HomeMy WebLinkAboutMINUTES - 10012013 - D.1RECOMMENDATION(S):
SELECT ICMA-RC as the County's Deferred Compensation Plan provider; 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 February 1, 2014 through January 31, 2017, with
the option to renew for two additional years; ACKNOWLEDGE that per discussions with ICMA-RC and
MassMutual in September 2014, the recommended effective date of the transfer of funds and recordkeeping is
February 1, 2014; this allows both vendors 120 days to change record-keeping platforms and finalize investment
options; and DIRECT the Human Resources Director to extend the contract with MassMutual with current terms for
an additional 30 days, if necessary.
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. On April 9, the Board of Supervisors was provided with additional information regarding the first
and third placed provider finalists (ICMA-RC and MassMutual respectively) and a confirmed recommendation of
ICMA-RC. During the Board meeting, MassMutual offered an alternative bid and offered to extend the contract that
had been with the Hartford to the end of the calendar year. The Board directed the Advisory Committee to follow up
APPROVE OTHER
RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE
Action of Board On: 10/01/2013 APPROVED AS RECOMMENDED OTHER
Clerks Notes:See Minutes Text
VOTE OF SUPERVISORS
NO:John Gioia, District I Supervisor
Candace Andersen, District II Supervisor
Mary N. Piepho, District III Supervisor
Karen Mitchoff, District IV Supervisor
ABSENT: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: October 1, 2013
David Twa, County Administrator and Clerk of the Board of Supervisors
By: Chris Heck, Deputy
cc:
D.1
To:Board of Supervisors
From:David Twa, County Administrator
Date:October 1, 2013
Contra
Costa
County
Subject:Intent to Select ICMA-RC as the County's Deferred Compensation Plan Provider
with both Mass Mutual and ICMA-RC to provide a last-best-final proposal and a recommendation.
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:
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 was to
expire 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,
MassMutual 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 April 9, 2013, the Board of Supervisors directed the Human Resources Director to extend the Contract with
The Hartford/MassMutual for the period of July 1, 2013 through December 31, 2013.
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 Mas Mutual, work with MassMutual for the term of the contract and consider an RFP process at a later date.
MassMutual 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
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: MassMutual 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 MassMutual. 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 were 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.
Based on the direction of the Board of Supervisors, The Committee met with ICMA-RC and Mass Mutual on
September 5, 2013 to finalize their proposals.
ICMA-RC focused their presentation on confirming the fees and pricing as presented to the Committee in
the February, 2013. Additionally, ICMA-RC stressed the need to communicate with and educate our
participants. ICMA-RC has provided information that indicates that the percentage of participants and
average deferral per participant for Contra Costa County is much lower than many other public sector
entities in California. To that end, ICMA-RC agreed to placing at risk $94,500 of the administrative fees
during the next five years. ICMA-RC is committed to educating our employees to increase participation,
and to educate our participants to increase contribution amounts and retirement income.
MassMutual spoke to a number of items that had been previously presented to Board of Supervisors in
individual meetings, but, that had never been presented to the Committee. Additionally, MassMutual
presented another proposal matching the administrative fees presented by ICMA-RC in February.
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. MassMutual 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 MassMutual, 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.
In September 2013, Buck Consultants completed the requested evaluation of General Account and Stable Value
investment products for consideration for inclusion in the Contra Costa County Deferred Compensation Plan. The
report is attached. In part, their recommendation states:
“We believe the most conservative option among all stable value and general account products presented in
this report would be the ICMA-RC PLUS commingled stable value fund. This investment would be easier
to liquidate or “undo” because of the 12-month put contract feature. If the County were to pursue a capital
preservation vehicle earning a higher rate of return, we would prefer the PIMCO separate account stable
value fund relative to the MassMutual general account product (and other products described in this report).
We would prefer the PIMCO product relative to any general account because assets would be segregated in
a separate account that would be owned by the County’s plan, and assets would not be commingled with an
insurer’s other assets. However, the PIMCO separate account (and nearly all other separate stable value
funds) would not have a book value settlement option and would be more difficult for the County to
oversee and administer than a commingled stable value fund.”
During the meeting with MassMutual on September 5, 2013, Mass Mutual advised that the Deferred
Compensation Plan can retain Schwab for the Self-directed Brokerage Account.
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.
As of September 5, 2013, ICMA-RC reinforced their commitment to communicating with and educating
participants, by their proposing service guarantees to meet the goals as determined by the Committee and
ICMA-RC.
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. MassMutual began full service
recordkeeping and administrative services for defined contribution plans in 1973. MassMutual 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
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. MassMutual 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:
Based on the revised proposal received from MassMutual on September 5, 2013, MassMutual has reduced their
fees to meet the ICMA-RC fees presented above.
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. Based on Board of Supervisors direction, transition did not occur on
July 1, 2013. MassMutual has indicated that a transition from The Hartford recordkeeping services and platform
to MassMutual recordkeeping services and platform can be accomplished by February 1, 2014. ICMA-RC has
also committed to accomplishing a transition to their recordkeeping services and platform by February 1, 2014.
Evaluation Summary :
Conclusion:
The Committee independently reviewed and rated each company. ICMA-RC consistently earned the highest score
outscoring both Prudential and MassMutual 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 is 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.
After meeting with ICMA-RC and MassMutual on September 5, 2013, and, receiving responses to additional
questions, the Deferred Compensation Advisory Committee recommends that Contra Costa County contract with
ICMA-RC for the recording keeping and administration of the Contra Costa County Deferred Compensation Plan.
This recommendation is based on the following:
The existence of a conflict of interest in having the General Account, which is 100% investment in
MassMutual, being managed by MassMutual. This is evidenced by attendance at meetings where the
Deferred Compensation Plan is presented by MassMutual to new employees and the lack of transparency in
the General Account fee accounting. Additionally, as experienced by Corporations such as Enron, to have
the majority of retirement dollars invested in a single company investment is in conflict with the fiduciary
responsibilities of the Committee.
The low participation rate and average participant deferrals when compared to local government entities can
be partially attributable to poor investment education and communication. It is evident that our deferred
compensation plan administration is lacking in investment education, tools and communication.
Fees appear to be a moving target with MassMutual. Their original proposal on fees is more than twice
their most current proposal. ICMA-RC has stated that there are no changes to their proposal because they
originally quoted the fees necessary to administer this Plan in accordance with their best practices.
In their letter to Contra Costa County on September 18, 2013 (copy attached to this report), Buck Consultants
stated in part:
“After reviewing RFP responses, reviewing answers to follow-up questions submitted at finalist interviews,
participating in finalist interviews, conducting reference checks, reviewing answers to additional follow-up
questions, and conducting additional vendor meetings, Buck believes with a high level of confidence that
ICMA-RC is the best provider of the recordkeeping and administration services sought by the County.”
Finally, the Committee appreciates the respect and integrity ICMA-RC has demonstrated throughout the RFP
process. ICMA-RC has been the Committee’s recommended vendor since the responses to the RFP were received.
ICMA-RC has, throughout this process, worked within the guidelines of the RFP.
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.
Based on an effective date of February 1, 2014, the review of investment options need to be determined by
mid-October rather than mid-May.
CONSEQUENCE OF NEGATIVE ACTION:
As of December 31, 2013, the Contra Costa County Deferred Compensation Plan would not have a Plan
Administrator.
CHILDREN'S IMPACT STATEMENT:
None.
CLERK'S ADDENDUM
The Board voted to authorize Human Resources Department staff to negotiate a new three-year contract with
The Board voted to authorize Human Resources Department staff to negotiate a new three-year contract with
Mass Mutual, starting January 1, 2014. The contract will include benchmarks for education and recent Mass
Mutual concessions that were made after submission of their response to the County's request for proposals,
such as a waiver of administration fees, other than the initial set-up fee for loans from deferred compensation
accounts. The final contract with Mass Mutual will be presented to the Board for consideration at a later date
which will follow negotiation and creation of the draft document. Human Resources Department staff was
directed to return to the Board in one year with a report on the status of the deferred compensation program,
including a report on education efforts, and statistical information reflecting County employee investment
choices. Public Speakers included: from Mass Mutual (Merlin Edwards, William Abramowicz, Bob Gleason),
Robert Campbell (Contra Costa County Auditor/Controller), Ken Westerman (Deputy Sheriff's Association),
Gwen Downs (retiree), Helen Lai (chose not to speak), Rollie Katz (Public Employees' Union Local One), and
from ICMA-RC (Rosh Cousino and Michelle Martin).
ATTACHMENTS
RFP Analysis 3-28-14
Stable Value & General Acct Comparison 9-18-13
Buck Letter 9-18-13
ICMA-RC Fact Sheet
1200 17th Street, Suite 1200 • Denver, CO 80202
720.359.7700 • 720.359.7701 (fax)
September 18, 2013
VIA EMAIL
Ms. Christine J. Penkala
Manager, Human Resources Department
Contra Costa County
651 Pine St. 5th Floor
Martinez, CA 94553
Re: Overview of Developments and Additional Information Received in the RFP Process
Dear Christine:
The purpose of this letter is to provide a brief overview of developments in the request for proposal
(“RFP”) process and additional information received from ICMA-RC and Mass Mutual regarding the
County’s 457(b) deferred compensation plan (“Plan”). Our “Summary Report” dated March 27, 2013,
contains useful and pertinent information, and we suggest that the contents of that report be considered
along with this letter. We are also submitting an additional report today that provides a high-level
overview of alternative general account and stable value products. We will provide a very brief
summary of that report in this letter, as well.
Fees
The original RFP requested fee quotes from vendors under multiple scenarios. One scenario involved
the use of a vendor’s proprietary investment products while another scenario involved a totally “open
architecture” framework in which the County would have complete flexibility to select any investment
product. This is important because some organizations are good at administering plans, but not at
managing assets. In addition, very few investment management firms have a “top tier” or “best -in
class” investment product in every asset class or category.
Question #89 of the original RFP requested fee quotes under an open-architecture framework. Mass
Mutual’s response of 0.25% in administration fees was not competitive relative to the other proposals
received, and in Buck’s experience it is not competitive for similarly sized plans. In addition, Mass
Mutual’s 0.25% fee quote was connected to a general account rate guarantee schedule, which runs
contrary to the “open architecture” premise of the question. In Buck’s view, Mass Mutual’s response
was either not responsive to the question, or the fee quote was not competitive with other offers that
were received (or both). Mass Mutual subsequently explained that the 0.25% administration fees that
would be charged to investors in the non-general account assets would actually serve to produce a
higher rate guarantee in the general account. We have two major comments here. First, that proposed
fee structure is not consistent with the nature of Question #89 of the RFP. Question #89 was
requesting Mass Mutual’s fee quote under a scenario where no Mass Mutual products would be offered
within the Plan. The response Mass Mutual gave would have been a more appropriate response to
Question #91, and that would have been welcome along with a more responsive answer to Question
#89. We believe the County could reasonably deem Mass Mutual’s RFP submission as non-
Ms. Christine J. Penkala
September 18, 2013
Page 2
responsive (and if Mass Mutual were to argue that the 0.25% fee quote was in fact an open-
architecture scenario offer, then it was clearly uncompetitive). In addition, we are very uncomfortable
with mechanisms that charge higher fees to one group of participants (non-general account investors)
in order to provide a benefit to a different group of participants (general account investors). We believe
that administration fees should be priced and evaluated separately from general account guaranteed
rates of return. While governments may enact policies that have similar effects via taxation and social
programs, we believe that this is fundamentally inappropriate within the context of a tax-qualified
deferred compensation or defined contribution plan. Mass Mutual subsequently made a revised fee
offer of 0.14% for administration services at their finalist interview, and this was accompanied by a
different general account rate guarantee schedule, but the 0.14% fee quote did not require that the
general account be included within the Plan. We view this clarification as an appropriate response to
question #89. Subsequent to the finalist interview and the revised 0.14% fee quote, Mass Mutual
complained to Buck Consultants that it did not receive the opportunity to provide fee quotes on a like-to-
like basis as other vendors. This is was not a valid complaint, as Mass Mutual had the opportunity to
provide fee quotes under multiple scenarios in response to the original RFP, and the finalist interview
provided a second opportunity to clarify pricing. Mass Mutual also attended a public Board of
Supervisors meeting during the first half of 2013 where the fee quotes of other RFP respondents were
made public. Mass Mutual subsequently submitted additional revised pricing scenarios.
The table below depicts Mass Mutual and ICMA-RC fee offers:
Original Proposal
(January 2013)
Finalist Interview
(March 2013)
Committee Meeting
(September 2013)
Mass Mutual
Administration Fee
(Open-Architecture) 0.25% 0.14% 0.11%
Mass Mutual
Administration Fee (with
Proprietary General
Account)
0.25%
0.14% - 0.25%,
(depending on general
account minimum rate
guarantee)
0.06% - 0.25%
(depending on general
account minimum rate
guarantee)
ICMA-RC
Administration Fee
(Open-Architecture)
0.122% 0.115% 0.115%
ICMA-RC
Administration Fee (with
Proprietary Stable Value)
0.625% 0.625% 0.625%
Ms. Christine J. Penkala
September 18, 2013
Page 3
Mass Mutual’s most recent fee offers are competitive with other vendors including ICMA-RC. However,
the most competitive offer from Mass Mutual was not received until after other vendor’s fee quotes
were made public at a Board of Supervisors meeting.
Education and Participant Engagement
The finalist interview agenda asked vendors to spend time discussing participant communication
materials, education, and the participant website. Our qualitative assessment ranked ICMA-RC higher
than Mass Mutual in terms of the quality of participant communication and education materials. In
addition, active participants in the County’s plan appear to be deferring, on average, approximately
$3,500 per year into the plan, based on information contained in plan administration reports produced
by Mass Mutual. We’ve seen many plans administered by other vendors, including ICMA-RC, achieve
average deferral rates which are substantially higher, and in many cases more than double the rate we
see in the County’s plan. Some of these differences may result from demographic or other differences
between the County’s employees and those in other jurisdictions. However, we would like to note that
the County has a relatively mature work force with a significant number of employees over age 50, and
participants in that age group should be making deferrals into the plan as they prepare for retirement.
Regardless of which vendor is selected as the administrator of the Plan, Buck recommends the County
leverage its provider to encourage greater levels of deferrals and higher participation rates.
As we have mentioned to the County previously, we are concerned with the high percentage of assets
invested in the general account option, the large number of participants that invest 100% of their
balances in the general account, and reports of Mass Mutual’s on-site representatives encouraging
participants -- regardless of age or risk tolerance -- to invest in the general account. Buck and the
Committee raised these issues with Mass Mutual at the Deferred Compensation Committee Meeting
which occurred in early September. Mass Mutual was receptive to that feedback and made a verbal
commitment to address those concerns, and this was encouraging. As of August 31, 2013, there were
1,810 participants solely invested in the general account. That represents over one-quarter of all
participants in the plan (6,653 as of July 31, 2013). We also recommend, regardless of who is selected
as plan administrator, that the County track the number of participants invested solely in the general
account (or stable value) option in total, and by age group, going forward.
General Account vs. Stable Value Products
Buck Consultants has recommended that the County move away from using a general account product
due to the concentration of risk in a single insurer. While State -level regulators oversee insurers to
promote stability, and several insurers appear to have strong financial conditions as measured by credit
ratings, we believe the consequences of bankruptcy or insolvency could be devastating to the Plan.
During periods of financial crisis, Federal regulators have sometimes intervened to promote stability,
which was the case during 2008 and 2009 when many financial institutions, including The Hartford,
received TARP money. However, Buck does not believe it is prudent to expect government
intervention during any future crisis. Our other reports dated March 28, 2013, and September 18, 2013,
contain more information on this topic.
Ms. Christine J. Penkala
September 18, 2013
Page 4
We have submitted a separate report titled “Stable Value and General Account Comparison” which is
dated September 18, 2013. We briefly summarize that report here. While we continue to not
recommend a general account product, the Mass Mutual general account offer appears to be the “least
bad” due to a high guaranteed rate of return and the relatively strong financial condition of Mass Mutual
as an organization. In terms of stable value funds, we believe the ICMA -RC PLUS stable value fund is
a very attractive choice for several reasons: 1) attractive returns relative to money market funds and
many peer stable value products, 2) assets segregated from the asset manager and insurance “wrap”
providers, and 3) The “12-month put” contract feature, which provides the County with a way to
terminate the investment and receive a book value payment after one year. (The fund would be fully
liquid to participant-initiated withdrawals and transfers during the 12-month period.) Most stable value
investment products that contain a “12-month put” feature are closed to new plans due to limited
capacity in the insurance “wrap” market and a specific aversion to the “12-month put” feature by
insurers. We also believe the PIMCO managed separate account solution would be very attractive to
the plan given PIMCO’s excellent track record at managing fixed-income portfolios and their deep
investment talent. However, with a separate account there would not be a “12-month put” contract
feature and there would be the added administrative burden for the County to deal with third-party wrap
contract issuers.
The RFP process has established that the County will have full open-architecture flexibility to select
non-proprietary investment products within the Plan. Please note that it is not necessary to make a
decision on the future of the Plan’s current general account investment option at the same time a
decision is made on recordkeeping and plan administration services.
Persistency Credit
We have recommended that the County discontinue the practice of the annual persistency credit.
Briefly, the credit is funded by fees collected from participant accounts (either in the form of implicit
revenue sharing attached to investment options, or from a reduced general account rate) and then
rebated back to participants in the form of a fixed-dollar credit. Please see our report dated March 28,
2013, for more information.
Benefits of RFP Process
We believe that this RFP process will result in a number of benefits for the County and Plan including:
Lower administration fees
More transparency with respect to the general account (if retained)
More transparency with respect to revenue sharing received from Plan investments
o In addition, revenue sharing reimbursements would automatically increase if the Plan’s
economics improve
Complete flexibility to select non-proprietary investment options and institutionally-priced mutual
fund share classes (open-architecture)
Increased vendor commitments to track and drive plan success metrics such as partic ipation
rates and average employee deferrals
Ms. Christine J. Penkala
September 18, 2013
Page 5
Performance guarantees where the vendor would place fees at risk if specific and measurable
actions are not met
Ability to choose new relationship manager or on-site vendor representative if the assigned
professional is not satisfactory to the County
The Hartford vs. Mass Mutual
We have been asked by the County to comment on the differences between The Hartford, the firm that
Contra Costa County originally hired to administer the 457(b) Plan, and Mass Mutual who acquired The
Hartford’s retirement plan business. In terms of financial stability, the transition to Mass Mutual is
clearly an improvement; Mass Mutual has an AA+ credit rating from S&P. We have also seen evidence
that Mass Mutual’s plan sponsor and participant websites are more robust. Relative to The Hartford,
we expect Mass Mutual to have enhanced capabilities of tracking plan success metrics and sending
targeting communications to participants. However, prior to the acquisition of The Hartford, Mass
Mutual was not administering a significant number of governmental 457(b) plans, and so Mass Mutual’s
ability to communicate with and engage government employees is has not been demonstrated. We are
aware of RFP situations in other public jurisdictions in which legacy clients of The Hartford have
considered vendor changes, and some of those have included political lobbying, involvement by
outside legal counsel, and theatrics at public meetings. We believe Mass Mutual is currently learning
the strengths and weaknesses of its newly acquired government retirement plan business. In five
years’ time, we fully expect Mass Mutual to bring stronger capabilities to the market in this aren a, but in
terms of exactly what that will look like, we honestly do not know.
Summary and Recommendations
After reviewing RFP responses, reviewing answers to follow-up questions submitted at finalist
interviews, participating in finalist interviews, conducting reference checks, reviewing answers to
additional follow-up questions, and conducting additional vendor meetings, Buck believes with a high
level of confidence that ICMA-RC is the best provider of the recordkeeping and administration services
sought by the County. Our second- and third-place ranked vendors would not include Mass Mutual, but
rather, they would be other vendors that had been ranked lower than ICMA-RC by Buck during this
process. We would like to highlight that Buck Consultants is independent and does not derive any
benefit from the County’s decision to select one provider over another. We would also like to note that
Staff, the Committee, and the County’s Board of Supervisors are under no obligation to agree with or
accept Buck’s recommendations. Regardless of what the County chooses, we firmly believe that this
RFP process will deliver tangible benefits to the County and the County’s employees.
Sincerely,
Jonathan P. Slinger, CFA
Senior Consultant
Buck Global Investment Advisors
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.
General Account and Stable Value
Comparison
September 18, 2013
Presented by:
Jonathan P. Slinger, CFA
Contra Costa County
1
Table of Contents
Table of Contents ............................................................................................ 1
Introduction ..................................................................................................... 2
General Account Products ............................................................................ 3-7
Mass Mutual ............................................................................................... 3
ING ............................................................................................................. 4
Nationwide ................................................................................................. 6
New York Life ............................................................................................. 7
General Account Overview .............................................................................. 9
Stable Value Products .............................................................................. 10-17
ICMA-RC .................................................................................................. 10
Galliard ..................................................................................................... 12
PIMCO ..................................................................................................... 14
Prudential ................................................................................................. 17
Summary and Recommendations ................................................................. 19
Contra Costa County
2
Introduction
The County has asked Buck Consultants to evaluate General Account and Stable Value investment
products for the County’s 457(b) Plan. The County has already received information on several general
account and stable value products as a result of the recordkeeping request for proposal process (“RFP”).
This report provides information on additional products the County might consider. As a result of the
recordkeeping RFP the County has the ability to select investment products that are not tied to the County’s
choice of recordkeeper. In other words, it is now possible for the County to hire one firm to manage a
general account or stable value product within the Plan, and then hire a different firm to perform core
recordkeeping services (such as tracking participant accounts, receiving payroll feeds of new employee
deferrals, processing withdrawals, creating and mailing statements, providing on-site participant education
and so on). This report is a high-level overview of alternative general account and stable value products.
Contra Costa County
3
General Account Products – Mass Mutual
Credit Ratings:
Standard & Poor’s: AA+
Moody’s: Aa2
A.M. Best: A++
Guaranteed Rate Return Schedule:
Minimum Guaranteed Rate:
Guaranteed minimum interest rate of 1%.
Targeted Spread or Margin in Pricing:
0.11%
Trading Restrictions:
The Plan would receive full book value after a five year contract period. If the County initiated a Plan-level
withdrawal from the fund prior the end of the five year contract period there may be a negative market value
adjustment.
Maximum Potential Loss:
The general account is guaranteed by Mass Mutual, but not the Federal government or any other entity.
Year Credited Rate Rate Reset Date Schedule
2014 3.20%1/1/2014 3.79%
2015 2.80%7/1/2014 3.54%
2016 2.40%1/1/2015 3.29%
2017 2.00%7/1/2015 3.04%
2018 2.00%1/1/2016 2.79%
7/1/2016 2.54%
1/1/2017 2.29%
7/1/2017 2.00%
1/1/2018 2.00%
7/1/2018 2.00%
Investment Only Pricing Bundle Pricing
Contra Costa County
4
General Account Products – ING
Credit Ratings:
Standard & Poor’s: A-
Moody’s: A3
A.M. Best: A
Minimum Guaranteed Rate:
ING will commit to the following enhanced credited interest rates for the first 3 years of the contract:
3.75% in year 1
A minimum of 3.00% in year 2
A minimum of 3.00% in year 3
The prevailing interest rate in effect thereafter will be credited. The proposed ING Fixed Account offers a
guaranteed minimum interest rate of 1.00% for the life of the contract.
Targeted Spread or Margin in Pricing:
To our knowledge, there is no generally accepted or industry standard approach for disclosing the economic
benefit attributable to a defined contribution plan’s investment allocation to the ING Fixed Account or to
comparable general account products available from other companies. It is important to note that there is
no expense ratio associated with the ING Fixed Account; it is managed on an aggregate basis and supports
all of the company’s financial commitments. No portion of the general account is attributable to a particular
customer nor do customers have any individual ownership interest in general account assets. Over the
long-term duration of the account we do try to earn a spread between what we invest money at and what we
credit back to plans.
Trading Restrictions:
Participant transfers are subject to industry standard equity wash provisions. For employer directed
withdrawals, ING’s proposed fixed account offers full liquidity on the 5th contract anniversary provided we
receive 60 days advance notice. Employer directed withdrawals at any other time will be subject to a market
value adjustment.
Maximum Potential Loss:
Insurance laws are designed to make sure all policyholder obligations are satisfied. For example: Life
insurance companies are excluded from coverage under the federal bankruptcy laws. Instead, the states,
including Connecticut, ILIAC’s primary regulator, have adopted laws governing insurer insolvency. The
Connecticut insurance laws also contain reporting requirements which are designed to give “early warning”
of potential financial difficulty. Sensing financial difficulty at an insurance company, the Connecticut
Insurance Commissioner could intervene. Under the Commissioner’s direction, we would expect the
company to be managed with a view to meeting its obligations. We would further expect the Commissioner
to use discretion in managing payouts, with the objective of meeting claims as they come due, over time, in
an orderly manner. If rehabilitation is ultimately determined to be impossible, the Commissioner could apply
to the court for an order to liquidate, and ultimately dissolve the company. It is only in liquidation that the
Contra Costa County
5
question of general account claims priority becomes an issue. After satisfaction of any secured claims,
policyholder claims have a high priority (Class 3), following only the costs of receiver and guaranty
association administration, but ahead of general (non-policyholder) unsecured claims.
Contra Costa County
6
General Account Products – Nationwide
Credit Ratings:
Standard & Poor’s: A+
Moody’s: A1
A.M. Best: A+
Minimum Guaranteed Rate:
CCC will have a unique rate based on purchases made after the initial deposit is received by Nationwide.
However, if NRS were to receive the funds today, we would anticipate a crediting rate of 3.35% for this
quarter. Nationwide has not offered a specific guaranteed rate schedule for future time periods.
Targeted Spread or Margin in Pricing:
NLIC targets a spread of 100 basis points to 125 basis points on the NLIC Fixed Annuity Contract.
Nationwide Life sets the crediting rates in its sole discretion and the targets are subject to change without
notice.
Trading Restrictions:
Under the terms of the Fixed Annuity Contract, exchanges and/or transfers of money from the Fixed Annuity
may be made no more than twice per year and may not exceed 20% of the participants fixed account value.
Once the 20% limit has been reached no further exchange/transfers will be permitted out of the Fixed
Account during the remainder of the calendar year. If a participant’s Fixed Account is less than or equal to
$1,000, they can exchange/transfer out up to their entire account value. Each exchange/transfer will count
toward the limitation of two exchange/transfers out of the Fixed Account per year. Additionally, a 5-year
exchange/transfer provision allows for the systematic movement of 100% of their account value out of the
Fixed Account on a monthly basis over a 5-year period. If elected, they cannot defer, exchange, or transfer
into the Fixed Account for the 5-year term without canceling the provision. An equity wash provision may be
enforced if a Plan Sponsor offers competing investment products in its fund lineup.
If a Plan Sponsor terminates the fixed annuity contract and withdraws its assets in a lump sum a Market
Value Adjustment (“MVA”) may apply. The MVA is the amount that NLIC determines would be the net
capital loss, if any, resulting to NLIC if investments were liquidated to satisfy the lump sum withdrawal. The
MVA would be calculated using NLIC’s current procedures applicable to all contracts of this type and class
at the time of withdrawal. If the employer withdraws its assets over a 60-month period (5 years) instead of in
a lump sum, the MVA would not apply. There are no fees associated with early withdrawal at the participant
level.
Maximum Potential Loss:
The Fixed Account is backed by Nationwide Life’s general account. Any guarantees associated with the
Fixed account are liabilities of the general account and are guaranteed by Nationwide Life. Assets held in
the Fixed Accounts are subject to the claims-paying ability of Nationwide Life and are not insured by the
FDIC, NCUSIF, or any other governmental agency.
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General Account Products – New York Life
Credit Ratings:
Standard & Poor’s: AA+
Moody’s: Aaa
A.M. Best: A++
Guaranteed Rate Return Schedule:
For new GIA clients that initially fund contracts during the last six months of 2013, the annualized gross
crediting rate is 2.35%. The initial rate will be guaranteed through 12/31 of the first contract year. The
crediting rate in subsequent years will be reset on 1/1 and 7/1 and guaranteed for a six-month period. The
GIA group annuity contract was introduced on July 1, 2009. The net annualized crediting rates for new GIA
clients since that inception are included below. Existing GIA clients may experience different performance
histories depending on when they initially entered the product.
Minimum Guaranteed Rate:
GIA provides a guaranteed minimum interest rate (GMIR) that floats according to the NAIC model index and
can never fall below 1.00% net of fees. Currently, the GMIR for GIA is 1.00%. The GMIR is reset every six
months in conjunction with the GIA declared crediting rates.
Targeted Spread or Margin in Pricing:
GIA offers an upfront expense charge of 0.10% with no revenue sharing. Additional revenue may or may
not be earned by New York Life depending upon the investment return of the portion of New York Life’s
general account attributable to the GIA. New York Life does not know what the earnings on this product will
be, as the crediting rates are guaranteed and declared in advance and we typically do not disclose actual
realized earnings on the product.
Trading Restrictions:
In the event that a participant chooses to transfer assets out the New York Life GIA and into a “competing
fund,” the assets first must reside in a “non-competing” fund for at least 90 days (equity Wash). A competing
fund is defined as a money market fund, self-directed brokerage account, or a bond fund with a duration of
less than three years. There are no restrictions and/or provisions limiting participant transfers to a non-
competing fund. Participant withdrawals resulting from an employer-initiated event (e.g., bankruptcy) may
be subject to limitations as described in the applicable group annuity contract.
A plan sponsor may elect to terminate their GIA group annuity contract at any time, provided they give at
least 30 days’ advance written notice to New York Life. Upon termination, the plan sponsor may elect to
take their GIA balance in either an immediate lump sum payment, subject to a two-way (+/-) market value
adjustment or a full book value payout, subject to six annual installments over five years. The first
installment payment is one-sixth of the overall balance and is made immediately upon termination. The
remaining five installments are paid on the anniversary of the first payment.
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Maximum Potential Loss:
New York state law would govern the insolvency and liquidation of company assets and liabilities. The
applicable law regarding New York insurer insolvency outlines various classes of creditors and the
hierarchy/priority in which their liabilities would be settled. GIA contract holders would be considered a
Class 4 claimant alongside insurance and annuity policyholders with respect to settlement. Level 4 claims
are settled before claims of general creditors, governments, and surplus note holders. Maximum losses are
very difficult to predict in this unlikely scenario, but would be dependent upon the value of the assets held by
New York Life, the size and nature of the liabilities across business and product lines, the size and value of
New York Life’s surplus, and the ability of any state guarantee funds to compensate for residual losses.
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General Account Overview
Buck Consultants has recommended that the County move away from using a general account product due
to the concentration of risk in a single insurer. While State-level regulators oversee insurers to promote
stability, and several insurers appear to have strong financial conditions as measured by credit ratings, we
believe the consequences of bankruptcy or insolvency could be devastating to the Plan. During periods of
financial crisis Federal regulators have sometimes intervened to promote stability which was the case
during 2008 and 2009 when many financial institutions, including The Hartford, received TARP money.
However, Buck does not believe it is prudent to expect government intervention during any future crisis.
While Buck is not recommending the use of any general account product, we have been asked to comment
on which product would be most beneficial for the County. For lack of better phrasing, we will use the
phrase “least bad” to suggest that the Mass Mutual general account has attractive features relative to the
other general account products that are available to the County. A table depicting minimum guaranteed
returns for the different general account products appears below:
While ING has offered higher guaranteed rates than Mass Mutual over some time periods, we note that ING
has a lower credit rating than Mass Mutual. We believe that financial stability should be a more important
factor than the guaranteed rate of return. Mass Mutual has offered a larger guaranteed rate if the County
also selects Mass Mutual as the recordkeeper. The “Investment Only” guaranteed rate schedule reflects
the scenario where the County uses Mass Mutual’s general account, and hires a different firm to serve as
the Plan’s recordkeeper. As we have mentioned to the County previously, we are concerned with the high
percentage of assets invested in the general account option, the large number of participants that invest
100% of their balances in the general account, and reports of Mass Mutual’s on-site representatives
encouraging participants -- regardless of age or risk tolerance -- to invest in the general account. Buck
believes there is a conflict of interest and in the event the County chooses to use a general account we
recommend hiring a different firm to administer the Plan and provide participant education. In spite of the
lower rate of return of the Mass Mutual “Investment Only” scenario, we prefer this to the bundled approach
because participants would receive education from a representative of a different firm.
Mass Mutual (Investment Only)Mass Mutual (Bundled)ING Nationwide New York Life
Jan-14 3.20%3.79%3.75%2 3
Jul-14 3.20%3.54%3.75%2 3
Jan-15 2.80%3.29%3.00%2 3
Jul-15 2.80%3.04%3.00%2 3
Jan-16 2.40%2.79%3.00%2 3
Jul-16 2.40%2.54%3.00%2 3
Jan-17 2.00%2.29%1 2 3
Jul-17 2.00%2.00%1 2 3
Jan-18 2.00%2.00%1 2 3
Jul-18 2.00%2.00%1 2 3
Guaranteed Rate Return Schedule - General Accounts
1 Prevailing interest rate in effect will be credited, minimum interest rate of 1%.
2 Minimum guaranteed interest rate is established at the beginning of each calendar year, currently 3.35%.
3 Minimum guaranteed interest rate floats according to the NAIC model and is subject to change every six months
(subject to a range between 1% and 3%), currently 2.35%.
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Stable Value Products – ICMA-RC
Vehicle Type:
Commingled stable value fund
Historical Returns as of June 30, 2013:
1 VT PLUS Fund return is annualized for all periods.
Market-to-Book Value Ratio: 100.97% as of 6/30/2013
Management Fees and other Fund Expenses:
0.44% (Class R10)
Wrap Fees:
0.13%
Guaranteed Minimum Rates:
No (wrap contracts guarantee minimum 0.00% return)
Wrap Contract Issuers and Credit Ratings:
1, 2 Standard & Poor's ("S&P")
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Participant Trading Restrictions:
Investors must transfer their money to a non-competing fund for 90 days (equity wash) before investing in a
competing fund. Whether or not a particular fund is a competing fund will be determined, at the sole
discretion of ICMA-RC, on a fund-by-fund basis.
Plan Level Trading Restrictions:
ICMA-RC retains full discretion to release employer-initiated VT PLUS Fund withdrawals in an orderly
manner over a period of up to 12 months from the date ICMA-RC receives written notification from the
Employer that it has made a final and binding selection of (a) a replacement for ICMA-RC as administrator
of the Employer’s Plan, or (b) a replacement investment option for the VT PLUS Fund under the Employer’s
Plan.
Is there a 12-month Put?
Yes
Maximum Potential Loss:
Investors can lose money investing in a VT Fund. VT Funds are not guaranteed or insured by the Federal
Deposit Insurance Corporate (FDI”), any other government agency, or ICMA-RC. Investors can lose all
money invested in the VT PLUS Fund. It should be noted that any guaranteed stable value fund is only as
valuable as the issuing firm is solvent. A primary objective of the VT PLUS Fund is preservation of capital.
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Stable Value Products – Galliard
Vehicle Type:
Stable value separate account
Historical Returns as of June 30, 3013:
Management Fees:
0.17% on the first $100 million
0.13% on the next $100 million
0.09% thereafter
Wrap Fees:
0.181%
Guaranteed Minimum Rates:
The contracts have a minimum floor crediting rate of 0% and guarantee plan participant-driven withdrawals
at book value (principal plus accrued interest).
Wrap Contract Issuers and Credit Ratings:
Galliard does not directly issue wrap contracts. For the Contra Costa County portfolio, Galliard is proposing
the following investment contract allocations:
American General Life: A2/A+
MetLife: Aa3/AA-
Prudential: A2/AA-
Participant Trading Restrictions:
All Galliard stable value accounts provide daily liquidity. Employee directed transfers are honored daily. The
only restriction imposed on employee directed transfers is if they are to a competing option, in which case
there would be a 90-day transfer limitation (90-day equity wash) required. Any exceptions would need to be
agreed upon by the respective wrap contract providers.
Plan Level Trading Restrictions:
Galliard Investment Advisory agreements typically allow for plan sponsor termination with 30 days’ notice.
Employee directed transfers are honored daily. The only restriction imposed on employee directed transfers
is if they are to a competing option, in which case there would be a 90-day transfer limitation (90-day equity
wash) required. The Fund is fully benefit responsive and there are no market value adjustments.
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Is there a 12-month Put?
No
Maximum Potential Loss:
The contracts have a minimum floor crediting rate of 0% and guarantee plan participant-driven withdrawals
at book value (principal plus accrued interest).
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Stable Value Products – PIMCO
Vehicle Type:
Separately managed stable value fund
Historical Returns as of June 30, 2013:
Management Fees:
0.375% on the first $50 million
0.250% on the next $550 million
0.200% thereafter
Wrap Fees:
Between 0.200% and 0.250%
Guaranteed Minimum Rates:
Wrap contracts support a minimum 0% crediting rate net of all fund related expenses.
Wrap Contract Issuer and Credit Rating:
If selected, PIMCO would solicit bids and seek to negotiate a wrap contracts with a number of wrap
providers, including those on the following list:
Names in DARK BLUE denote issuers that are providing capacity but only if it is bundled in whole or in part with affiliated fixed
income management. This list consists of financial institutions which, to the best of PIMCO’s knowledge, provide, have provid ed, or
intend to provide, book value contracts to the marketplace. This list is n ot intended to be exhaustive and is subject to change
without notice.
DATE YTD 1 MO 3 MOS 12 MOS 2 YRS 3 YRS 5 YRS 10 YRS
6/30/2013 1.91%0.30%0.93%4.01%4.10%4.31%4.41%4.85%
Stable Value Book Value Model Performance - Net of Investment Management Fee
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Participant Trading Restrictions:
In general, under the terms of a wrap contract, all participant-directed withdrawals, not resulting from a plan
sponsor initiated event (e.g. plan termination, merger and acquisition, group lay-off) or financial advice
received through the plan (e.g. Financial Engines, managed accounts), are transacted at book value.
However, participant transfer activities from the stable value fund to another investment option with similar
characteristics to the stable value fund (typically defined as any investment option with a target duration less
than 3.0 years) can transact at book value only if the money is first transferred to a non-competing
investment option for at least 90 days before subsequently moving to a competing investment option (this
provision is called the 90-day equity wash rule).
Plan Level Trading Restrictions:
Stable value wrap contracts typically do not impose trading or liquidity restrictions at the plan-level. More
precisely, the contracts define certain events or actions initiated by the plan sponsor that may cause
participant-directed withdrawals to be funded at market value instead of book value. These events or
actions can be grouped into three categories:
1) Corporate events – This would include mergers, acquisitions, group lay-offs, and bankruptcy, etc.;
2) Plan events – This would cover any changes to the retirement plan not previously disclosed to the
wrap providers including but not limited to: any change to the investment line-up, making available to
participants professional investment advice service, plan termination, and the exclusion of a group of
employees from participating in the plan;
3) External events – This would cover any change in accounting rules or ERISA laws that would
materially affect how stable value is offered.
Is there a 12-month Put?
No
What Events Would Trigger a Market Value Adjustment?
There could be negative market value adjustments on participant-directed withdrawals resulting from
‘market value events’. Over the years, PIMCO has been able to negotiate certain provisions into wrap
contracts to mitigate the risk of a market value adjustment including:
1) ‘Book value corridor’ – Wrap providers would agree to cover up to xx% of participant-directed
withdrawals at book value irrespective of the event or action that caused the withdrawals; depending on
plan demographics, the percentage is typically 10% annual and 20% life-time caps.
2) Materiality threshold – For an event or action to meet the definition of a ‘market value event’, we would
require that wrap providers demonstrate a material increase to their risk as a result of such event or
action. Most events would fall short of meeting this materiality threshold and therefore would not meet
the definition of a ‘market value event’.
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Maximum Potential Loss:
The theoretical maximum possible loss that can be experienced by investors is the fund’s entire book value
(e.g. 100% non-qualified withdrawals and market value goes to zero).
While the probability of a 100% stable value loss is extremely low, there is s ignificant difference in credit
exposure between a general account and a stable value fund.
When a retirement plan invests in an insurance company general account, the plan’s entire investment is at
risk if the insurance company becomes insolvent. On the other hand, if a plan invests in a stable value fund,
the only amount that could be at risk to the wrap providers is the difference between the stable value fund’s
book value and market value. In fact, the plan has zero exposure when the fund’s market value is greater
than its book value.
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Stable Value Products – Prudential
Vehicle Type:
The Prudential Stable Value Fund (PSVF) is a combination of a book value wrap contract issued by The
Prudential Insurance Company of America (PICA) and an underlying inve stment, which is represented by a
unitized investment in the Prudential Core Conservative Intermediate Bond Fund (“Bond Fund”), part of the
Prudential Trust Company Collective Trust
Historical Returns as of June 30, 2013:
Management Fees:
0.20%
Wrap Fees:
0.20%
Guaranteed Minimum Rates:
The guaranteed minimum interest rate offered by the PSVF is 0%, effectively guaranteeing no loss of
principal or accumulated interest. This is guaranteed for the life of the contract.
Wrap Contract Issuer and Credit Rating:
Prudential Insurance Company of America (PICA) has received the following ratings from major,
independent rating agencies.
Standard & Poor’s: AA-
Moody’s: A1
A.M. Best: A+
Fitch: A+
Participant Trading Restrictions:
Participant withdrawals and transfers freely permitted on a daily basis according to plan provisions.
Principal and accrued interest on the Prudential Stable Value Fund (PSVF) is guaranteed without restriction.
The Prudential Stable Value Fund (PSVF) is subject only to an industry standard equity wash provision, to
protect it from disintermediation.
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Plan Level Trading Restrictions:
For plan termination, with 30 days’ notice, the Prudential Stable Value Fund (PSVF) allows the contract
holder to terminate with or without cause, and elect one of the following options (there are no termination
fees associated with the Prudential Stable Value Fund):
1) As of the termination date specified in the notice, the contract holder can retain its unit holdings of
the Prudential Core Conservative Intermediate Bond Fund at market value or the ability (subject to
any restrictions imposed by the collective trust fund) to transfer the cash equivalent to another
provider.
Is there a 12-month Put?
No
What Events Would Trigger a Market Value Adjustment?
A contract-holder may incur a market value adjustment (either positive or negative) as a result of certain
uncovered withdrawals or a termination of the contract with cause by Prudential, as described in sections
4.1(d) and 7.3 of the wrap contract, respectively.
Maximum Potential Loss:
While the contract is active the minimum interest rate offered by the Prudential Stable Value Fund
(PSVF) is 0%, effectively guaranteeing no loss of principal or accumulated interest.
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Summary and Recommendations
We view each of the four stable value products presented on the previous pages as high-quality options. In
terms of a specific recommendation, the ICMA-RC PLUS fund has a unique characteristic which we find
particularly attractive. The commingled fund has a “12-month put” option which means that the County can
decide to terminate the fund at any time, and 12-months later receive full book value redemption. During
the 12-month period the fund would remain completely liquid to participant-initiated withdrawals and
transfers. The fund is commingled, which means that the Plan’s assets would be combined with other
457(b) plans, however, the assets would be segregated from those of the asset manager (ICMA-RC) and
the third-party insurance “wrap” providers that guarantee the 0% minimum rate. While recent returns on
stable value funds have been lower than general account products, assets are not commingled with an
insurance company’s other assets. In addition, relative to money market funds, stable value products have
produced higher returns while maintaining stability of principal. Most commingled stable value funds that
offer a 12-month put feature do not have additional capacity and are closed as a result of reluctance by
insurance “wrap” contract issuers to provide the “wrap” insurance on products that contain a 12-month put
feature. “Wrap” capacity is greater for separate accounts and other structures where no 12-month put
feature exists.
We also believe the PIMCO separate account solution is particularly appealing given our confidence in their
skill as an investment manager. We believe PIMCO will likely outperform most peer stable value managers
in the future, and while there are no guarantees, we think it is possible PIMCO will outperform many general
account products as well. In this scenario, Contra Costa County would have a dedicated separate account
managed by PIMCO, and then the County would enter into “wrap” contracts with third-party insurance
companies. This would present additional complexity as the County would have contracts with the
investment manager and with the wrap contract issuers. The County may not wish to pursue this added
level of complexity, and this structure would be more diff icult (but not prohibitive) for the County to
administer. Another disadvantage of the separate account structure is the lack of a “12 month put” option.
Contra Costa County would own the separate account, but plan-level terminations or withdrawals from the
fund would only happen when the market-to-book value ratio was above 100%. In other words, a plan-level
book value withdrawal would only be available if the market value of the assets in the separate account was
greater than book value. However, the “wrap” contracts would allow participant-directed withdrawals and
transfers at book value even if the market value was lower than book value. At the level of the individual
participant, the product is designed to be fully benefit-responsive at book value to all transfers and
withdrawals initiated by individual participants.
We believe the most conservative option among all stable value and general account products presented in
this report would be the ICMA-RC PLUS commingled stable value fund. This investment would be easier to
liquidate or “undo” because of the 12-month put contract feature. If the County were to pursue a capital
preservation vehicle earning a higher rate of return, we would prefer the PIMCO separate account stable
value fund relative to the Mass Mutual general account product (and the other products described in this
report). We would prefer the PIMCO product relative to any general account because assets would be
segregated in a separate account that would be owned by the County’s plan, and assets would not be
commingled with an insurer’s other assets. However, the PIMCO separate account (and nearly all other
Contra Costa County
20
separate account stable value funds) would not have a book value settlement option and would be more
difficult for the County to oversee and administer than a commingled stable value fund.