Presented by David Rodriguez, Regional Manager

1. The Real Value of a TMRS Benefit Presented byDavid Rodriguez, Regional Manager Leslee Hardy, ASA,EA,MAAA, Actuarial Services Director

2. 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?

3. Why TMRS Makes “Dollars and Sense”

4. 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

5. System Soundness + City Choices SYSTEM CITY • 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 *Average rates weighted by payroll • 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%

6. 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

7. Flexible, Local Control Menu of benefits provides cities with over 1,400 possible combinations. Cities control these four major cost drivers of their plans: • Employee deposit rate: 5%, 6%, or 7% (by law, em-ployees must agree, by 2/3 vote, to lower deposit rate) • Employer match of contributions at retirement: 1:1; 1.5:1; or 2:1 • Retiree COLAs: Adopt, change, or rescind a repeating or ad hoc COLA at either 30%, 50%, or 70% of CPI • Updated Service Credit: May be adopted at either 50%, 75%, or 100% of the calculated credit, and can be modified or rescinded by employer

8. TMRS Makes Dollars & Sense to the Public • 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

9. Makes Sense to the Public, cont. • 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

10. 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”

11. TMRS Makes Dollars & Sense to Members • 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

12. Makes Sense to Members, cont. • After retirement, members draw a guaranteed annuity for life • After retirement, retirees may receive a COLA based on their city’s plan choices

13. 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

14. 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

15. DB vs. DC vs. TMRS

16. Cost Benefit Comparisons

17. 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

18. 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

19. 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

20. Example Plan 1 – TMRS...compared to

21. Example Plan 1 – 401(k)-type plan

22. Cost Breakdown Comparison — Example Plan 1 Proportion of Total Benefit paid by: Remember the formula: C + I = B + E

23. Example Plan 2 – TMRS...compared to

24. Example Plan 2 – 401(k)-type plan

25. Cost Breakdown Comparison —Example Plan 2 Proportion of Total Benefit paid by: Remember the formula: C + I = B + E

26. Ex. Plan 3 – TMRS... compared to

27. Ex. Plan 3 – 401(k)-type plan

28. Cost Breakdown Comparison — Example Plan 3 Proportion of Total Benefit paid by: Remember the formula: C + I = B + E

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

30. Questions? 30