Travis County Commissioners Court
April 4, 2006
Item 10
Number 10 is to discuss and provide direction on the retirement store consultant analysis and evaluation report regarding the county's deferred compensation 457-b plan. Thank you for your patience. We had hoped to get here a little bit sooner.
>> we're only 10 minutes off. That's pretty good.
>> judge, Commissioners, good afternoon.
>> okay.
>> we're here today to present to the Commissioners court the consultant's findings of the evaluation of the 4 457 deferred compensation plan for Travis County. Last June the court directed staff to have a review of the plan to determine the fitness of the plan and how it is benefitting the employees. We were allowed to retain the services of the consultant, mr. Al dechristophero of the retirement store, conducted the analysis and is here to present the report to you. I致e just handed out slide backup. There should be some slide coming up on the monitor soon, but in the event they don't work, there's some slides for you. So with that...
>> good afternoon, judge and Commissioners. My name is al dechristophero as dan just mentioned. I致e prepared a brief presentation today that will take you through the highlights of the review I conducted on the county's deferred compensation plan and the recommendations that I致e made to the county. From an agenda standpoint we'll talk about some of the key findings of the 457 review, look at the key recommendations and then seek the court's approval or direction to implement those recommendations. And I guess the slides aren't working.
>> media, do we have the slides? 457 review?
>> that looked like one of them.
>> it doesn't look like it. If you all have a hard copy, we can go by the hard copy. That's fine. First of all I壇 like to talk about the current status of the program. Obviously deferred compensation, much like any other voluntary retirement program, whether that's 401 k in the private scekter or 403-b in the education sector is considered a very valuable employee benefit primarily because it allows employees to contribute to a fund on a pretax basis. Typically these plans supplement the primary retirement benefits that county employees would receive from tcdrs. Currently there are in excess of 1200 active participants in the program. The county program has over 25 million in assets. And if I could just mention here, all of the money in the plan currently is employee money. The county has not now and has never contributed to the employees' deferred compensation plan. This is the first ever review of the 457 program in Travis County, and I salute you for taking this,. Actually, 457 for governmental entities became available in 1978. The Travis County plan was initiated in 1980, and nationwide has administered that plan since its inception in 1980. What of a surprise, there was never a competitive bid process conducted to appoint nationwide as administrator of this program, and to kind of put that in perspective, I guess -- I致e been trying to think of other county products or services, first of all, that are the same as they were or being provided by the same vendor as they may have been in 1980. That were never selected initially through a competitive bid process, and in a marketplace that has multiple providers of those options where the program has never gone back to the marketplace to test its validity or its value against the current offering. But that is essentially what you have with the current deferred compensation program. The next slide is simply an overview of what the county's fiduciary responsibility is under Texas law. Chapter 609 of the Texas government code pretty much authorizes the cities and counties and state agencies to establish programs like 457. They require the assets of those programs to be held in trust for the exclusive benefit of the plan's participants and beneficiaries and they require sponsors to manage the plan. It's also that section of chapter 609 of the Texas government code that gives political subdivisions the authority to establish if they chose oversight committees that supervise the activities and the operations of these programs. Since the assets are held in trust, there's wide opinion that -- wide concurrence that chapter 117 of the Texas property code which relates to trusts would also be a guiding law. Chapter 117 is also known as the uniform prudent investor act. Once again since the assets are held in trust, the county is a trustee and it owes a duty to the beneficiaries of the trust to act prudently. And I don't think that's any different than if you or I were the trution tee, -- trustee, for example, of trusts set up for our parents or children. The law pretty much requires us in those instances to act prudently. And if we don't know what we're doing, the law requires us to secure outside resources to make decisions that are solely in the interests of the beneficiaries of the trust. And the county's responsibility is really no different when it comes to this particular program. The next few slides are -- will take you through kind of the fundamentals of this program. And the first slide here is the asset growth in the program from 2001 through 2005 and that's the period of time where I reviewed this program. If you look in 2001 the county assets in the 457 program for about 15.6 million and at the end of last year, December 31st of 2005, the assets were about 24.5 million. And obviously there's been some significant growth in the assets of the plan, and that's important because this plan has pretty much left the spectrum of smaller plans and is now at a size where it might be able to leverage its assets for a better deal for its participants and employees. The next slide shows participant growth if in the plan. And these numbers are from nationwide. Nationwide uses a rather unique way of defining a plan participant. County payroll records show 1278 active people deferring through the plan through the end of last year and nationwide has 1687. And the difference is anyone that had an account with nationwide is shown as an active participant, but for purposes of comparison, as long as we're using the same explanation for the five-year period, I don't get particular heart burn over that.
>> [one moment, please, for change in captioners]
>> primarily the investment components of the plan and there are essentially two types of investments in the plan, one is a fixed account, and the other are the mutual fund components or the mutual fund portfolios available to employees to -- to invest deferrals in. The fixed account in this particular plan is an insurance product. It's a fixed annuity product. Unlike a traditional separate account like a mutual fund, there really is no account. It's simply promise to pay by the issuer of the annuity product. In this case. In this case nationwide life insurance company. The account assets are tied to the general account of nationwide life insurance company. That may be significant, for example, if something were to happen to nationwide life insurance company, if their financial situation changed and I believe that is highly unlikely, but if it were to change, the assets in their general account become subject to -- to the liens of their creditors. Nationwide currently pays 4.15%, I知 sorry that was the interest rate they paid in the first quarter on the assets in that fixed account. They have a minimum interest rate this year of 3.1%, so if interest rates were to drop, nationwide has promised to pay no less than 3.6%. On the assets in that account. And finally, they have a life-time contract guarantee of 3.5%. So if interest rates were to fall, completely through the floor, nationwide is still obligated to pay 3.5% on the assets in the fixed account. An alternative to a fixed account product is a stable value product. And unlike the fixed account product, if you just go back on that top list, under fixed account, stable value products are not insurance products. They are more like mutual funds. They fully disclose expenses. And earnings unlike a fixed account product and a fixed account product you really don't know what you are paying for or what the company actually earned on their general account investments. As interest rates move up, that's what we have experienced for the last couple of years, staple value products typically keep pace with those changes more quickly than fixed account products do. Conversely, when interest rates move down, staple value products move down faster, normally, than -- than fixed account or general account products. On the following page -- kind of a broad overview of the mutual fund menu that's currently included in the nationwide product. There were 41 mutual funds in the product. What the county has today is what's known in the emergency as a bundled product. This particular product is bundled through the national association of counties. And what that means is that Travis County really didn't pick any of the elements of this product. Any of the underlying investments. And when you were small, when you were a smaller county and you had -- you had significantly fewer assets, that may have been the best deal going for you in the marketplace. I don't believe that -- that with your size today that's any longer the case, that's pretty much what you have. So the underlying investments in this contract are not something the county approved or wanted, it's just what nationwide had. And that particular product that you have today. One of the criteria I typically use from mutual funds, I look and see if the funds are in the top quartile of their asset class for either the last three or five years. I知 just talking about actively managed funds, not indexed fund or anything, but -- but if you are looking for a strong mutual fund you want somebody with long-term track record who is consistently outperformed their peer group for an extended period of time. I think the last three to five years is a pretty good indication of that. From an expense standpoint I look for equal to or -- over all average for funds in that particular asset class. I try to lement eliminate [indiscernible] a lot of large capital funds are funds that are trying to accomplish the same objective. But in the current menu, if you use that criteria, 46% of the funds and the current menu were not top quartile for either three or five years. 20% have experience structures that were greater than the average. In the current fund menu, nine funds out of 41 all have a large cap growth. Objective, investment objective. Part of the problem with that, too, if I could just digress for just a moment, but folks thinking they are diversing their money and by putting it in -- in just a large cap growth, but they are different large cap growth funds, really I haven't diversified anything because large cap growth funds essentially buy the same types of underlying securities. 22% are on a nation's wide's watch list. That means that they have established criteria that each investment option needs to meet on a regular basis from a performance or expense or -- or management tenure perspective and 22% of the existing fund menu is on a watch list and that doesn't mean they will be eliminated. You put fund on a watch list to better track them and monitor their performance and if they don't get better over a period of time, then you eliminate them. There's been several eliminations in your fund menu both last year and the year before and the year before that. There are several studies published by the industry by investment advisors that really point to the fact that more is not better when you get into these types of plans. More tend to confuse people. More prevent people from even participating because they can't make rational investment decisions from an extensive menu. If you were to change this plan, my recommendation would be you eliminate a lot of the redundancy in the asset class mix that -- that is there today.
>> how many of these programs have you looked -- different counties, how many have you looked at in the last five years? How many have you consulted with or --
>> probably around 10.
>> 10?
>> yeah.
>> and where would you say we would land in the 10 on a grade, if you will? Give me an a through --, I mean, we all understand a through f, we all went to school with. Where would we be with a plan that we have in your guesstimation, being the consultant.
>> I guess my question to you, Commissioner, would be from what perspective.
>> strictly speaking, mutual fund-wise, let's just go to the mutual funds here versus the fixed. I mean, what would you -- how would you couch what we have? I mean would it to you be acceptable?
>> I would not think that it's acceptable today. No, sir.
>> > I知 sorry, what did you just say, what did that just mean? I heard what you said but it's not computing with what you just said. What did that mean?
>> the -- the -- I believe there -- there's a better way to skin this animal than what you have today. And once again, what you have today is not anything you chose. It was something that was given to you and that's not suggesting for a moment that you can't make changes to what you have. All that I知 -- all that I知 saying is that you have a bundled product. These are the same investment options that you would find probably in a county with a million of assets. Travis has 25 million. You have -- you are at the point where you do have some leverage and control to create your own destiny.
>> thank you. Okay.
>> does that mean that you -- if you change you are going to be tossing the dice a little more?
>> in what sense?
>> well, it's not going to be fixed. Now it's going to be -- going to be a little more risky?
>> no Commissioner. You will always have two components to the product. You will always have a fixed or a stable value of what -- because you will have investors in the county that want a credited rate of return on their investments. But you also have other investors in the county who would not put their money in a fixed account under any condition. So the challenge here is to come up with an investment menu that makes sense for the broad cross-section of county employees.
>> does that mean -- of the investment opportunities -- gone from a million dollars to 25 million-dollars as far as assets are concerned, does that mean that we can also look at ra -- like a roth ira, other iras that are kind of predicated on the mutual funds. As you stated the menu that we have is something that we inherited because of something that was given to the county. It's kind of -- kind of limited, so does this -- does this suggest that -- that other investment opportunities such as an example a roth ira, does that open up avenues for that or are they still limited?
>> yeah. There are -- Commissioner, there are other product options, for example, you could -- the county could make roth iras available to county employees. There have been changes in the tax law that actually allow people on the 401 k and 403 b programs to contribute a portion of their contribution into a vehicle like a roth, that's not available yet in 457. But there are options, there are other options.
>> okay. I just wanted to see if that was -- something that we could look at. As far as the options -- opportunities to open the door to those options. That's what I知 trying to -- that's what I知 trying to get to with those questions.
>> yes, sir.
>> the other options, will they be tax free to the employee or -- or are they post income tax investments?
>> yeah, if you did -- if the county sponsored a roth ira program, it really wouldn't change your 457 at all. What it would allow county employees to do is take -- take after tax money and put it in a roth ira and as you probably know, that money comes out tax free as long as you meet the minimum roth criteria. But it really doesn't impact what happens on the 457 side. There -- they are almost -- for governmental deferred compensation plans, they are really two different issues. But the answer to Commissioner Davis' question is you have the option of doing virtually anything that you think is prudent for your employees.
>> when we first got started on this, one of the things that we had a lot of discussion on had to do with the issue of choice. That when we got started on this, that this was -- this was a process that was agreed upon, but I think we also saw that it was for the not coming from our employees saying we beg of you to take a look at this. But we went ahead and did it. But I知 seeing that you have come down to a conclusion on page 4 that the county should maintain the single administrator structure. Meaning to have one provider, not multiple providers. My question is this: one of the things that we did talk about from the very beginning was that -- that some of us kind of came down the path, others in different places, that we would not be -- some of us would not be going into a situation where we would be forcing people to give up what they have got right now and make a change just because. It ought to be something that they wanted to. So if there was a second provider and people did want to change to the other provider, peace be with you. But what I知 seeing here is that we have got even today something like 44% of the folks, myself included, who have our money in a fixed account. If you switch to a different provider, by the very definition 44% of us are going to have to make some other options. And have to make some changes. And of the other 60 -- less than 60% others, they may be in certain kinds of funds that are available in the portfolio through nrs but may not be open for investment under a different kind of provider. I知 going okay cut to the chase. You think we can get a better deal, but it seems like if you are saying we need a single administrator and the only way to respect people not wanting to make changes where they don't want to make changes, seems like you ought to leverage your situation and say we want to renegotiate this contract. If we are them not happy and can't get the leverage and confessions that we think our employees are entitled to, that's when you say okay then, we are going out on a new rfp, we are going to open this thing up to competition. You can't have it both ways, you can't say we respect choice, we are for the going to force anybody off the current plan. You need to stay with a single administrator and not get to that conclusion.
>> I hear what you are saying, Commissioner. And I believe the county makes decisions all the time that -- that individual employees may not like. But we are -- but this court believes they are in the best interests of the employee group as a whole. Health insurance for example, I may like my doctor at -- at company a and the county decides for whatever reason to move its health insurance to company b, and I lose my doctor in the process, and -- and you know there's really very little that I can do about that because somebody here has made the decision that -- that the change was in the best interests of -- of all of the county's 4,000 employees and not just a slight majority. And I mean I -- I think renegotiating the contract is an option available to this court. And to the county. I知 not suggesting for a minute that the only way to solve this problem is to go to an r.f.p. But I will point out once again that -- that this -- this program has never faced a competitive bid environment. Which strikes me as being very unusual for a public entity.
>> take a week or two, [indiscernible] do a new job for us. You just finished the investment stage, right?
>> right.
>> why don't we let you finish the presentation. And folk are looking at me kind of funny with other items on the agenda.
>> the --
>> people learned a lot about county government today.
>> on the expense side, so I think there's some -- there's confusion right now about what if anything people pay to participate in the program. And those of you who might be in a fixed account, that -- that question looms large because -- because the company that issues the contract that holds the fixed account assets does not disclose what it makes on the assets for Travis County. It also does not disclose what expenses it incurs in managing those assets for Travis County. I値l give you an example. If you give me a thousand dollars, and I知 able to invest that thousand dollars at 6%, and I credit you 4%, that probably is a very good deal for me. I致e made 2% on the assets. And you may be comfortable with a 4% rate of return. If -- if another bank down the street paid you 5%, there may be something that gains your attention there. And that is basically how fixed account products work. And the review I did, I assumed, a revenue stream to nationwide of 1% of the fixed account assets. So I知 a little over $10 million in fixed account assets in the plan, I estimated revenue to nationwide of about $110,000. That revenue estimate, in my opinion, is extremely conservative. And I can -- I can tell you that from my prior experience in working within the industry. But we normally made about -- oh, 1.5, to 1.75% on fixed general account assets. But for purposes here I am giving everyone the benefit of the doubt. We used the -- a revenue stream of 1%. On the mutual fund expenses, there are really two places nationwide gains revenue. One is from mortality and expense charges. Which they call administrative charge. Those range from.55% on to .01% on the fund. For the funds people use they are more in the .90% category, than they are in the.55% category. And that revenue stream is about -- about combined with the revenue from 12 b 1 fees and other revenue sharing arrangements, totals about $130,000 a year. So bottom line, there's about $238,000 a year, about $187 that each active participant pays in annual expenses. If we go a little -- if you go to the following page, and this is just a -- an example of how -- how this works on -- on -- for folks who have invested in the mutual fund options. But the theory is the same. Even if you are in the fixed account. And that is the larger your account balance, the more you tend to pay. And all this does is -- it illustrates if someone had invested half of their money in funds that had a.55% charge and the other half in funds that had a .90% charge, if you had an account value of $300,000, your annual fee is around $21,775 a -- 2,175, the fee is about $363 a year. So obviously as your account balancings up, people incur more of the plan expense. That's all that we are trying to illustrate here. That applies whether or not it's a fixed account investor or a mutual fund investor. There are several restrictions in the county's program right now. They primarily deal with the fixed account. If you are in the fixed account and you wanted to move your money into mutual funds, nationwide restricts you to no more than 20% a year. You can't move more than 20% of your fixed account balance annually from that fixed account into any of the mutual funds in the program. The plan is restricted to 12%. So if -- if many participants moved their full 20%, the plan is restricted to no more than -- than 12% of that mixed account balance annually from the 123105 asset number of the prior year. There's a market value adjustment if the county decided to move this business, if it went out to bid and moved the business to another provider, nationwide -- the market -- the market value adjustment applies to the fixed account assets. As of 12-31-05 it was $133,000. By contrast the year before, in 12-31-04 it was zero. It is interest rate sensitive, so as interest rates go up in the market, this index tracks that change and has a corresponding impact on your market value adjustment. Bringing that a step further, the $133,000 number, if the fixed account assets were the same as they were on 12-31-05 to today, I know that number has gone up because of the fed increasing interest rates a couple of weeks ago. Next page are recommendations. First of all 7 aapplaud -- I applaud you for not adding another provider into this plan. I will give you an example. You can't go anywhere in the private sector and find a 401 k product with any company that has multiple providers. The only reason in governmental entities that you ever had multiple providers was going back 10 or 15 years ago to create diversification in that plan you had to bring in a separate provider because -- I値l take the company that I work for, when I first came to Texas, we had 6 investment options in our plan. We had a fixed account and five that were internally ly managed by that company. Nationwide was in the same situation back in the early 90s, but the financial services industry today essentially anything that you want in the marketplace is available through a single plan administrator. If it's not, if that single plan administrator cannot provide you that option, it's probably not the right administrator for the plan. I have formed an employee committee to look at this process. Once again that's something that I applaud the county for doing. My recommendation is that you formalize that committee and give them specific charges and responsibilities not only to help resolve this issue burke for example if the -- but for example if the court decides to go out to competitive bid, it's my recommendation that that committee really -- really establish the criteria and make a recommendation to this court about the best provider from a bid process. If the court decides simply to stay with nation-wide and renegotiate its arrangement, that committee should be periodically reviewing the operations of nationwide and the investment options in the plan and making recommendations again to the court to change what needs to be changed on a -- on a routine basis. This is not -- this should never been a one-time. What you have done right now, what I have done for you should never be just a one-time deal. This is a complicated business. It becomes more complicated every day. And there needs to be regular formal oversight.
>> meaning when?
>> at least quarterly is my recommendation.
>> quarterly.
>> thank you.
>> and from an operating policy and investment policy statement, just sitting out criteria for what should be included in the plan, what criteria investment options in the plan need to be and so forth. The process that a -- that a committee uses to review those options or make recommendations, that should all be in a -- in a formalized statement for the county. Final recommendation is either you can go to bid or negotiate, I apologize for taking that much time.
>> were you planning to come back and visit with us?
>> yes, sir.
>> we have just been handed three pages of recommendations. That augment what we have heard. My recommendation is about to be to the court that -- we review these at our leisure and discuss these and the rest of the report that we heard today either next week or two weeks from today.
>> two weeks Margaret and I both are out.
>> next week.
>> > is there room on the agenda.
>> we will make room, this is the Commissioners court. [laughter] we promised to read the two and one third pages that dan just handed us, right?
>> that's the analysis and recommendations made by al so you have -- you have a condensed version.
>> okay.
>> we don't have brodie lane until later. Don't have brodie lane next week.
>> that's why I知 asking the question. In terms of somebody --
>> we will have it back on. Try to take care of it early.
>> it really depends on --
>> we will try to fix until -- so at least you don't wait around an hour.
>> you don't want to be after brodie lane, trust me.
>> thank you very much, we will have it back on.
The Closed Caption log for this Commissioners Court agenda item is provided by Travis County Internet Services. Since this file is derived from the Closed Captions created during live cablecasts, there are occasional spelling and grammatical errors. This Closed Caption log is not an official record the Commissioners Court Meeting and cannot be relied on for official purposes. For official records please contact the County Clerk at (512) 854-4722.
Last Modified:
Wednesday, April 5, 2006 10:34 AM