City of Harlingen 401(a) Retirement Plan

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Esmond Gilmore
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1 City of Harlingen 401(a) Retirement Plan Administered by Investments Managed by

2 Who We Are Operate primarily in public sector and non profit sectors Fee-Only Investing, Consulting and Third-Party Administrator services TCG Advisors Assets Under Management: $1+ Billion TCG Administrators is the administrator for hundreds of retirement plans across the country

3 Plan Background In 2007 the City was alerted by its bond agency that the cost of retirement benefits in the Texas Municipal Retirement System (TMRS) plan could negatively effect the City s financial status The City Commission decided to explore alternatives to TMRS TCG Consulting, LP was a compensation consultant to the Texas City Management Association (TCMA); was hired to help the City look at alternatives

4 Plan Background TCG worked with City staff and departments to help develop a plan design that would be competitive with TMRS but would be a pay as you go plan to avoid unfunded liability TCG ran numerous scenarios of employees at all salary levels to help assure the plan design was competitive We will review these later in the presentation

account Retirement = Account Balance Examples: 401(k) & 457(b) Defined

5 Defined Contribution vs. Defined Benefit Plan Defined Contribution Money goes into employee account Retirement = Account Balance Examples: 401(k) & 457(b) Defined Benefit Employer guarantees monthly annuity Vesting requirements Typically, must annuitize Guaranteed Monthly Retirement Income

6 What is TMRS? Hybrid: Cash Balance Plan Defined Benefit Plan Receive Monthly Annuity (no account value paid out) Defined Contribution Plan Monthly Annuity based on Account Value TMRS is technically a Defined Benefit Plan Annuity based on accumulated account balance at retirement But, can have an unfunded liability if (among other reasons): Plan provides benefits that are not fully funded when added (e.g., cost of living adjustment to salary, particularly if retroactive Annuity factors change due to COLA, life expectancy changes and earnings projection changes

7 401(a) vs. 457(b) Plan 401 (a) 457 (b) Tax Deferred Investments Yes Yes Contribution Limits (2017) $54,000 $18,000 Excess Contribution over age 50 $0 $6,000 Availability for Withdrawal Plan Loans to Participants Termination of Service Can Allow Termination of Service Can Allow 10% Early Withdrawal Penalty Yes No Contribution Mandatory Voluntary

8 City 401(a) Plan Design City of Harlingen 401(a) Retirement Plan Employee Contributions Employer Contributions 457 Plan Voluntary Deferrals 401(a) Plan Contributions by Employee (Required) 401(a) Plan Contributions by Employer Employee Account with City 457 Plan Company of Choice Percentage of salary Match Based on Years of Service

9 Who Manages the Plan City of Harlingen 401(a) Retirement Plan City Investment Advisory Committee TCG Administrators Third Party Administrator (TPA) TCG Advisors Registered Investment Advisor Custodian/Trustee Invest and safeguard Assets As Directed by Advisor and City

10 Comparison: City of Harlingen Retirement Plan to TMRS Plan Feature City of Harlingen Retirement Plan and Trust 1. Vesting Employee* is always fully vested in his or her account. Texas Municipal Retirement System (TMRS) (Please see the TMRS Member Benefits Guide at efits_guide_2017.pdf Employee* must work 5** years in TMRS to vest. 2. Retirement Employee may retire at any time. Employee must have at least 5** years of service in TMRS and be age 60 or have at least 20*** years of service. 3. Investment choices Employee chooses own investments as appropriate for risk tolerance, age and financial circumstances, from a choice of 21 investment fund options, including and 10 Lifecycle retirement based options and a Stable Value Fund. Default investment is target retirement fund assuming retirement at age 65. All funds are invested in a pooled investment account managed by TMRS with no employee choice, regardless of employee age, financial circumstances or risk tolerance. 10

11 Comparison: City of Harlingen Retirement Plan to TMRS Plan Feature 4. Contributions to Plan City of Harlingen Retirement Plan and Trust City Employee Time with City 5.00% 5.00% Date of Hire of Pay of Pay through End of 5 th Year 6.00% 6.00% 6 th Year of Pay of Pay to Beginning of 11 th Year Texas Municipal Retirement System (TMRS) (Please see the TMRS Member Benefits Guide at nefits_guide_2017.pdf Employee contributes 5%, 6%, or 7% of gross salary, depending on city rules. The city matches Employee deposits at a rate chosen by the City: 1 to 1; 1.5 to 1; or 2 to 1. City of Harlingen s grandfathered employees receive 2:1 match and contribute 7% of pay. 7.00% 7.00% 11 th Year + of Pay of Pay 11

12 Comparison: City of Harlingen Retirement Plan to TMRS Plan Feature City of Harlingen Retirement Plan and Trust 5. Retirement Benefits Employee can receive a lump sum payment, or obtain TCG s assistance in setting up a low cost periodic withdrawal Individual Retirement Account (IRA) with Charles Schwab, or TD Ameritrade, or another company of their choice. Texas Municipal Retirement System (TMRS) (Please see the TMRS Member Benefits Guide at efits_guide_2017.pdf TMRS will pay the member a lifetime annuity (with choices for guaranteed payments and spousal payment options). If the member wants any other payment option they must forfeit all contributions by employers (they will receive only their own member contributions plus interest) 6. Disability In the event of total and permanent disability as determined by the City, the employee can receive a payment from his or her account in the same manner as if the individual terminates employment or retires. 7. Death Benefit In the event of the employee s death, the employee s beneficiary can receive a payment from the account in the same manner as if the employee had terminated employment or retired. If the employee wishes to purchase additional life insurance equal to one year s salary (comparable to the TMRS Supplemental Death Benefit some cities have), TCG can assist the employee in doing this through the City s Group Term Life Insurance program. In the event of disability as defined by TMRS, the member may take an Occupational Disability Retirement or Service Retirement. If the employee is vested, TMRS will pay the beneficiary a lifetime annuity (with choices for guaranteed payments and spousal payment options) at the employee s normal retirement age. If the beneficiary wants any other payment option, or the employee is not vested, they must forfeit all contributions by employers (they will receive only their own member contributions plus interest). Some cities pay additional for a Supplemental Death Benefit, which usually pays an additional amount to the beneficiary equal to one year s salary). 12

13 Comparison: City of Harlingen Retirement Plan to TMRS Plan Feature City of Harlingen Retirement Plan and Trust Texas Municipal Retirement System (TMRS) (Please see the TMRS Member Benefits Guide at 8. Portability The employee can take his or her account with them through a tax-free rollover to an IRA or another retirement plan when they leave the City. The employee can receive a lifetime annuity when he or she reaches normal retirement age. If the employee does not reach vesting with TMRS (see item 1. above) and/or they wish to move their funds to an IRA or another retirement plan, they must forfeit all contributions by employers (they will receive only their own member contributions plus interest). Under certain circumstances a benefit from another Texas retirement plan may coordinate service and benefits with TMRS. Under the Texas Proportionate Retirement Program if the employee currently has service credit in more than one of these retirement systems TMRS The Teacher Retirement System of Texas The Employees Retirement System of Texas The Judicial Retirement System of Texas (Plan 1 or 2) The Texas County and District Retirement System The City of Austin Employees Retirement System he or she may, under certain circumstances, combine that service credit to become vested and become eligible to retire in TMRS and the other systems. The benefit payment from each system is based on the employee s service credit with that system. Please consult the TMRS website for more information. 13

14 Comparison: City of Harlingen Retirement Plan to TMRS Plan Feature City of Harlingen Retirement Plan and Trust 9 Safety of Plan Benefits The City Plan is a pay-as-you-go plan with funds held in a Trust that are protected from bankruptcy of the City or the employee. The funds cannot legally be used for any other purpose but paying benefits to the participants. Each employee is fully vested in his account at all times. There is no guarantee of future payments but current account balances are safe. The gains or losses on the investments in the account are based on the employee s choice of investments so he or she can control the risk. Texas Municipal Retirement System (TMRS) (Please see the TMRS Member Benefits Guide at ts_guide_2017.pdf TMRS funds are held in a Trust and the funds are protected from bankruptcy of the City or the employee. However, the participating cities can choose to provide benefits under the plan that are not paid for now. The ability to fund these benefits is only as good as the city s ability to make the payments. These payments are not guaranteed by TMRS, the state or federal governments. Thus, like the City of Harlingen Plan, there is no guarantee of future payments but current account balances are safe. The gains or losses on the investments in the account are based on TMRS s choice of investments so the employee has no control over the investment risk. Employees become vested in their accounts after 5 or more years, as described in item 1. above. It is very important to understand that cities do not always meet their pension obligations. This is entirely dependent on the fiscal management of the city leaders. 14

15 Comparison of City Retirement Plan to TMRS - Illustrations Paycheck Comparison Yr 1 City 401(a) ASSUMPTIONS Plan TMRS $ 20, Starting Salary $ 20, $ 20, Salary 6.38% TMRS Rate of Return (5 year return ) $ 1, $ 2, Employer Contribution 10.14% City of Harlingen 401(a) Plan Rate of Return* $ 1, $ 1, Employee Contribution 3.00% Annual Salary Increases $ $ Plan Contribution *5 Year Target Fund Returns $ 2, $ 4, Total Contribution $ 1, $ 1, FICA & Medicare Tax City 401(a) Plan Contributions $ 2, $ 2, % Tax Rate EM Contribution EE Contribution Years $ 14, $ 14, Est Take Home 5.0% 5.0% % Difference 6.0% 6.0% % 7.0% Projected Account Balances Accumulated Savings $1,200, $1,000, $800, $600, $400, $200, $ Years of Service TMRS City 401(a) Plan & 457 City of Harlingen TMRS Ending Balance & 457 Ending Balance Difference % Year 5 $ 25, $ 15, ($9,747.71) % Year 10 $ 63, $ 44, ($19,007.35) % Year 15 $ 120, $ 97, ($23,892.66) % Year 20 $ 204, $ 185, ($18,588.68) -9.11% Year 25 $ 323, $ 333, $9, % Year 30 $ 493, $ 578, $84, % Year 35 $ 733, $ 981, $247, % 15

16 Comparison of City Retirement Plan to TMRS - Illustrations 16

17 Comparison of City Retirement Plan to TMRS - Illustrations Paycheck Comparison Yr 1 City 401(a) ASSUMPTIONS Plan TMRS $ 40, Starting Salary $ 40, $ 40, Salary 6.38% TMRS Rate of Return (5 year return ) $ 2, $ 5, Employer Contribution 10.14% City of Harlingen 401(a) Plan Rate of Return* $ 2, $ 2, Employee Contribution 3.00% Annual Salary Increases $ $ Plan Contribution *5 Year Target Fund Returns $ 4, $ 8, Total Contribution $ 3, $ 3, FICA & Medicare Tax City 401(a) Plan Contributions $ 5, $ 5, % Tax Rate EM Contribution EE Contribution Years $ 28, $ 28, Est Take Home 5.0% 5.0% % Difference 6.0% 6.0% % 7.0% Projected Account Balances Accumulated Savings $2,500, $2,000, $1,500, $1,000, $500, $ Years of Service TMRS City 401(a) Plan & 457 City of Harlingen TMRS Ending Balance & 457 Ending Balance Difference % Year 5 $ 50, $ 31, ($19,495.42) % Year 10 $ 127, $ 89, ($38,014.69) % Year 15 $ 241, $ 194, ($47,785.31) % Year 20 $ 408, $ 371, ($37,177.36) -9.11% Year 25 $ 647, $ 666, $19, % Year 30 $ 987, $ 1,156, $168, % Year 35 $ 1,467, $ 1,962, $494, % 17

18 Comparison of City Retirement Plan to TMRS - Illustrations 18

19 Comparison of City Retirement Plan to TMRS - Illustrations Paycheck Comparison Yr 1 City 401(a) ASSUMPTIONS Plan TMRS $ 60, Starting Salary $ 60, $ 60, Salary 6.38% TMRS Rate of Return (5 year return ) $ 3, $ 8, Employer Contribution 10.14% City of Harlingen 401(a) Plan Rate of Return* $ 3, $ 4, Employee Contribution 3.00% Annual Salary Increases $ 1, $ Plan Contribution *5 Year Target Fund Returns $ 6, $ 12, Total Contribution $ 4, $ 4, FICA & Medicare Tax City 401(a) Plan Contributions $ 8, $ 8, % Tax Rate EM Contribution EE Contribution Years $ 42, $ 42, Est Take Home 5.0% 5.0% % Difference 6.0% 6.0% % 7.0% Projected Account Balances Accumulated Savings $3,500, $3,000, $2,500, $2,000, $1,500, $1,000, $500, $ Years of Service TMRS City 401(a) Plan & 457 City of Harlingen TMRS Ending Balance & 457 Ending Balance Difference % Year 5 $ 76, $ 46, ($29,243.13) % Year 10 $ 191, $ 134, ($57,022.04) % Year 15 $ 362, $ 291, ($71,677.97) % Year 20 $ 612, $ 556, ($55,766.03) -9.11% Year 25 $ 970, $ 1,000, $29, % Year 30 $ 1,481, $ 1,734, $253, % Year 35 $ 2,201, $ 2,943, $741, % 19

20 Comparison of City Retirement Plan to TMRS - Illustrations 20

21 Comparison of City Retirement Plan to TMRS - Illustrations Paycheck Comparison Yr 1 City 401(a) ASSUMPTIONS Plan TMRS $ 80, Starting Salary $ 80, $ 80, Salary 6.38% TMRS Rate of Return (5 year return ) $ 4, $ 11, Employer Contribution 10.14% City of Harlingen 401(a) Plan Rate of Return* $ 4, $ 5, Employee Contribution 3.00% Annual Salary Increases $ 1, $ Plan Contribution *5 Year Target Fund Returns $ 8, $ 16, Total Contribution $ 6, $ 6, FICA & Medicare Tax City 401(a) Plan Contributions $ 11, $ 11, % Tax Rate EM Contribution EE Contribution Years $ 57, $ 57, Est Take Home 5.0% 5.0% % Difference 6.0% 6.0% % 7.0% Projected Account Balances Accumulated Savings $4,500, $4,000, $3,500, $3,000, $2,500, $2,000, $1,500, $1,000, $500, $ Years of Service TMRS City 401(a) Plan & 457 City of Harlingen TMRS Ending Balance & 457 Ending Balance Difference % Year 5 $ 101, $ 62, ($38,990.85) % Year 10 $ 255, $ 179, ($76,029.39) % Year 15 $ 483, $ 388, ($95,570.62) % Year 20 $ 816, $ 742, ($74,354.71) -9.11% Year 25 $ 1,294, $ 1,333, $38, % Year 30 $ 1,975, $ 2,312, $337, % Year 35 $ 2,935, $ 3,924, $988, % 21

22 Comparison of City Retirement Plan to TMRS - Illustrations 22

23 The Power of Compounding: Why the City Plan Can Potentially Outperform TMRS Contributions Earnings $200 per month invested 30% 69% 85% 15% 31% 70% 5 years $14, years $34, years $243,995 Assumes a hypothetical $200 monthly investment with a 7% annualized return. This is an assumed hypothetical rate and there is no guarantee that your actual investments will earn this rate. All investing involves risk.

24 Possible Plan Enhancements Current Plan Pays Benefits Only as Lump Sum Cash Rollover to Individual Retirement Account (IRA) or Another Tax Deferred Plan Proposed Will be Considered by Plan Management Offer lifetime annuity payout Annuity would offer guaranteed payout from highly rated company like TIAA, Prudential, ICMA-RC TCG would obtain proposals 24

25 Possible Plan Enhancements Current Plan Does Not Allow Loans Proposed Will be Considered by Plan Management Offer Plan Loans per Rules of Internal Revenue Code Participant Could Borrow up to One-Half of Account Balance (Maximum $50,000) Interest Rate = 2% + Prime Interest Rate (Current Total 6.25%) Could Repay Over Maximum of 5 Years (Longer if for Home Mortgage) 25

26 Why You Need to Save Remember that all investing involves risk

28 I can t afford to save Age Monthly Savings Number of Years Rate of Return Value at Age $ % $150, $ % $150, $ % $150, $ % $150, $ % $150, $2, % $150,000 Future value calculated at 6% interest. This is an assumed hypothetical rate and there is no guarantee that your actual investments will earn this rate. All investing involves risk.

29 The Power of Compounding Contributions Earnings $200 per month invested 30% 69% 85% 15% 31% 70% 5 years $14, years $34, years $243,995 Assumes a hypothetical $200 monthly investment with a 7% annualized return. This is an assumed hypothetical rate and there is no guarantee that your actual investments will earn this rate. All investing involves risk.

30 A Small Contribution Makes a Difference 12% of Pay vs. 6% of Pay Over a Career $350, Comparison of Account Balances $300, $250, $200, $150, $317, $100, $50, $0.00 $158, % 6.00% Assumes an average salary of $36,000 for 25 years with a 7.5% annualized return. This is an assumed hypothetical rate and there is no guarantee that your actual investments will earn this rate. The above example assumes no employer match. All investing involves risk.

31 Plan Investments Remember that all investing involves risk

32 Managing Risk How Do You Get Decent Returns and Minimize Risk? 3 Words: Diversify Diversify Diversify All sectors of investing have risk Even money under the mattress risk is inflation Being in many different investments in a number of different sectors of the market is the best long-term strategy

33 Market Movements Good or Bad? Price/Share Price/Share Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Investing $200/mo Month $/Share # Shares Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Total Shares Owned Total Account Value $2, All investing involves risk.

34 Market Movements Good or Bad? Price/Share Price/Share Investing $200/mo Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Month $/Share # Shares Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Total Shares Owned Total Account Value $2, % Increase in Account Value All investing involves risk.

35 Active Management? Percentage of Active Managers that outperform their index All investing involves risk.

36 Plan Investments Individually directed investments 21 options Includes Lifecycle retirement date models (10 options; 2015 to 2060) Wells Fargo Stable Value Fund Default investment if you do not select an investment for your funds is the Lifecycle Target Retirement Fund for your age 65 Current Quarterly Investment Report on the TCG Website Go to Go to My Account, Plan Information Type City of Harlingen in box Go to Resources at bottom of page and click on investment report Or go to _ pdf All investing involves risk.

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39 Plan Fees TCG Administrators Fee $1.50 per month 40 basis points (.40%) TCG Advisors Investment Management Fee 45 basis points (.45%) + Mutual Fund fees See TCG Administrators website for the investment fees of the funds TCG companies do not accept commissions or any other revenue from the plan investments or any other sources. If fees are required to be paid by certain mutual funds, these are allocated to participant accounts.

40 How to Enroll and Make Changes to Your Account

41 Online Access to your Account Setting up your account online is quick and easy! Choose a beneficiary Note that if you are married, your spouse is automatically your beneficiary Choose how you are invested View account balances View transactions Please call (800) if you need help

42 Online Access to your Account All forms and transactions available through TCG Administrators Website My Account, Login, Group Retirement Plan Login, Portal Login Current and New Participants User Name: SSN Password: date of birth in MMDDYYYY format Or the User Name and Password you selected, if you have already used the website Phone: (800) Fax: (888)

44 Disclosures TCG Advisors is a registered investment advisor regulated by the U.S. Securities and Exchange Commission (SEC) and registered municipal advisor, subject to the Rules and Regulations of the Investment Advisor Act of 1940 and the rules of the Municipal Securities Rulemaking Board (MSRB), and is a part of TCG Group Holdings, LLP. Registration does not imply a certain level of skill or training. TCG Advisors parent company, TCG Group Holdings, LLP, owns and operates several other entities which provide various services to employers across the U. S. Those affiliates (wholly owned subsidiaries of TCG Group Holdings, LLP) sometimes provide services to TCG Advisors Clients. These affiliates are Total Compensation Group Consulting, LP; TCG Administrators, LP (f/k/a JEM Resource Partners, LP); TCG Benefits (f/k/a The Paragon Group, LP; Paragon National, LP; and Paragon Benefits, LP, collectively). The business activities of these companies are discussed in its ADV Part 2A. TCG Advisors is located in Austin, Texas, and a copy of its Form ADV Part 2 is available upon request. This presentation is not authorized for use as an offer of sale or a solicitation of an offer to purchase investments. This presentation is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Past performance may not be indicative of any future results. No current or prospective client should assume that the future performance of any investment or investment strategy referenced directly or indirectly in this presentation will perform in the same manner in the future. Different types of investments and investment strategies involve varying degrees of risk all investing involves risk and may experience positive or negative growth. Nothing in this presentation should be construed as guaranteeing any investment performance. The index performance used herein is not illustrative of the fund s performance. Indexes are unmanaged and have no fees or expenses. An investment cannot be made directly in an index. The Funds consist of securities which may vary significantly from those in the S&P Indexes and performance calculation methods may not be entirely comparably. Accordingly, comparing results shown to those of the S&P indexes may be of limited use. Remember that all investing involves risk. 44

45 Disclosures (continued) An investment in the plans discussed will involve a significant degree of risk, and there can be no assurance that the investment objectives will be achieved or that an investment therein will be profitable. Investors will experience individual returns that vary materially from those illustrated in this presentation depending on various factors, including but not limited to, the timing of their investment, the level of fees, and the effects of additions and withdrawals from their capital accounts. Past performance is not necessarily indicative of the future performance or the profitability of an investment in a plan. This presentation includes forward-looking statements. All statements that are not historical facts are forwardlooking statements, including any statements that relate to future market conditions, results, operations, strategies or other future conditions or developments and any statements regarding objectives, opportunities, positioning or prospects. Forward-looking statements are necessarily based upon speculation, expectations, estimates and assumptions that are inherently unreliable and subject to significant business, economic and competitive uncertainties and contingencies. Forward-looking statements are not a promise or guaranty about future events. Any discussion of liquid or illiquid investments is qualified by the fact that the liquidity of an investment depends largely on market conditions, which change from time to time. An investment that is currently liquid could prove to be completely or substantially illiquid at any time in the future. No assurances can be given regarding the time at which it may be possible or reasonably practical to sell any investment, regardless of the degree of liquidity or illiquidity currently associated with the investment. Any statements about the likely timing for the future disposition or maturity of any investment or group of investments are forward-looking statements that are inherently unreliable and should not be relied upon for any purpose. The projections or other information generated herein regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There are frequently substantial differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program Remember that all investing involves risk. 45

Questions Blake Rhodes or Mike Cochran Email: bhrodes@tcgservices.com mcochran@tcgservices.com 900 S.

46 Questions Blake Rhodes or Mike Cochran S. Capital of Texas Highway, Suite 350, Austin, TX (800) Fax: (888) Website:

Financial Independence: Improve your retirement outcome

Financial Independence: Improve your retirement outcome Introduction of TCG Group Holdings, LP We deliver long-term investment and benefit solutions that provide peace of mind. ~TCG Mission Statement Fee-Only