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HomeMy WebLinkAboutMINUTES - 04092013 - D.2RECOMMENDATION(S): DECLARE the County's intent to select ICMA-RC as the County's Deferred Compensation Plan provider (in lieu of The Hartford) and DIRECT the Human Resources Director to negotiate an agreement with ICMA - RC for plan investment and administrative services for the Internal Revenue Code Section 457 Deferred Compensation Plan, for the period of July 1, 2013 through June 30, 2016, with the option to renew for two additional years. FISCAL IMPACT: This program is funded by fees charged to employee participants. There is no fiscal impact beyond over-head administrative support costs. BACKGROUND: At their meeting on March 19, 2013, the Board of Supervisors requested additional information regarding the Deferred Compensation Advisory Committee’s recommendation for Deferred Compensation Plan administration and record keeping. The purpose of this report is to provide that additional information and to recommend that the County select ICMA-RC as the County's Deferred Compensation Plan provider. The Deferred Compensation Advisory Committee (Committee) is comprised of three unrepresented Management Employees and three represented employees. The current committee includes: APPROVE OTHER RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE Action of Board On: 04/09/2013 APPROVED AS RECOMMENDED OTHER Clerks Notes:See Addendum VOTE OF SUPERVISORS AYE:John Gioia, District I Supervisor Candace Andersen, District II Supervisor Mary N. Piepho, District III Supervisor Karen Mitchoff, District IV Supervisor Federal D. Glover, District V Supervisor Contact: Christine Penkala, Benefits Manager (925) 335-1747 I hereby certify that this is a true and correct copy of an action taken and entered on the minutes of the Board of Supervisors on the date shown. ATTESTED: April 9, 2013 David Twa, County Administrator and Clerk of the Board of Supervisors By: June McHuen, Deputy cc: Ted Cwiek, Human Resources Director, Robert Campbell, Auditor-Controller, Deferred Compensation Committee (via Human Resources) D. 2 To:Board of Supervisors From:David Twa, County Administrator Date:April 9, 2013 Contra Costa County Subject:Intent to Select ICMA-RC as the County's Deferred Compensation Plan Provider BACKGROUND: (CONT'D) Lisa Driscoll, County Finance Director/County Administrator’s Office Bob Campbell, Auditor Controller Marilyn Leedom, CCCERA Executive Officer Brian Hast, Deputy District Attorney/Deputy District Attorneys’ Association Ward Smedt, Patient Financial Services Specialist/AFSCME Local 2700 Robert Tevrucht, Systems Analyst/ AFSCME Local 512 Contra Costa County has contracted with The Hartford to provide administrative services for the Deferred Compensation Plan since 1985. The current contract between Contra Costa County and The Hartford expires on June 30, 2013. On March 21, 2012, The Hartford advised Contra Costa County of their intent to divest their retirement services, with an anticipated decision date of 12-18 months forward. On September 4, 2012, Mass Mutual Life Insurance Company announced their intent to purchase The Hartford Retirement Plans Group (RPG) of The Hartford Life Insurance Company. The acquisition was completed on January 1, 2013. Effective October 1, 2012, Contra Costa County engaged Buck Consultants to work with the Committee to develop, distribute and evaluate a limited scope Request for Proposal (RFP) for 457(b) Plan Administration Services. On October 9, 2012, the Committee requested that The Hartford prepare two extensions to the current contract: The first was a 3-year extension. If this extension was acceptable, the Committee was prepared to recommend to the County Administrator that the County consider retaining the services of The Hartford through their transition to Mass Mutual, work with Mass Mutual for the term of the contract and consider an RFP process at a later date. Mass Mutual would be a new vendor. Extending the contract for a 3-year period, while including ‘60-day notice to terminate provision’, would provide time to evaluate the services of the new vendor while ensuring that the County could terminate the contract at any time with a 60-day notice. The second was a 6-month extension. If this extension was acceptable, the Committee was prepared to recommend this extension to the County Administrator to allow additional time for the County to work through the RFP process. The Committee was also prepared to recommend to the County Administrator an “open-to-all-bidders” RFP, as this extension would have provided the time necessary to do so. On December 5, 2012, the Committee reviewed and did not recommend the following proposals from The Hartford and committed to proceed with the limited scope RFP Process : Extension for the period of 7/1/13 – 6/30/16, as proposed by The Hartford: General Account Floor Interest Rate/Minimum Guarantee: 7/1/13 – 6/30/14 3.0% 7/1/14 – 6/30/15 2.0% 7/1/15 – 7/1/16 1.0% Persistency credit not included. Rates would be reduced to approximately 2.84%, 1.84% and .84% if persistency credit is included. (Based on previous and current persistency credit adj.) Guaranteed minimum: 1% for contract term and for 12 month put period. Discontinuance Provision: 12 month put period with 1.00% minimum guarantee rate relative to assets in the General Account. [A persistency credit is funded from fees received by the Plan Administrator (currently The Hartford) associated with investments currently offered within the Plan. This credit is paid for by plan participants from fees charged to plan participants in other ways such as implicit revenue sharing contained in mutual funds or a reduced general account guarantee rate. A 12-month put is a12-month notice that retirement plan sponsors must typically give to a pooled fund if they want to exit the fund and no longer offer it to their plan participants. In the case of a segregated account stable value fund built for a specific sponsor, the fund is wound down over a period of time that matches the duration of its underlying investment portfolio.] Reason for Determination to not recommend this proposal: The current contract with The Hartford includes a fixed rate of 4.25% reduced to 4.09% for the persistency The current contract with The Hartford includes a fixed rate of 4.25% reduced to 4.09% for the persistency credit. A fixed rate of 3% decreasing to 1% over 3 years (not including a persistency credit) is not a substantial benefit over the risks in a fixed account vs. stable value account. The new 12-month put on transferring fixed account funds any time after 7/1/13 was not acceptable, yet the Committee was told this could not be avoided nor negotiated for any contract going forward. Asset based fees were estimated at 25 basis points as calculated by Buck Consultants. Estimated fees of $624,290. [A basis point (bp) is equal to one hundredth of a percent. For example 25 basis points equals 0.25%.] Extension for the period of 7/1/13 – 12/31/13, as proposed by The Hartford: General Account Floor Interest Rate/Minimum Guarantee: 7/1/13 – 12/31/13 3.0% Persistency credit not included. Per The Hartford, not practical under a 6-month extension. Guaranteed minimum: 1% for contract term and for 12 month put period. Discontinuance Provision: 12 month put period with 1.00% minimum guarantee rate relative to assets in the General Account. Reason for Determination to not recommend this proposal: The current contract with The Hartford includes a fixed rate of 4.25% reduced to 4.09% for the persistency credit. A fixed rate of 3% (not including a persistency credit) is not a substantial benefit over the risks in a fixed account vs. stable value account. The persistency credit is not available on a 6-month contract. The new 12-month put on transferring fixed account funds any time after 7/1/13 was not acceptable, yet the Committee was told this could not be avoided nor negotiated for any contract going forward Asset based fees were estimated at 25 basis points as calculated by Buck Consultants. Estimated fees of $624,290 Request for Proposal (RFP) Timeline: • October 9, 2012 - Committee began working with Buck Consultant to develop an RFP that could be used for either a limited or open-to-all bidders’ process. • December 5, 2012 – After voting to not recommend the extension proposals from The Hartford, the Committee determined to go forth with a limited RFP process. • December 17, 2012 - Committee finalized and approved the RFP for distribution. • December 21, 2012 – RFP Distributed. • January 4, 2013 – Last day for requests from RFP recipients • January 11, 2013 – Response to all RFP recipients • January 22, 2013 – Last day to respond to RFP • February 8, 2012 – Evaluation of Proposals by Committee • February 14, 2012 – Received Responses to Committee Questions • February 15, 2013 – Finalists Selected and sent additional questions • February 25, 2013 – Last day to respond to follow-up questions • February 28, 2013 – Finalist Interviews The RFP Process: Prospective bidders were asked to respond to a 101-item questionnaire and to provide a number of supporting exhibits covering their experience, capabilities, service and pricing. The following five organizations responded to the RFP: Mass Mutual Financial Group; Great-West Financial Group; ICMA-RC; ING; and Prudential (Vanguard & MetLife inquired about the RFP but did not submit proposals). The proposals were initially reviewed by Buck Consultants, who presented their findings to the Committee on February 8, 2013. Buck Consultants recommended removing ING from consideration due to high fees contained in their proposal submission. The Committee concurred and continued the evaluation process of the four remaining vendors. On February 15, 2013, the Committee selected three finalists: ICMA-RC; Prudential; and Mass Mutual. Buck Consultants advised the three finalists of their status, requested additional information based on the Committee’s remaining questions, and, scheduled interviews for February 28, 2013. Interview Process : On February 28, 2013, the County’s interview panel included four members (two from management and two from labor) of the Committee and the Buck Consultant. Additionally, the Manager, Supervisor and Human Resources Consultant in the Employee Benefits Unit of the Human Resources Department participated in the interview process. Panel members was asked to score each company based on: investment options, participant communication and education, recordkeeping and administrative services, organizational capabilities and stability, fees, and ability to transition services effective July 1, 2013. Investment Options: All proposals received confirmed the ability to maintain most of the current investment options. The Artisan mid-cap fund is closed to future participants and will be reviewed by the Committee to determine an alternate mid-cap fund. Mass Mutual uses State Street for the Self Directed Brokerage Account and ICMA-RC uses TD Ameritrade. With ICMA-RC, the Vantage Trust PLUS Fund is the recommended stable value fund. With Mass Mutual, the general account would remain, but, at a lower guaranteed rate. It is important to note, that a decision on whether to include a stable value or general account is not necessary at this time. Please refer to “Next Steps in the Process’ for additional information. Prudential’s proposal had fewer of the existing investment options available; however, the same investment classes were available. Participant Communication & Education: All proposals received confirmed the ability to educate the participants and respond to participant needs. ICMA-RC’s Communication and education clearly reflects the needs of the public sector employee/retiree. ICMA-RC’s first year education curriculum focuses on both active and retired participants of all ages. Their “transition website” is focused on keeping participants involved throughout the transition. Their communication pieces also focused on the demographics of the participants. ICMA-RC’s communication and education presentation and materials was rated the highest by all Committee members. Recordkeeping and administrative services: All proposals received confirmed the ability to effectively record keep and administer the provisions of the County’s Deferred Compensation Plan. The Committee was particularly impressed by the robust record keeping system of ICMA-RC. The ease of access for participants and the ability to store historical information provided by the participants will be of great value to the participants. From the County’s perspective, ICMA-RC’s legal department focuses on ensuring that the ICMA-RC systems and the County’s Plan are always in compliance with the changing Internal Revenue Code provisions. Additionally, the provisions of the County’s Deferred Compensation Plan are built into the recordkeeping system so that participants always have the latest data/information available. The ICMA-RC site also provides customized electronic access to plan data to help the County with their fiduciary responsibilities. Organization Capabilities & Stability: All proposals received confirmed the financial stability of the organizations. Mass Mutual began full service recordkeeping and administrative services for defined contribution plans in 1973. Mass Mutual currently has 2,306 full services (investment and recordkeeping) clients with assets of $12.7 billion. ICMA-RC was created by the public sector for the public sector in 1972 and administered the first nationally available §457 in 1972, as well. ICMA-RC currently has 6,934 full service public sector clients with assets of $31.1 billion. Fees: Based on the original proposals received, assuming no changes to the investment structure and using the March 28, 2013 Plan Balance, the following table depicts each of the proposers quoted basis points and calculated total fees: Based on the original proposals received, assuming the use of the vendor’s proprietary stable value or general account, and using the March 28, 2013 Plan Balance: After the initial evaluation, ING was removed from further consideration due to their fees. The four remaining proposers were asked to re-evaluate their fees. Subsequently, Great West was removed from further consideration due to required additional managed account service with additional fees paid by participants. While participants could chose not to elect to use the additional managed account service, there was concern that vendor representatives would encourage participants to use the feature which contained higher fees. Mass Mutual was included in the final review group as a professional courtesy due to their relationship to our previous provided, The Hartford. Based on the revised proposals received, assuming no changes to the investment structure and using the March 28, 2013 Plan Balance: Based on the revised proposals received, assuming the use of the vendor’s proprietary stable value or general account, and using the March 28, 2013 Plan Balance: Ability to Transition Plan by July 1, 2013: All proposals received confirmed the ability to transition to the new administrator/record keeper by July 1, 2013. Evaluation Summary : Conclusion: The Committee independently reviewed and rated each company. ICMA-RC consistently earned the highest score outscoring both Prudential and Mass Mutual in every category. It is the unanimous decision of the Committee to recommend ICMA-RC as the County's Deferred Compensation Plan provider for plan investment and administrative services for the Internal Revenue Code Section 457 Deferred Compensation Plan, for the period of July 1, 2013 through June 30, 2016, with the option to extend the contract for an additional two additional years. The Deferred Compensation Advisory Committee takes their fiduciary responsibility to the Plan Participants very seriously, both in fees and investment options. The quality of plan participant educational services are also considered to be very important. Two items are attached to and made a part of this report: the 457(b) Plan Administration RFP Summary Report prepared by Jonathan R. Slinger, CFA, with Buck Consultants Global Investment Advisors Division, and a Fact Sheet regarding ICMA-RC. Next Steps in the Process: If ICMA-RC is selected by the Board of Supervisors, the Deferred Compensation Advisory Committee will work with Buck Consultants Global Investment Advisors and ICMA-RC to review all current investment options and pricing. Upon completion of the review, the Committee will present a summary report and recommendation to the County Finance Committee. This process needs to be completed by mid-May to allow for facilitating communication and educational materials for the plan participants and establishing contracts with fund companies, as needed. After finalizing all contract provisions, investment options and the administrative services agreement, the Committee will return to the Board of Supervisors for their approval and adoption. CONSEQUENCE OF NEGATIVE ACTION: As of June 30, 2013, the Contra Costa County Deferred Compensation Plan would not have a Plan Administrator. CHILDREN'S IMPACT STATEMENT: None. CLERK'S ADDENDUM Speakers:  Rollie Katz, Public Employees' Union, Local One. AUTHORIZED staff to enter into negotiations to extend the currrent contract for six months; and DIRECTED staff to return to the Board with information regarding the process and the status of filling the Labor seat on the Deferred Compensation Advisory Committee. ATTACHMENTS 457 (b) Plan Administration RFP Summary Report (Buck Consultants) ICMA-RC Fact Sheet 457(b) Plan Administration RFP Summary Report March 28, 2013 Presented by: Jonathan P. Slinger, CFA 1 Table of Contents Table of Contents ............................................................................................ 1 Introduction ..................................................................................................... 2 Review of Process ........................................................................................... 3 Investments .................................................................................................. 4-5 Persistency Credit ........................................................................................... 6 Participant Communication and Education ...................................................... 7 Recordkeeping and Administration .................................................................. 8 Plan Sponsor Service ...................................................................................... 8 Organizational Capabilities and Stability .......................................................... 9 References .................................................................................................... 10 Fees .............................................................................................................. 11 Revenue Sharing ........................................................................................... 12 Conclusion .................................................................................................... 13 2 Introduction Buck Consultants, with assistance from Contra Costa County’s Employee Benefits Services Unit (“Staff”) published a request for proposal (“RFP”) for investment and administration services in connection with the County’s tax-qualified 457(b) deferred compensation plan. Buck views ICMA-RC as having submitted the most attractive proposal for the services covered by the RFP. This report provides a high level overview of the RFP process, additional commentary and analysis, Buck’s recommendations, and comparisons of ICMA-RC with the incumbent vendor, Mass Mutual. 3 Review of Process The evaluation followed a comprehensive and documented process involving multiple steps including:  Buck Consultants drafted an RFP for review by Staff and Committee.  Committee and Staff reviewed the draft RFP and provided input.  The RFP was distributed to seven vendors, five of which ultimately submitted a proposal.  Vendors were given the opportunity to submit written questions to the County. Answers to all of these questions were distributed to the seven vendors that received the RFP.  Five vendors submitted proposals in response to the RFP addressing a lengthy questionnaire and requests to provide multiple attachments with additional information. The following five vendors submitted proposals: ING, Great West, ICMA-RC, Prudential and Mass Mutual.  Buck reviewed proposals and presented a report to the Committee on strengths, weaknesses and other features of the submitted proposals.  ING was removed from consideration after quoting an uncompetitive level of fees.  Three vendors (Great West, ICMA-RC, and Prudential) quoted a lower level of fees than what was initially offered by Mass Mutual.  Vendors were offered the opportunity to provide a lower fee quote prior to finalist selections.  Great West’s revised fee quote contained a requirement that the County offer a fee-based managed account service within the Plan as a condition of the fee quote. Great West was removed from consideration as a result of this requirement (question #64.b of the RFP addressed this topic and Great West’s original response was either ambiguous or not responsive).  At this stage Buck recommended inviting ICMA-RC and Prudential for finalist interviews based on the quality of their proposals and the level of fees. The County also decided to extend an interview invitation to Mass Mutual.  ICMA-RC, Prudential and Mass Mutual were all asked to provide written answers to follow-up questions in advance of finalist interviews with the Committee.  Buck conducted reference checks.  ICMA-RC, Prudential and Mass Mutual each gave separate 90 minute finalist interviews and answered committee questions.  Committee members individually scored the prospective vendors based on original proposals, Buck’s reports to the Committee, answers to follow-up questions provided by vendors, and finalist presentations. 4 Investments The County’s Plan currently offers a number of funds managed by The Hartford as well as other managers, and all proposers were asked to confirm whether they could offer the County’s current menu of investments. In addition, proposers were also asked to provide the County with complete flexibility to select non- proprietary investment options; this arrangement is often described with the phrase “open architecture.” The clear advantage of an open-architecture approach is that it allows a plan sponsor to select funds from different investment managers and combine them into an investment menu that offers a high quality investment option in every category and asset class. This is important because investment management firms generally do not have a “top-tier” product offering in every category. Given the size of the County’s plan, multiple vendors offered this flexibility. Proposers were also asked to provide spreadsheets listing the total number of mutual funds and share classes available on their recordkeeping platform. Lists provided by the finalists ranged from 3,500 to over 10,000 entries (although some are duplicates due to multiple share classes of the same fund being listed). In addition, finalists indicated that they add mutual funds to their recordkeeping platform when requested to do so by clients. As a result of this RFP process, the County will have substantial flexibility in terms of structuring an investment menu for participants regardless of which vendor is selected. By achieving open-architecture flexibility, the selection of an investment menu becomes separate from the County’s selection of a third- party administrator. 5 Investments: General Account vs. Stable Value The County’s plan currently offers a general account product which is very popular among participants. Over 4,500 participants currently invest at least a portion of their assets in the product, amounting to roughly half of the total plan assets. Over 1,500 plan participants use the general account as their only investment option. The general account product has historically provided returns which are greater than money market funds and traditional stable value funds. However, in spite of the popularity and attractive returns offered by the product, there are important considerations the County should evaluate. Specifically, there is a concentration of risk in the general account product associated with Mass Mutual. In a general account product, your plan’s assets are commingled with Mass Mutual’s other assets. If Mass Mutual were to experience bankruptcy, investors in the general account product may lose a substantial percentag e of their savings because those assets are not segregated. In Buck’s view, money market funds and traditional stable value products have a more appropriate risk profile for an investment option that is intended to be conservative. While the likelihood of a Mass Mutual bankruptcy may be small, the consequences of such an event could be devastating. Buck does not recommend offering a general account investment option in your plan even with the higher potential returns offered by those products. Mass Mutual’s general account offer consists of an initial guaranteed minimum rate of return of 3.75%. The minimum guarantee would drop by 0.50% per year and would ultimately be 1.00% after five years. The ultimate 1.00% guarantee is higher than returns currently available on money market funds, but lower than current returns offered by many traditional stable value funds. Mass Mutual also indicated verbally during their finalist presentation that the general account product would be available to the County on an “investment-only” basis. This means that the County could select a different vendor to act as the third-party administrator of the 457(b) Plan, and still offer Mass Mutual’s general account product within the plan. While ICMA-RC has offered the County full flexibility to select non-proprietary investment options, they included information on their Vantage Trust PLUS Fund in their proposal which would be available to the County. The PLUS fund is a traditional stable value fund currently offering returns in the range of 2.00% to 2.50% depending on the share class selected (The PLUS fund’s one year trailing net-of-fee return as of 2/28/2013 was 2.39%). While the current returns are lower than the initial guaranteed rate of the Mass Mutual general account, they are very attractive relative to money market funds that currently offer returns very close to zero percent per year. The PLUS fund is a commingled fund, which means the assets would be combined with assets of other plans and managed in one vehicle by ICMA-RC (similar in structure to the equity mutual funds currently offered within the County’s plan). However, the assets in the PLUS fund are held in a trust and segregated from ICMA’s other assets. In the event of a bankruptcy or other financial distress experienced by ICMA, the assets in the PLUS fund would be protected from ICMA’s creditors. The ICMA-RC PLUS fund also has third-party insurance contracts (“wrap contracts”) in place to guarantee the stability of principal. These guarantees could potentially fail in the same way the Mass Mutual general account guarantee might fail. However, Buck views the PLUS fund as containing substantially less risk because assets are segregated. The PLUS fund has also outperformed a universe of peer stable value funds as documented by the investment research firm Heuler. Buck views the PLUS fund as an attractive investment option, and we also remind the County that it could select a non-proprietary stable value, money market, or general account product. 6 Persistency Credit In recent years the County has offered a $50 per person per year persistency credit to participants that continue to participate in the 457(b) plan. Approximately 6,000 participants received the credit in the most recent year and this amounted to a total of approximately $300,000. The credit is funded from fees received by The Hartford/Mass Mutual associated with investments currently offered within the plan. Briefly, this credit is paid for by plan participants from fees charged to plan participants in other ways such as implicit revenue sharing contained in mutual funds or a reduced general account guaranteed rate. All vendors serving large 457(b) plans have the ability to administer a flat dollar per participant credit. As an alternative, the County may choose to reduce the fees contained in the investments offered within the plan and simultaneously eliminate the credit. Buck views the persistency credit as an unusual plan feature. We do not believe that considerations surrounding the persistency credit should influence the County’s choice of a vendor in any direction. While all vendors are able to administer the persistency credit, the County may in the future be discouraged from continuing the practice by whomever it selects as a vendor. In particular, the persistency credit could be seen as taking money out of participant accounts in the form of higher investment-related fees, and then subsequently rebating those fees back to participants in proportions different from how the fees were levied. 7 Participant Communication and Education The RFP requested a substantial amount of information on the communication and education resources that would be available to plan participants. Proposers were asked to describe their approach to participant communications and provide sample communications materials. Proposers were also asked to detail online tools that would be available. At a high level, all finalists are capable of providing adequate participant communications for the County’s plan, on-line savings calculators, and general education delivered in print, on-line, and via on-site representatives. The County currently has one full-time vendor representative serving plan participants and providing education, and the RFP requested that proposers incorporate that same level of service into their RFP responses. As a part of the reference check process, Buck asked other jurisdictions about the perceived quality of on-site representatives that would deliver education directly to plan participants. As a result of these reference checks, finalist presentations, and feedback from Committee members, Buck believes that ICMA-RC would offer excellent on-site representation and participant education services. Buck is also concerned with the high level of assets currently invested in the general account option in the plan, and that has led to a more negative assessment of The Hartford/Mass Mutual’s abilities in terms of education and on-site vendor support. Specifically, we are concerned that participants are not being educated about the risks inherent in the general account. We are also concerned that many plan participants may not have an appropriate asset allocation given their age, risk tolerances and other financial considerations. Buck believes that there are too many participants that are choosing to invest solely in the general account, and are not diversified among other investment options offered within the plan. We believe over 25% of plan participants are currently investing 100% of their 457(b) balances in the general account. Given that The Hartford/Mass Mutual expects to generate an economic benefit from the assets invested in the general account, and the large asset balances contained in the general account, we question whether education has been provided with participant’s best interests in mind. In addition to one full-time on-site representative, ICMA’s proposal also includes 12 days per year of one- on-one meetings with a certified financial planner (CFP) for retirees and participants nearing retirement. While the CFP may only be able to meet with 40-60 participants per year, we do believe this is a meaningful benefit to the County and participants that want help with their financial planning. 8 Recordkeeping & Administration The RFP requested a substantial amount of information on the underlying system used to track participant accounts, process payroll feeds, test for compliance with IRS contribution limits, and the ability to administer other plan features such as loans or unforeseen emergency withdrawals. All proposers would be able to do the actual plan recordkeeping, and currently perform these services for other similar clients. All proposers received the County’s current plan document with the RFP and would be able to administer the plan according to the County’s current plan design. ICMA-RC uses the SunGard OMNI system for recordkeeping which is a standard product used by many different firms to perform back office third-party administration services to 457(b) plans. Mass Mutual uses an internally developed system to perform the same functions. Recordkeeping for legacy clients of The Hartford are performed on a separate system that will eventually be transitioned to Mass Mutual’s systems. While we don’t view the merging of systems as a major concern, we do expect it to place an increased burden on some of Mass Mutual’s internal resources in the near term. In terms of data backup and disaster recovery, both Mass Mutual and ICMA-RC conduct daily backups of recordkeeping data with off-site storage. If the administration of the Plan were moved to a different vendor, the new loan program would be supported with a similar fee structure (same $50 initiation fee if ICMA-RC was selected). Both Mass Mutual and ICMA-RC would be expected by Buck to accurately track participant accounts and conduct back-office recordkeeping of the Plan according to the current plan design. Plan Sponsor Service Buck has a favorable view of the relationship managers proposed by both Mass Mutual (Bob Gleason) and ICMA-RC (Michelle Martin). Bob and Michelle received very positive reviews from their references. There are differences with regards to client loads with Michelle currently serving four clients while Bob is serving forty four. In Buck’s conversations with the Committee we have not gotten an impression that Bob’s client load has negatively impacted his ability to service the County. Nonetheless, we expect Michelle Martin would be able to devote a larger proportion of her time to serving the County. Both ICMA-RC and Mass Mutual indicated in their proposal response that the County could request and receive a different relationship manager if desired. 9 Organization Capabilities and Stability Buck views both Mass Mutual and ICMA-RC as financially stable organizations. Mass Mutual receives a credit rating of AA+ from Standard and Poor’s. ICMA-RC is a non-profit corporation and is not rated by rating agencies. To assess financial stability Buck has reviewed ICMA-RC’s confidential financial statements. At a high level, ICMA’s assets substantially exceed liabilities, and revenues also exceed expenses. The County has also received a copy of ICMA-RC’s financial statements, and we do not cite those documents in more detail here due to the confidentiality. ICMA’s status as a non-profit organization dedicated solely to public sector retirement plans is a meaningful differentiator, in Buck’s view. Both Mass Mutual and ICMA-RC serve similar public jurisdictions. Mass Mutual currently serves 324 clients in California, but we are unsure how many of those 324 clients are public sector entities. ICMA-RC currently serves 629 public sector clients in California. The table below lists a subset of clients served by each organization: Mass Mutual ICMA-RC County of San Joaquin BART DEFERRED COMPENSATION County of San Mateo CITY OF ANAHEIM Stanislaus County CITY OF BEVERLY HILLS City of Stockton CITY OF BURBANK City of Oakland CITY OF CAMPBELL County of Humboldt CITY OF CLOVIS County of Napa CITY OF ESCONDIDO City of Santa Clara CITY OF GLENDALE CITY OF LONG BEACH CITY OF MILPITAS CITY OF PLEASANTON CITY OF ROSEVILLE CITY OF SACRAMENTO CITY OF SAN RAMON CITY OF WALNUT CREEK COUNTY OF ORANGE COUNTY OF SANTA CLARA COUNTY OF SOLANO FRESNO METROPOLITAN FLOOD CONTROL DISTRICT GOLDEN GATE BRIDGE LOS ANGELES CNTY METRO TRANSP LOS ANGELES CO SANITATION DIST SACRAMENTO COUNTY 10 References Buck conducted reference checks for the three vendors selected as finalists (Mass Mutual, ICMA-RC, and Prudential). While reference checks suffer the inherent limitation of self-selection bias we do think they add some value. In addition, the RFP requested terminated client references and we also ask each reference if they have previous experience with different vendors. Buck’s experience conducting reference checks during other RFP processes also informed our view of different vendors. Overall, finalist references were positive and that is typical in our experience. As mentioned earlier, both Bob Gleason of Mass Mutual and Michelle Martin of ICMA-RC received positive references. ICMA-RC’s terminated reference did not provide useful information. Mass Mutual’s terminated reference was a legacy client of The Hartford and had positive things to say, but ultimately changed vendors over fees. Buck was not surprised to hear this feedback given the level of fees contained in The Hartford’s extension offers to the County presented during the fourth quarter of 2012, and the fees contained in Mass Mutual’s original proposal in response to the RFP. While all references were positive, Buck felt that ICMA-RC’s references were more enthusiastic in their support of the organization, and this is consistent with reference checks we have made in conjunction with RFP processes for different public jurisdictions. No major issues or concerns were uncovered during reference checks. 11 Fees To facilitate accurate comparisons of fees among vendors, the RFP requested pricing under an open architecture scenario, and also under an alternate scenario where some level of proprietary investment product would be required. Vendor Fee with Open Architecture Investment Structure Fee if County Uses Vendor’s Proprietary Stable Value or General Account Product (required product) Mass Mutual 0.14% 0.14% ICMA-RC 0.116% 0.0625% (PLUS Fund) Estimated Mass Mutual Current Fee* 0.25%, or 0.35% on non- general account assets *Current Mass Mutual Fees were estimated by Buck based on Mass Mutual’s proposal response describing revenue sharing of Plan investment options, and Plan asset balances. In a small number of cases Mass Mutual did not indicate the level of revenue sharing received by a current plan investment option. In those cases Buck estimated the revenue sharing for that option based on the fund company, share class, total expense ratio, and known revenue sharing amounts provided for similar products. The 0.25% estimates results from crediting 0.15% in revenue sharing for the Plan’s general account option which is consistent with Mass Mutual’s enhanced pricing offer. However, 0.15% may not be the appropriate revenue sharing credit to capture the economic benefit generated by the general account. The County has previously been told by The Hartford that their goal was to earn 1.00% from the general account by investing in assets that produced a return greater than the rate of return provided to investors in the general account vehicle. When we excluded the general account assets we calculated a weighted average revenue sharing amount of 0.35% on the variable assets. However current plan fees are estimated, it is clear the RFP will result in fee savings for participants. 12 Revenue Sharing Mutual fund expense ratios (and fees on other products) commonly contain “revenue sharing” amounts which are paid from the investment manager to a plan’s third-party administrator. These fees are a component of the expense ratio (not in addition to the expense ratio) and are generally invisible to plan participants. Many plans use revenue sharing contained in funds to pay for the services of the third-party administrator. Additionally, some plans structure an investment menu that generates revenue sharing greater than fees required by the third-party administrator, and the extra fees are then rebated to the plan sponsor. Rebated revenue sharing amounts are commonly used to pay for plan-related expenses such as legal, audit, or consulting fees. Some plan sponsors have dedicated deferred compensation staff members and use rebated revenue sharing to pay for internal administration expenses, including salaries. The RFP requested proposers to confirm that any revenue sharing amounts generated in excess of fee quotes would be tracked and reimbursed to the County. ICMA’s proposal confirmed this practice. Mass Mutual’s proposal indicated that some amount could be available for reimbursement but did not commit to the process requested by the RFP. Mass Mutual was asked about this in written follow-up questions prior to finalist interviews, and their response indicated a preference for a different process involving a fixed dollar reimbursement and a plus or minus 10% buffer around the level of Mass Mutual’s required revenue. This approach could lead to the Plan paying slightly more or slightly less in total fees than the 0.14% required revenue quoted by Mass Mutual. 13 Conclusion Buck views ICMA-RC has having submitted the most attractive proposal for the services covered by the RFP. Relative to the incumbent provider, Mass Mutual, Buck believes ICMA-RC would provide superior services at a lower level of fees. ICMA-RC FACT SHEET • Created in 1972, by the public sector for the public sector, ICMA-RC began with one plan and one participant. The ICMA-RC mission was and continues to be to “build retirement security exclusively for public sector employees”. • Administered first nationally available 457 Plan. • Currently serve more than 9000 Plans representing over 1,000,000 plan participants with assets excess of $42 billion under their management. • U.S.-based non-profit organization with the singular commitment to the public sector. • Leading provider of retirement plans in California with more than 1400 Plans for over 180,000 public sector plan participants, accounting for over $9 Billion in assets. • Plan provider for 13 of the 16 cities in Contra Costa County. • Proposal includes a full time Retirement Plans Specialist exclusively dedicated to Contra Costa County • The ICMA-RC Vantage Trust PLUS Fund is one of the oldest (incepted in 1991) and largest ($10.1 billion) stable value funds available to public sector employees, and has produced attractive performance results over time when compared to a peer group universe of similar products. • Industry-leading plan-level retention rate of 99.7% and participant-level retention rate of 96.8%.