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Understanding T.M.R.S.
Hey guys, I'm an out-of-stater looking at lateraling into the DFW area, and I have done quite a bit of research on comparing salaries, benefits, and retirements for different agencies. It seems that pretty much all of the local agencies belong to TMRS for their retirement programs, except for Dallas and Fort Worth which have their own proprietary pension plans. I have read the entire TMRS Benefits Guide (http://www.tmrs.com/down/pubs/pubs_bene_guide_08.pdf) in its entirety multiple times in order to try to understand the system, and for the most part I am clear on how it works. However, there is still one gaping hole in the system's foundation that leaves me confused...
Here is my confusion: The plan is a defined contribution plan, unlike standard pension plans which are defined benefit plans. So, at retirement, each retiree's individual retirement account will have a specific defined value, at which point TMRS will establish a pay schedule for the retiree based on the value of the account and the retiree's "life expectancy", as well as other factors. The retiree will then receive guaranteed monthly retirement benefits for the remainder of his life, based on the pay schedule set at the time of retirement (plus COLA when applicable). Below I have included an excerpt from page 8 of the benefits guide (bolded text was specifically bolded by ME):
So, with that being said, here's the million dollar question: What happens when a retiree outlives their estimated life expectancy? Because each retiree's personal retirement account has a finite amount of funds, it is clearly possible for your account to be completely withdrawn, leaving you with nothing. So how exactly can TMRS guarantee a retirement benefit for life, when the funding for that benefit is finite? Does TMRS just draw the needed funds from a general account, or some sort of overdraft account? I'm pretty sure I know the answer to this question, which is that ALL the funds from individual accounts are held in a single group account anyway, and that individual account balances are just numbers on an balance sheet with no dedicated personal account associated to it. I am pretty sure that is how it works, but it still leaves the question of how funding is provided for retirees that outlive their estimated beneficiary period. Does anyone here know the specifics of exactly how this works? Many posters here are probably members of TMRS, so I'll bet there are others who would like to know as well.
My other concern with TMRS is just how odd of a retirement plan it is. I don't mean odd in a bad way, but just odd as in "unique". Many people, myself included, are used to and familiar with traditional defined benefit pension plans, which operate on a very simple principal: Individual employees contribute a specific percentage of their pay to the plan, along with a specific percentage contributed by the employing agency. These contributions are then pooled together into a single fund, from which benefits are paid to everybody at the time of retirement. These plans provide a very specific benefits schedule so that everyone knows exactly what their retirement benefits will be, and those benefits are uniformly based on age and years of service at time of retirement. So, if you retire at age 55 and have been employed for 25 years, your benefits will be _% of your ending salary (or average of last 3 years salary, etc., it varies by plan). It is fairly simple to understand, and objective. The other type of retirement plan many people are familiar with is the defined contribution plan, such as a 401k, 457b, or even an IRA. These plans do not pool funds, but instead are funded solely for the benefit of a single employee. They provide for a finite amount of funds available at retirement, and once those funds are depleted, ba-da-bing, no more benefits. Very simple to understand and, again, objective.
But then, there is TMRS... which from everything I can see is trying to be a hybrid mutant combination of plans (hence my calling it "odd"). For funding, TMRS is set up as a defined contribution plan, but when it comes to benefits disbursement, it is set up as a defined benefit plan. These two types of plans are, by their very nature, mutually exclusive. Now, TMRS has been around since 1947, and is apparently fiscally solvent, so obviously the system works. Somehow. I'm clearly not an accountant or expert on the matter by any means, but I must admit I am baffled by how the system operates.
With that being said, I did also just notice that Texas currently has legislation pending that would restructure some of the accounting principles employed by the current TMRS system. Here is a link to the FAQ regarding the pending legislation: http://www.tmrs.com/down/legislative...tructuring.pdf Considering the current economic environment, I am not at all surprised that this is happening. It's a wonder that it took so long for changes to be proposed. Luckily, it does not appear that benefits will be affected, as the changes are only to internal funding organization. It's actually a good read for anyone who is a TMRS member and wants to know more.
FYI- Yes, I am well aware that this post is ridiculously long and ridiculously boring... but when you're as inquisitive about these kinds of things as I am, it just comes as second nature. Also, I have been a lurker on these forums for quite some time, and I have seen numerous people ask questions about TMRS, and they always went unanswered. Hopefully this post can create some sort of reference guide for people wanting to understand the system better.
Good night!
Here is my confusion: The plan is a defined contribution plan, unlike standard pension plans which are defined benefit plans. So, at retirement, each retiree's individual retirement account will have a specific defined value, at which point TMRS will establish a pay schedule for the retiree based on the value of the account and the retiree's "life expectancy", as well as other factors. The retiree will then receive guaranteed monthly retirement benefits for the remainder of his life, based on the pay schedule set at the time of retirement (plus COLA when applicable). Below I have included an excerpt from page 8 of the benefits guide (bolded text was specifically bolded by ME):
At retirement, you will choose a monthly payment option
to receive your benefit. All options pay you a monthly benefit
for the rest of your life. Besides the Retiree Life Only
benefit, six payment options are available that can provide
payments to your beneficiary if you die. Choosing your retirement
option is one of the most important decisions you
will make as a TMRS member. Detailed information on the
options begins on page 29.
Your monthly benefit at retirement is based on your member
deposits and interest, the city’s matching funds, other
credits, your life expectancy (and your beneficiary’s, if you
choose certain options), future account interest assumptions
as set by law, and the monthly payment plan you
choose.
to receive your benefit. All options pay you a monthly benefit
for the rest of your life. Besides the Retiree Life Only
benefit, six payment options are available that can provide
payments to your beneficiary if you die. Choosing your retirement
option is one of the most important decisions you
will make as a TMRS member. Detailed information on the
options begins on page 29.
Your monthly benefit at retirement is based on your member
deposits and interest, the city’s matching funds, other
credits, your life expectancy (and your beneficiary’s, if you
choose certain options), future account interest assumptions
as set by law, and the monthly payment plan you
choose.
My other concern with TMRS is just how odd of a retirement plan it is. I don't mean odd in a bad way, but just odd as in "unique". Many people, myself included, are used to and familiar with traditional defined benefit pension plans, which operate on a very simple principal: Individual employees contribute a specific percentage of their pay to the plan, along with a specific percentage contributed by the employing agency. These contributions are then pooled together into a single fund, from which benefits are paid to everybody at the time of retirement. These plans provide a very specific benefits schedule so that everyone knows exactly what their retirement benefits will be, and those benefits are uniformly based on age and years of service at time of retirement. So, if you retire at age 55 and have been employed for 25 years, your benefits will be _% of your ending salary (or average of last 3 years salary, etc., it varies by plan). It is fairly simple to understand, and objective. The other type of retirement plan many people are familiar with is the defined contribution plan, such as a 401k, 457b, or even an IRA. These plans do not pool funds, but instead are funded solely for the benefit of a single employee. They provide for a finite amount of funds available at retirement, and once those funds are depleted, ba-da-bing, no more benefits. Very simple to understand and, again, objective.
But then, there is TMRS... which from everything I can see is trying to be a hybrid mutant combination of plans (hence my calling it "odd"). For funding, TMRS is set up as a defined contribution plan, but when it comes to benefits disbursement, it is set up as a defined benefit plan. These two types of plans are, by their very nature, mutually exclusive. Now, TMRS has been around since 1947, and is apparently fiscally solvent, so obviously the system works. Somehow. I'm clearly not an accountant or expert on the matter by any means, but I must admit I am baffled by how the system operates.
With that being said, I did also just notice that Texas currently has legislation pending that would restructure some of the accounting principles employed by the current TMRS system. Here is a link to the FAQ regarding the pending legislation: http://www.tmrs.com/down/legislative...tructuring.pdf Considering the current economic environment, I am not at all surprised that this is happening. It's a wonder that it took so long for changes to be proposed. Luckily, it does not appear that benefits will be affected, as the changes are only to internal funding organization. It's actually a good read for anyone who is a TMRS member and wants to know more.
FYI- Yes, I am well aware that this post is ridiculously long and ridiculously boring... but when you're as inquisitive about these kinds of things as I am, it just comes as second nature. Also, I have been a lurker on these forums for quite some time, and I have seen numerous people ask questions about TMRS, and they always went unanswered. Hopefully this post can create some sort of reference guide for people wanting to understand the system better.
Good night!
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