Inflation Investing TIP – Vanguard Readies Inflation-Indexed Fund

June 5, 2000 (PLANSPONSOR.com) - The Vanguard Group is gearing up to introduce a new no-load fund that concentrates primarily in inflation-indexed bonds. The Vanguard Inflation-Protected Securities Fund will buy inflation-indexed securities offered by the US Treasury, U.S. government agencies, and corporations. A four-week subscription period begins today.

Principal and interest payments will be adjusted to reflect changes in inflation shown by such indicators as the Consumer Price Index for Urban Consumers, which governs adjustments to Treasury Inflation-Indexed Securities (or “TIPS”).
 
If you believe inflation will go up, such fixed income instruments can be a good call within this asset class, although at present it might not appear so.  The current yield on a 10-year Treasury Inflation-Indexed Security is 4.12%; by comparison, the yield on a conventional 10-year Treasury bond is 6.12%. 
 
The 200 basis point difference is the “implied inflation rate;” the expected inflation rate over the life of the bond.  Looking at the twelve months ended April 30, 2000, the Consumer Price Index (CPI) increased at an annual rate of 3.0%, 100 basis points higher than the implied inflation rate.  With few exceptions, prices have risen over the past five decades; the question going forward is, how much? 
 
Inflation-indexed bonds have greater income risk than traditional bonds.  However, they offer a greater level of protection against interest rate risk, since they mostly bear the risk of changes in real rates, which historically have been stable over time.  The more volatile component of interest rate changes-the current inflation rate and expectation of future inflation-is addressed by these securities.
 
The Vanguard Inflation-Protected Securities Fund will be offered at an expense ratio of 0.25% by Vanguard’s Fixed Income Group.  This group within the $560 billion company oversees $140 billion in assets spread through 45 taxable and tax-free bond and money market portfolios.
 

Government Reviewing Plan Sponsor Disclosure To Early Retirees

May 5, 2000 (PLANSPONSOR.com) - Several federal agencies are reviewing whether plan sponsors provide early retirees with adequate information when faced with a choice between annuities and lump sum payouts, according to BNA Daily Labor Report.

The informational reviews by the US Treasury, the Labor Department, and the Internal Revenue Service were prompted by concerns that Senator Tom Harkin (D-Iowa) raised in a letter in January.

Warning shots

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If he has his way, the agencies will issue stern warnings to plan sponsors. Failing to provide adequate information could disqualify plans for income tax purposes and/or result in personal liabilities for plan fiduciaries, according to Harkin.

The senator raised concerns that employers fail to inform early retirees of benefit losses if they don?t take annuities instead of lump sum payouts. His letter went to Treasury Secretary Lawrence H. Summers and Labor Secretary Alexis M. Herman. In it, Harkin requested more vigorous enforcement of ERISA disclosure rules.

Herman then voiced concerns in February to the Senate Appropriations Subcommittee on Labor, Health, Human Services and Education that defined benefit plan participants were choosing lump sums over potentially more valuable subsidized early retirement benefits paid as annuities.

Harkin?s take

Annuity options studied by Harkin in one case were 80 percent more valuable to an early retiree than the alternative lump sum. “For someone to be employed by a company for 10 or 20 years and then lose a large share of their pension because an employer buries the fact that a lump sum payment does not include early retirement benefits is outrageous,” Harkin said.

Of course, an annuity will end when the participant or the surviving spouse passes away, while the remainder of a lump sum payment will transfer to the estate.

In response to Harkin?s letter, Treasury Acting Assistant Secretary Jonathan Talisman noted the need for agencies to ascertain what disclosure practices plan administrators follow, and how those compare to “best practices.”

– Ann Bidou       editors@plansponsor.com

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