Presented byDavid Rodriguez, Regional Manager

Leslee Hardy, ASA,EA,MAAA, Actuarial Services Director

The Real Value of a TMRS Benefit

TMRS’ Value Why TMRS Makes “Dollars & Sense…”

To Cities… To the Public… To Members…

Cost Benefit Comparisons TMRS DB Plan vs. 401(k)-Type DC Plan What do city’s and employee’s dollars

buy?

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Why TMRS Makes “Dollars and Sense”

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TMRS Makes Dollars & Sense to Cities Plan of choice for Texas cities; voluntary

statewide retirement plan Defined benefit (cash balance) plan Benefits are funded by mandatory

employee deposits, city contributions, and investment income

Operates by local control: Each participating city controls employer costs by choosing its own options

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System Soundness + City Choices

Contribution rates* vary depending on benefits (e.g., 2.34% for cities with 5% / 1:1 match with no COLA, vs. 16.08% for cities with a 7% / 2:1 match and repeating COLAs)

Average contribution rate for all cities for 2013 is 13.22%

All TMRS benefits are fully advance-funded over each employee’s active working career

TMRS’ System funded ratio is 85.1% and System-wide UAAL is $1.7 billion

SYSTEM CITY

*Average rates weighted by payroll

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Makes Sense to Cities, cont. Each city is funded as separate entity;

assets are pooled for investment purposes

Each city has its own assets and liabilities and Funded Ratio

TMRS increases a city’s competitive edge in hiring: 849 cities have chosen to participate in TMRS, and the number increases each year

TMRS benefits are effectively portable across participating cities to help attract experienced employees

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Flexible, Local ControlMenu of benefits provides cities with over 1,400 possible combinations. Cities control these four major cost drivers of their plans:1.Employee deposit rate: 5%, 6%, or 7% (by

law, em-ployees must agree, by 2/3 vote, to lower deposit rate)

2.Employer match of contributions at retirement: 1:1; 1.5:1; or 2:1

3.Retiree COLAs: Adopt, change, or rescind a repeating or ad hoc COLA at either 30%, 50%, or 70% of CPI

4.Updated Service Credit: May be adopted at either 50%, 75%, or 100% of the calculated credit, and can be modified or rescinded by employer

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The majority of a retiree’s benefit is funded by investment earnings on member and city contributions over the member’s career

TMRS’ administrative costs are low — approximately 0.15% of assets in 2011 (compared to a median “all-in” fee  of 0.78% for 401(k)s)*

TMRS’ actuarial investment return assumption (net of expenses) is 7% — one of the lowest in the country for large public sector plans

* Source: Deloitte/InvestmentCompany Institute, 2011

TMRS Makes Dollars & Sense to the Public

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TMRS is a “cash balance” or “savings-based” plan that receives no state funding

Decisions that affect costs are made locally TMRS invests $18.5 billion (as of

12/31/11) in the markets― providing capital for the national economy

In 2011, TMRS paid more than $810 million in retirement benefits, which circulate through local economies For example, a 2007 study by the Perryman Group

showed that TMRS benefits resulted in $1.32 billion in annual spending, most of it in the communities from which members retired

Makes Sense to the Public, cont.

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TMRS determines each city’s Annual Required Contribution (ARC) based on benefit plan chosen by city

Cities must pay the ARC every year, or reduce benefits if ARC is not sustainable ARC = the cost of the current year’s

accruals (Normal Cost Rate) + amortization of the UAAL (Prior Service Rate)

No pension contribution “holidays”

Makes Sense to the Public, cont.

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System assets are secure, and the System-wide funded ratio has increased over the past 4 years

TMRS members’ contributions provide a “savings plan” for the benefit of the employee

The member’s account gains a 5% interest credit each year, guaranteed by law Fluctuations in the plan’s value do not

directly affect the benefit amounts promised to members

TMRS Makes Dollars & Sense to Members

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After retirement, members draw a guaranteed annuity for life

After retirement, retirees may receive a COLA based on their city’s plan choices

Makes Sense to Members, cont.

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As members, city employees are rewarded by the prudent, diversified investment policies of the System (as opposed to relying on outside investment advisors or making investment decisions alone)

A pension plan provides greater stability and less vulnerability to market fluctuations Retirement savings of TMRS members were

not affected by the stock market crash of 2008; whereas 401(k) asset values declined more than 25% on average

Makes Sense to Members, cont.

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Retirement Components Retirement is traditionally described as a

“three-legged” stool, comprising: Retirement Program Social Security (86% of TMRS cities have

Social Security) Personal Savings

401(k)s and similar DC plans were never intended to be the primary retirement vehicle

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DB vs. DC vs. TMRS Defined Benefit Defined Contribution TMRS

Benefit based on formula; not based solely on actual contributions

Benefit based on employee contributions

Benefit based on member’s contributions and city’s matching funds. PLUS has defined benefit features – USC & COLA

Lifetime annuity Not a lifetime annuity Lifetime annuity

Money pooled and professionally invested

Self-directed investments Money pooled and

professionally invested

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Cost Benefit Comparisons

Basic Formula for All Pension Plans C + I = B + E

C= Employee and Employer ContributionsI = Investment IncomeB= Benefit PaymentsE= Expenses

soB = C + I – E

Total benefit payments must be paid from the total employee and employer contributions plus total net investment income

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Built-in Cost Savers of TMRS’ DB Plan Versus 401(k)-Type DC Plan Longevity Risk Pooling: 15% savings

TMRS: Benefits are paid over the average life expectancy of all retirees

401(k)s: Individual must “over-save” so as to not outlive their retirement income

Maintenance of diversified portfolio over time: 5% savings TMRS: investment returns reflect the advantage

of the maintaining balanced portfolios over generations of workers — asset portfolio is “forever young”

401(k)s: Individuals shift toward lower risk/return assets as they age and approach retirement — individual asset portfolio has a finite life

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Built-in Cost Savers of TMRS’ DB Plan Versus 401(k)-Type DC Plan, cont. Superior Investment Returns: 26%

savings TMRS: Assets are pooled for investment

purposes and professionally managed, resulting in higher returns and lower fees/administrative expenses

401(k)s: Individual participant account fees and administrative expenses are significantly higher due to assets lacking economies of scale

Total combined cost savings of DB Plan relative to 401(k)-type DC Plan is estimated to be 46%, according to a 2008 study by National Institute on Retirement Security

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Example Plan 1 – TMRS...compared to

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Example Plan 1 – 401(k)-type plan

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Cost Breakdown Comparison — Example Plan 1

12%

7%

81%

TMRS Plan

Employer ER Contrib.Employee EE Contrib.Investment Earnings

26%

7%67%

401(k)- type PlanProportion of Total Benefit paid by:

Remember the formula: C + I = B + E

Example Plan 2 – TMRS...compared to

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Example Plan 2 – 401(k)-type plan

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Cost Breakdown Comparison — Example Plan 2

12%

9%

79%

TMRS Plan

Employer ER Contrib.Employee EE Contrib.Investment Earnings

26%

9%65%

401(k)-type PlanProportion of Total Benefit paid by:

Remember the formula: C + I = B + E

Ex. Plan 3 – TMRS... compared to

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Ex. Plan 3 – 401(k)-type plan

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Cost Breakdown Comparison — Example Plan 3

11%

10%

79%

TMRS Plan

Employer ER Contrib.Employee EE Contrib.Investment Earnings

25%

10%65%

401(k)-type PlanProportion of Total Benefit paid by:

Remember the formula: C + I = B + E

TMRS Versus 401(k)-Type Plan — Employer Cost Summary

TMRS 401(k)

Cost Ratio

Plan 1: 7%; 2:1100% USC; 70% CPI COLA

12.50% 26.50% 47%

Plan 2: 7%; 2:1100% USC; NO COLA

9.25% 20.30% 46%

Plan 3: 7%; 2:1 NO USC; NO COLA

7.75% 17.50% 44%

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Questions?

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