To Prefund in a Section 115 Trust or Not: A Greater Potential for Long-Term Earnings May Be the AnswerCategories: National Developments,OPEB/GASB 45/75,PARS News
Besides the fiscal prudence of dedicating funds for future retiree healthcare using a Section 115 trust, the other compelling function is the ability to diversify investments. Unlike the general fund, state laws allows Section 115 trusts greater use of equities and diversified fixed income to potentially earn higher long-term rates of return.
Below we compare the hypothetical investment earnings that an agency could have made over the last 5 years by contributing $1 million to the PARS Section 115 trust that is offered in partnership with Vanguard and U.S. Bank, to leaving it in a government treasury bond fund that is common for general fund investing:
Please note that past performance is not an indication or guarantee of future returns.
Calculation assumes no additional contributions & disbursements. Earnings are gross, without investment management and administrative fees.
Before making an investment decision, it’s important to review your specific investment objectives and liquidity requirements.
* Based on 5-Year return of PARS-Vanguard Balanced strategy (as of 6/30/21)
** Based on 5-Year return of Bloomberg Barclays US Treasury Bond Fund 1-3 Yrs (as of 6/30/21)
Simply by prefunding assets in the PARS trust, the agency would have hypothetically earned an additional $550,198 in investment income towards the funding of its retiree healthcare benefits. With this amount compounding over the course of many years, Section 115 trust investing can play a significant role in reducing an agency’s long-term costs and liabilities and serve as an additional source of funds during difficult economic or budgetary times.
The PARS trust is an IRS-approved, legally compliant program that allows for OPEB to be prefunded within a single program. In conjunction with partners Vanguard and U.S. Bank, the program offers low-cost, flexible investments and is the largest and fastest growing of its kind in the nation with over 430 participating agencies.
For more information, please contact:
Maureen Toal, Executive Vice President
844.540.6732 | firstname.lastname@example.org