisions in overseeing the public pension plan and its investments.

Infrastructure Investments

These investments are investments in assets that provide essential services to communities, businesses and governments. These investments might include parking lots, airports, electricity distribution centers, subways, schools, etc. These are typically long-term investments with projected rates of return in line with the investment objectives of TRS. Because of the size of the TRS trust fund and the expertise of its investment staff, TRS is able to invest in these projects and take advantage of opportunities that would not be available to most investors. To achieve prudent diversification among infrastructure investments, TRS infrastructure investments are not limited to Texas or even to the United States. Under TRS’ diversified investment strategy, infrastructure projects represent 2 percent to 5 percent of the total trust.

Market Value of Assets

The market value of assets is the price at which all pension fund assets could presumably be purchased or sold.

Real Rate of Return

Real rate of return shows the growth rate of one’s investments after inflation is taken into account. It is an annual percentage of gains or losses from investments, including income received and the market value of the assets at the end of the period, adjusted for changes in prices due to inflation or other external factors like taxes.

Stable Value Portfolio

Typically, stable value portfolios include investments with a stated rate of interest or fixed rate of return promised in a contract. Under TRS’ diversified investment strategy, 20 percent of trust assets are invested in a stable value portfolio. U.S. Treasury bonds are an example of an investment in TRS’ stable value portfolio.

Subprime Mortgage

A type of mortgage that is normally given to borrowers with lower credit ratings. As a result of the borrower’s low credit rating, the lender refuses to offer a conventional mortgage because the lender views the borrower as a greater default risk. Lending institutions often charge higher rates of interest on subprime mortgages as compensation for assuming more default risk.

Unfunded Actuarial Accrued Liability (UAAL)

UAAL is the difference between the current value of the fund’s assets and what the fund will need for future payouts. UAAL is a common indicator of a pension fund’s health.

Sources: BusinessDictionary.com and Investopedia.com

Resize Text with buttons to the rightSet a Normal Text SizeSet a Large Text SizeSet an Extra Large  Text Size
MyTRS LOGIN TRS.TV

Download PDF Viewer

Find us on:
Facebook Icon  YouTube Icon 
LinkedIn Icon  Twitter Icon

Download PDF ViewerDownload PDF Viewer
[ back to Top ]