Presented by

David 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”

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%

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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

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 Control Menu 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75%, or 100% of the calculated credit, and can be modified or rescinded by employer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/Investment Company Institute, 2011

TMRS Makes Dollars & Sense to the Public

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

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Makes Sense to the Public, cont.

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”

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Makes Sense to the Public, cont.

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

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TMRS Makes Dollars & Sense to Members

After retirement, members draw a guaranteed annuity for life After retirement, retirees may receive a

COLA based on their city’s plan choices

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Makes Sense to Members, cont.

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

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Makes Sense to Members, cont.

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 Contributions I = Investment Income B= Benefit Payments E= Expenses

so

B = 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 Plan

Proportion 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 Plan

Proportion 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 Plan

Proportion 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%; 2:1 100% USC; 70% CPI COLA

12.50% 26.50% 47%

Plan 2: 7%; 2:1 100% 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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