Travis County Commissioners Court
November 28, 2006
Item 19
Now, we did indicate our intention to call up number 19 after our discussion of that item. 19. Receive report from deferred compensation committee regarding contract negotiations between Travis County and nationwide regarding employee benefits, especially deferred compensation, including the following: 1. Consultant's report dated October 23, 2006 and tentative service agreements made during negotiations; b. Whether to issue a request for proposal for deferred compensation administration and when; and and c, update on consultant's contract including need for additional services and expiration date of current contract. My reading of this is that it's a discussion item only today?
>> yes, that's correct.
>> we anticipate having it back on next week, with the appropriate -- when appropriate for action.
>> when the contract is ready it could be a week, could be two weeks.
>> will we know by the end of this discussion today?
>> we have submitted
>> [indiscernible] with nation-wide return solutions. We have submitted our contract response and we are just going over some items. I feel that they will be agreement -- that there will be agreement on this contract. We will ask your positive consideration with the committee recommendation subject to that contract renegotiation. Renegotiation. Any idea when that contract may be back here?
>> judge. Lou and I were intending to go over the suggested changes by nation-wide later today. And so -- so if everything goes agreeablably between it, it could be by the end of business today. If we find some stumblers it may be a bit more. We will know by the end of the day.
>> the only question is whether to put it back on next week because it's not posted for action today.
>> I can let you know by the end of the day, sure.
>> okay.
>> judge, Commissioners, alicia perez, executive manager for administrative operations. The item before you concerns deferred compensation. The program was first adopted by the court in 1980, judge. And it I think -- in cooperation with the national association of counties, the program allows Travis County employees to set aside compensation pretax primarily for retirement as of yesterday the fund that -- that -- the money that belongs to Travis County employees that has been deposited and has -- has earned interest is $27,294,000. 11,489 in fixed assets, 15,805,000 in variable, which is mostly mutual funds. The court appointed a committee made up of employees to review the contract. We have been in negotiation with nationwide since June. Lou, who is with nationwide on regional director is here with us today. We also have -- have mr. Defaro our consultant in helping us review all of the contracts and has a report for you and dan mansour who is with risk. I'm going to turn it over to al.
>> good morning, my name is al
>> [indiscernible], I'm with the retirement
>> [indiscernible] here in Austin. I'm the consultant retained by the county to review the county's deferred compensation plan and make recommendations and make some suggestions to improve it going forward. And I would just like to -- by way of -- of a little historical background, when we met with the court the last time, the court -- the court's mandate was to go out and renegotiate the best possible arrangement that we could with nationwide and then to report back to the court with the recommendations. As ms. Perez mentioned a committee of employees was formed by the county to assist the court in this process. And I would just like to talk very briefly about that committee. In my opinion, they were diligent in their work. They did an outstanding job of -- of understanding the issues. And looking after the best interests of the -- of the court and the county's employees. I think after going through this process the committee understand goes the dynamics of the industry and the components of options available and the deferred compensation business and I think most importantly the committee understands its -- and the court's responsibilities under the law and that is to make decisions about this program that are solely in the best interests of the plan's participants. And that applies even though there is no county money involved. In deferred compensation the law still requires those people making decisions are exercising any authority over the program to make decisions that are solely in the best interests of the -- of the plan's participants. As a result of this negotiation process, the committee had two recommendations to the court. The first recommendation was to accept the nation-wide offer, the best offer that we were able to renegotiate with nation-wide, I will get into specifics about that in just a moment. The second recommendation was to launch an rfp process, that could be immediate, could be at some point in time in the future. One of the ropes, if I could very briefly talk about the two recommendations, the first recommendation of accepting the program or accepting the offer from nationwide is important because it creates immediate monetary savings to a lot of the plan's participants. You are acting as a fiduciary to this program. I think that it's important that you do what's necessary to make sure people have the best value they can get in the program. The second recommendation about the r.f.p. Deals with the -- with the committee had difficulty evaluating how good the nation-wide offer was because they just had nothing else to compare it to. And once again that -- that's a -- recommendation that could be implemented now or at some point in time in the future. If I could very briefly go through and I'm going to talk about the four primary objectives of the renegotiation process. And I believe that you have this handout to the deferred compensation committee. From the retirement store. Objective number one was to reduce plan expenses, and the outcome was that -- was this on the mutual fund side, we were able to reduce and virtually eliminate the plan administrative fees which range from 55 basis points,.55%, to 10 basis point or.-- 90 basis points to virtually 0 on all funds in the menu except one which is a fidelity fund. But the net savings to plan participants in the elimination of those administrative fees is roughly $85,000 a year. The way that you would reduce plan expenses for fixed account participants, for participants who choose to invest their money not in a mutual fund but in the fixed investment option and the plan, would be to increase the interest rate. And we were unsuccessful in negotiating that with nation-wide. On a skill of one to 10 with one being the worst, 10 being the best outcome, I would probably give that a six sings it is very good on -- since it is very good news for those participants who are invested in some of the mutual fund options in the plan and there's really no change at all for anyone invested in the fixed account option. That's not saying that they have been harmed by the process, but they were not bettered by the process either.
>> let me make it clear that there never were administrative charges related to the fixed account. If it's 0, if it's related to the administrative charge, the answer is that it's still 0.
>> that is correct. And when you are talking about plan expenses, when you get to a fixed account, it is what the value of that rate of return is from nationwide versus other places in the marketplace. So if nation-wide is paying you 4.05 today, you were able to get 5% of that money, the difference between 4.05 and 5% is the value on the table.
>> let me follow that up. Given the fact that there's no fee attached in the fixed, the $85,000 savings we will witness this year out of administrative fees, that is a yearly --
>> that is correct.
>> that's a yearly deal. If you were to go back, 26 years, do you have any idea what those administrative fees would have -- tallied up to? Because I realize that each year, when it first started there was a lot less money, obviously that fee structure was a lot smaller. But $85,000 a year I mean not saying that -- that's coming a long way. I mean, if I was a company, I sure wish that I could bill you for another 85,000. What do you think that it's been for the 26 years administrative fee wise that nation-wide has collected from Travis County?
>> the fee schedule has changed. Probably a lot over the last 26 years. The assets changed a lot over the 26 years. The mix has changed. I mean --
>> we don't really have that figure. It was -- it would probably be pretty close to impossible to calculate. With any degree of certainty. But I think -- I think what's important is that going forward it is a much, much better arrangement than where we are today. That's why the committee felt strongly that the court should take the offer that's on the table and acting in a prudent capacity as a fiewsh sherri. The second major objective was to improve the investment menu. The investment menu today has -- has a lot of redundant funded, funds that aren't performing as well as they should. Vis-a-vis their peer group averages. The committee came up with some criteria of -- for the investment menu, that is shown under strategy. Item no. 2, you can read that, I won't go over it. In the outcome is that -- is that the investment menu nationwide offered a -- a menu of funds that essentially met all of the criteria that the committee set out or set forth for the renegotiation process. If there's one concern that I might have, it's on the index fund side. But the nationwide proposed using their own proprietary index fund options. Which -- which -- in many cases are significantly more expensive than you might be able to purchase from other vendors in the marketplace. But they fill the gap. They met the criteria. So -- so nationwide insists that they needed that to make the numbers work.
>> just so everybody understands you know what maybe you are really saying is that there are these funds that you can participate in that are proprietary that only nationwide can sell and that the thing that they do not want to give up, which is understandable, understandable, is that, you know, we are telling you, you just told everybody that's listening that you could get these at a better price. Most likely. But given the fact that -- that we have gotten nationwide to, you know, these I guess arrangements that we are about to -- I guess that we may sign-off on, this is one of those things they are not willing to give up. If we give up our administrative fees, all of this kind of stuff, come on we have got to be in the business to make some money somewhere. That is roughly I mean what we are saying. So that everybody just really understands, I mean, --
>> that's correct.
>> one of the things that we do not want to give up as far as the focus for the Travis County employees was the service level. The education level. One of the things that we know that this program is really all about your employees, having a more secure future as serving the citizens of Travis County. We maintain the integrity of local service, kim wilder is here with us today. She -- local service and also william or south Texas program director. So in essence in this negotiation while lowering the prices, we maintain the service but then we actually increase the service by having a certified financial planner in the county two weeks out of the year to talk about asset allocation, risk tolerance, things of that nature. So overall we have lowered the charges and we have increased the service and sophistication of the service with the account balances. So I think the focus was always on the employee and what's best for your employee group and to service them and take them to the next level.
>> you know, I want you to know that I'm -- that I've been very pleased with -- kim has done a wonderful job. Since I'm kind of the rock thrower in this deal, I mean,, you know, I certainly want to give credit where it's due. You have done a good job and it's nice working with -- with kim, not that I don't work with mr. Sawyer. I started -- mr. Sawyer if you don't mind
>> [laughter]
>> local service is a differentiator.
>> since the atmosphere of this thing obviously is a little tense, has been, you know,, I mean, I want to give credit where it's due, I am appreciative of that.
>> in the past there have been limited abilities for persons to move money from their fixed assets to mutual funds. Has that been changed foundation wide.
>> under the new arrangement, there won't be any -- either individual level restrictions or plan level restrictions.
>> what was the previous restrictions?
>> 20% on individual and 20% on aggregate with this negotiation --
>> 20% on the --
>> no.
>> on the individual but --
>> I'm sorry, 20 and 12, you are right. 20 personal on the individual it was 20%, and on the aggregate it was 12.
>> okay. I guess my question then -- whatever is aggregate, 20%. I guess under the -- explain to -- the new arrangement to me a little bit. In other words if you have an aggregate of 20% I guess first come first served --
>> there will be no restrictions on movement -- if everyone decided to move into mutuals from fixed asset, that would be okay. There's no obstruction, if you decided to move all your funds from fixed asset into mutuals there would be no restriction.
>> so that is a tremendous enhancement to the fixed account. That flexibility without lowering of the interest rate in the fixed account pool. That is subject to an exclusive arrangement with nationwide. So in essence we have brought that to the table as a benefit for your fixed account invest store, they now have greater flexibility with the same interest rate opportunity that others that have -- that have a restriction on the face that we had before. That's enhancement for your employees.
>> right. But that had -- I guess as far as nationwide is concerned. There has to be some balance of some money left there, you know. I don't think everybody is going to -- they would move all of their money out of the fixed account.
>> a lot of employees are fixed account investor.
>> what is the required balance?
>> there is no required balance. We are willing to take that market risk, business risk. Proper asset allocation and planning. We know employees may have a certain -- number of employees
>> [indiscernible] part of the increased education levels that we want to bring out there. The point is this was very important to the committee, in order to provide some enhancement plus the underlying 3.5% guarantee. Minimum guaranteed floor rate. This liquidity within our menu of options is showing that we brought benefit to your employees participating in the fix, benefit to your employees participating in the variable also. That's a winning solution for your employees.
>> okay. How will this information be disseminated as far as what we discussed the other day with those particular persons that are in --
>> right. We are going to have --
>> because those are some significant changes that we are hearing here.
>> we are going to champion those changes, those enhancements, the work for the committee and take that to the streets. We are going to take that department by department and talk about how a good deal has gotten even better and really champion that with Travis County's deferred compensation program. So we look forward to that opportunity and educating the employees. We are going to bring in a certified financial planner to bring in kim and william to zero in on financial education models asset allocation. That's another level that we have brought to the table for the education and partnership as their selecting their solutions in deferred compensation. Excellent question, Commissioner Davis.
>> thank you.
>> so just to go back to that for just a second. Before in terms of when the mock -- when the market was hot and folks were going oh, my goodness, I want to be able to get out of this fixed account into the hot market, there were some I think legitimate complaints of people not having the flexibility to get in. On the converse when people were saying oh, my god, get me out of this, let me get into a more secure, stable place, back into the fixed account, they had the converse problem of not being able to get out of a market that was not working their way. This will give people flexibility both ways in terms of getting out of something they don't want to be in anymore getting into something they want to get into, not have those restrictions related to the aggravate, the whole plan --
>> one of the flexibilities we want to do is increase the education. What we don't want employees to do is to chase the variable account that had the highest return last quarter because it's about the next quarter and the next three, five, 10 years. Therefore through proper education and asset allocation and risk tolerance and certified financialer planner and training we are going to educate them not to chase the returns, but to make an overall risk adjusted balance, asset allocation decision, based on their risk tolerance and their time horizons. So the education component is very strong and that's why we wanted to seen step up the education level.
>> I think that's very good point because actually you take folks that have been investing in this for years, you have an opportunity to get -- I'm talking about
>> [indiscernible] you have an opportunity to get out of that and then chase what's out there in the market. Sometimes you end up losing a lot of money. So this is -- I don't think this is what the folks really want to do, but that's the chance you take when you start sometimes chasing and --
>> [multiple voices]
>> not going in the fixed account through proper education
>> [indiscernible]
>> okay.
>> thank you.
>> the third primary objective for the committee, renegotiation process was the elimination of the market value adjustment. By way of background the market value adjustment is a penalty assessed at the map's sponsor level, that is Travis County, in the event that the county decided to move the administration of the fixed account assets to a different firm. And the -- the market value adjustment is a -- is a fairly intricate formula that is interest rate sensitive. That -- that varies according to what happens with interest rates in the general marketplace. And -- and in my professional opinion, what it does is that it artificially ties the plan sponsor to a firm when there really isn't a need for it. You know, if you kind of look at your fixed account assets as a cd, you've had a 26-year cd at some point in time. It should mature, you should be able to be -- to move that money to a different entity or firm if you can get a better deal somewhere else. So the market value adjustment kind of creates this -- this -- at least a psychological impression that moving that money may -- may involve a financial penalty and as a result prevents people from -- from taking that action. On page 2 of your handout, you will notice what the market value adjustment has been in the last couple of years beginning in December of -- of '04 or -- where it was 0 to -- to 133,000 at -- in December of '05. To a high of 430,000 in July of this year. And we were told yesterday that it's down to 214,000 as of November 15th. And at -- one point that I would like to make to the court is that -- is that while the market value adjustment creates a psychological -- a psychological feeling of not being able to take action, there is also a contract provision that would allow the county to move the fixed account assets at 20% per year over a five year period to a new plan administrator and if you did it that way, the market value adjustment would not apply. And in any event, we were unsuccessful in negotiating the market value adjustment with nation-wide although nation-wide did agree to provide the county a monthly accounting of -- monthly calculation of what the market value adjustment would be going forward. At such point in time if the county decided to issue an r.f.p. For plan administration, you would have a much better idea of what the current penalty might be on that. On that -- on those fixed account assets. Finally, item no. 4 was to address current life insurance in the plan. And going back several years ago, there was an investment option for plan participants to use deferred compensation dollars to actually purchase life insurance in the plan that -- that option is no longer -- no longer exists for -- for new participants. It was grandfathered for those folks who opted to do it in the past. But it creates -- creates some fiduciary exposure, I believe, for the county. And nationwide has put together a very thoughtful plan to contact each and every one of those people who purchased life insurance as an investment option and to review with them what their options might be concerning that investment, going forward, and to -- to have them be linked to either -- to either continue the investment as is or to -- to make some change in it that is more beneficial for their current situation.
>>
>> [indiscernible] other avenues that were available. I guess still are available, with nation-wide I guess as far as some of the -- using some of our fixed asset moneys, dollars or whatever. Are we talking about basically like about maybe emergency situations that an employee may encounter. There's a restriction there on what those emergencies are, how they are defined, how that money is to be used on those particular situations. Have there been any changes in those?
>> no, sir, no, sir.
>> so there -- they are still basically the same type of situations where you can end up using that?
>> yes, sir.
>> deferred money and those -- those critical emergency situations?
>> absolutely.
>> there's a -- there's a hardship withdrawal provision in the contract that allows people to take money out. Also a loan provision that the county implemented a couple -- was it last year? Yeah, last year that allows people to borrow from their account balance. So I think that it's important for employees to know that they have access to the money.
>> exactly. And I'm going to shut up here in one second here. But let me ask this last question. I'm concerned, we issue, we say look we go out for an r.f.p. All right. There are? -- there are some things that -- I don't know when the r.f.p. Is going to basically go out, but a concern about the fixed asset -- let's say that nationwide may not get the next r.f.p. Depending on how it goes, they may not get the next contract, I don't know. But what happens to the money in the -- money in all of this, invested whether it's in fixed assets or whether it's in mutual fund, what happens to that money that's already in the hands of nationwide if -- if another firm ends up beating out nationwide on the next r.f.p.
>> that's a good question. On the mutual fund side, if the money were moved to a new and different plan administrator other than nationwide, the money would actually go through a mapping process, a process called mapping, go from nationwide directly to another administrator and normally that process occurs within 48 hours. On the fixed account side, depending on the market value adjustment, you know the option would be for the county to either pay the market value adjustment and move the assets immediately to whatever the replacement administrator's product is, or to -- to move those assets over a five year period at 20% per year, so that -- that the county does not incur the market value adjustment penalty.
>> right now we don't know what the market variable adjustment is.
>> right now it's $214,000.
>> at this point. But that can move.
>> that varies every day, changes every day.
>> right. That's my last question. That's my last question.
>> to answer that Commissioner Davis, today there is a 214,000 market value adjustment. That would have to be paid if the Commissioners court decided to move that money in a lump sum to another company. Another company may step in and say we will pick up that cost of 214,000, the bottom line is directly or indirectly your employees are going to pick up that $214,000 cost. Employees are not charged on their decisions, on any market adjustment. The key is that times the market value adjustment here has been 0. At times $430,000. Every month we are going to send to the county what the market value adjustment is. At a point in time with the market -- when the market value is in 0, we are going to offer an enhancement to move the money to a stable value fund and you have to take into consideration what that interest rate, what if any minimum guarantees there are and what is the current interest rate compared to the fixed account rate. So that is something to consider at a future date. When you take the money out over five years without a market value adjustment, now you are making employees move old money, directing new money, what are they earning, what type of service are you getting. So I know this Commissioners court in the past has talked about I don't want to tell completion that they have to move their money to another company. Again, it's been their voluntary contributions. But the key is that the market value adjustment and that's why we proposed, to be candid with you, we have given enhancements to this program. We were asking for a five year contract. We are basically agreeing to a one year contract. Because we want to keep the performance, we want you to hold our feet to the fire make sure that we become better and better in serving your employees. Over time as the assets have grown the fees have come down. In these negotiations with the committee with your consultant, they have challenged us to be better. We have not been bitter in the process. We have worked and focused on the employees and I think that's why we feel comfortable that we have a a great arrangement with minimum interruption for your employees and consistency and tangible benefits that when we take this story to the streets in our new marketing plan, education plan, they are going to come back and they are going to say this is -- this is wow factor. This is game changing, this is different and better. We will continue to be challenged by your committee to make our program better as the assets grow. And I think that's what we like is that we are going to -- we are going to report to you knowly what the market value adjustment and when it is 0. There are opportunities internally and externally for you all to consider whether it be a committee consultant or this court.
>> okay. Thank you.
>> that's kind of -- the highlight of my report. Once again I would encourage the court to respond favorably to the initial recommendation of the committee. To approve the contract. Or to approve these enhancements to -- to the existing arrangement. If you have any other question, I would be happy to -- to see if I can answer them.
>> questions? Should we plan to have you back on for action in a week or two weeks?
>> in a week.
>> are you planning to be here?
>> because this discussion reminded me of something that needs to be done before -- before -- I need to go back through the current contract and see about provisions that are in there that need to be included in this that haven't been, like the 20% pay out per year, fixed account.
>> we should have it back on.
>> yes, sir.
>> thank you very much.
>> okay.
>> and we have just two other items on b. I think that you have gotten the recommendation and then c, dan?
>> on item c, judge, Commissioners, the committee is very productive. One of the best committees that I have ever served o. What we are recommending since we are moving into a contract year is that the committee be designated as standing committee with oversight responsibilities of the 457 b plan. And also that we -- that we would require the services ongoing services for an expert in the 457, we are requesting that the contract with -- with the retirement store be extended on a year to year basis. What we would do is bring back to the court, when this comes back up in two weeks, a -- a program to outline how the committee would be structured, how -- how new members would be added to the committee, and what their charge would be for oversight purposes. So we would like to bring that back in two weeks when we bring the contract back.
>> I know this time around, that was something that nationwide agreed to pick up. What was is the presumption as to who would pick up that expense in the future.
>> the negotiations, I will let barbara explain.
>> in negotiations what nationwide agreed to is to give us $10,000 when this contract is signed in relation to the consultant fees. For each year that the contract is renewed or goes forward beyond that for five that would be picking up 5,000 of -- of what that consultant charges us now. That might be more than what the consultant charges us in one year, less in another. What's depending on how many services the consultant asked to provide us during a particular year.
>> we are in the -- in the throes of finishing up the negotiations getting the contract. One of the issues that we have discussed is the contract that is being developed now is a one-year contract. Not a year to year contract. Which means if it's a one year contract we would be probably be before the court in six months discussing an r.f.p. As opposed to a year to year contract which would be --
>> we could still do that with the year to year, too.
>> I need some clarification on that. Because I know that when we had given instructions to basically get us a new contract, I never thought that I heard instructions from a majority of the court to say bring back a one-year contract and let's start all over on this and dedicate all of the time and resources what it was going to take to do an r.f.p. Where did that instruction come from in the one year contract?
>> the committee recommended that.
>> well, I appreciate what the committee has recommended on a lot of things, but I don't believe that was the instructions given from this Commissioners court and I'm wondering why --
>> we will have that back on when we take action.
>> whether --
>> [multiple voices]
>> we will --
>> that's the court owe snow.
>> is this the committee the same as the employee benefits committee?
>> no, sir it's not. It's a separate committee.
>> let us know who is on there.
>> yes, sir, we can do that.
>> we will do that. Two weeks instead of one?
>> I believe so.
>> okay.
>> for specific items I think each ought to be listed give us a chance to land on it one way or the other.
>> if the will of the court is to go with a one year contract so be it. If the will of the court is to make it a renewable contract so be it. Whatever. But procurement processes are expensive and they are time consuming and I never thought that we would spend all of this time and energy and go great we are done for five months and we start all over again.
>> we will make and list go through them.
>> bob, we will take your item this afternoon. I don't think we ought to rush through it. If there's nothing to do, I think we ought to wait until next week. If we need to do something, I think we ought to take our time and do it. We could take it pretty close to 1:30, your afternoon payment is 2:15. If you get here safely at 1:40, we will get you out of here before 2:00, I know. That's probably better than trying to rush through it.
>> sure. 15 minutes would be adequate.
>> move that we recess to 1:30.
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Last Modified:
Wednesday, November 29, 2006 07:48 AM