Travis County Commissioners Court
October 16, 2007
Item 22
Number 22 is to consider and take appropriate action on issues regarding nationwide retirement solutions, including but not limited to the following: a, time line for consultant and committee review of nationwide's performance. B, religious for renewal -- recommendation for renewal of contract ending December 11, 2007. And c, related issue for review by the oversight committee.
>> good afternoon, alicia perez, executive manager for administrative operations. Last week the court considered several of these items, and be I think we're back to talk about some of them also. And I have here today with me our financial consultant for 457 and also norman mccree that have been workogthis particular project and is our point person for now on this program. The 457 program, as some of you know, it's really referring to the internal revenue code 457. It is a means by which public employees can defer as a savings plan their account pretax into a saving account when they leave or retire their employment with, say, Travis County, they have access to the funds. If they don't leave, then there are certain other requirements that they must meet in order to not experience a penalty. We have been with -- it used to be pepsco, now it's nationwide retirement solution. We had a contract with them and naco, national association of counties, and that was in 1980 when we went into that particular contract. The law establishing 457 was passed in the late '70 be's '70's and we were part of pushing for that legislation and have been a part of naco. Naco negotiated with pepsco and then with nationwide. They did provide us information that they had competitively -- had proposals that were competitive and they had decided on nationwide. As of -- since 2004-2005 we've been bringing this issue, have researched it thoroughly to the court. In January, December of last year and in January of 2007 we asked for -- court approved a committee of employees to oversee this particular program and come back to recommendations -- with recommendations to the court, much like we do health care benefits, a committee that's worked out very well. In March we asked for nominations. Right about that time we're getting ready for health care, life insurance, the other benefits. So this was the first time after we've adopted the budget that we bring this issue back to you. Last week you actually approved the nominations of the committee and this week we are here to talk about a schedule. And other issues and answer any questions which you may have. You have in your backup a schedule that talks about meetings by the deferred comp oversight committee and then coming to the court -- back to the court the 20 or the 27th on the extension of the contract to nationwide and pros and cons of issuing an r.f.p., pros or cons of one or more plan administrators. And then in January coming back to the court also with further recommendations. And then if the court would wish to go out for an r.f.p., then we would start working on it and have it ready in February or March. What -- it was never our intention --
>> but as far as the r.f.p. Timing, right now we're looking -- it's really going to go beyond the contractual situation that we have with nationwide currently.
>> yes.
>> and -- but anyway, go ahead.
>> last time the court asked us to negotiate with nationwide, and on November the 28th of '06 we came with the recommendation to the court that would have considered development of an r.f.p. What the court's direction was is for us to negotiate with nationwide and get the best deal possible. We then did that, brought that back and they made several concessions and um improvements. We reduced the plan expenses. The administrative fees were eliminated. We improved the investment menu. We have now the services of a representative on site on a weekly basis. We have the services of a cfp, certified financial planner for employees. We made fees that were transparent on the summary that goes out to employees where before they didn't list the actual fees for each of the funds, now the expense ratio is indeed listed. We had previously included the loan provision that was not originally in the plan. And nationwide also agreed to pay $10,000 the first year and $5,000 the subsequent year to offset county administrative costs for a financial advisor, consultant. So we negotiated good provisions, what we felt were good provisions with nationwide. The question would remain are they the best? And the committee would say we don't know until probably the best way to find that out is if you go ahead and complete the service. The thought of the committee and your staff was to put the committee together and have them get some education, go over the performance of nationwide for the last year, list the pros and cons of going out on an r.f.p. And then reporting back to the court for you to decide whether you want to actually develop a proposal. But to renew the contract with nationwide for one more year because it's going to take about that long to put together the r.f.p., to do the selection, to get the employees educated and then also to do the transition. If you went with another provider, do the transition from nationwide into another provider or if you went with two providers to look at what the cost and how you would transition then to the new provider. So it will take about that long. We've consulted with al and I think we're in agreement that probably if we look at December to renew the contract with nationwide and then if the court decides to go -- to develop an r.f.p., then we do that with plenty of time.
>> I guess what I'm hearing, I guess, but right now I know we're under the time line to, as you stated, in December to move forward and go ahead and renew the contract itself, probably pending an r.f.p. But one of my concerns, though, as far as the r.f.p. Is concerned, when it gets out, there has to be, I guess, a basis -- baseline of what we expect all the other participating parties to offer as far as in the confines of our fee. One thing I do not want to see is we end up getting less than what we have now. So I'm kind of concerned about that. The development r.f.p., what we've already dealt with as far as what we already have on the table, but in addition to that to make things better than what we have, if it's possible. I don't know if anybody is able to meet the demands that we're requesting. I don't really know. We haven't gone out yet to determine that. But there has been some things that have been negotiated and worked out as far as what we have now. On some of the concerns that we heard from folks earlier, but at the end of the day, I think I'm still concerned at the development of that r.f.p. And then what are the real catching and required components that I think need to be part of the r.f.p. To not go back within the situation, but forward where we can benefit the employees. So that's basically where I'm coming from to make sure that happens.
>> absolutely. And you're right that we would develop a baseline where any proposal would be -- we came, developed the r.f.p. And came with a recommendation to the court that whatever was brought forward would be better, a better deal than what we have now. And there are several quantitative and qualitative factors that we would look at for all proposals. This particular fund is attractive and I think it will garner a lot of interest. And just to give you an example, from 2005 -- this is all employees funds. We had 23,569,000. In '06 that jumped to 26,469,000. And in '07 we have $31,612,000 in the fund. 31,612,000. So it has been growing very steadily and so therefore it becomes a very attractive fund for anyone to manage. As our funds have grown, so have the investments in mutual funds. We started off in '05, it was about 50/50. I think 45% in fixed account, 55% in the variable account, the mutual and bonds. In '06 that changed to 43% in the fixed account and 57% in the variable account. Today we have 37% in fixed accounts and 63% in the variable accounts. So you see we believe that through edge case and more involvement -- through education and more involvement in the work sessions and the one on one sessions that have been provided to nationwide that individuals are willing and becoming more educated about investments and are being able to take advantage of a good market when it is good.
>> in terms of the committee and working backwards from December 11th, 2008 date, the r.f.p. -- last week we discuss that the r.f.p. Process would probably take six months. I'm wondering -- one of the bullet points for the deferred compensation committee time line is the pros and cons for issuing an r.f.p. For a plan administrator, has that task essentially already been accomplished or is there more to do in developing the pros and cons list of issuing an r.f.p.?
>> there's more to do. The committee that you approved last week has new members. And so we would have to work with that particular membership, look at the performance of nationwide in their last year and then develop -- work with al and develop the pros and cons, frarnl, of having two providers, of having an exclusive provider and of issuing or not issuing an r.f.p.
>> but the issuing or not issuing an r.f.p. Would simply be revisiting the previous deferred compensation committee's religious to go ahead and issue one -- committee's recommendation to go ahead and issue one.
>> if we need to revisit those issues, retest them in the light of today's facts. I'm not saying you won't reach the same conclusion, but the facts have changed a little bit.
>> I'm trying to determine whether it's a matter of whether or not to issue an r.f.p. Or whether it's actually a matter of what kind of r.f.p.
>> I feel very strongly that the first step in providing education to the committee is making sure they understand their fiduciary responsibility both to the court and to the employees who participate in this plan. And while I'd like to think what prior committee's recommendations were, this group may come up with a completely different assessment, but until you understand what your responsibilities are as a fiduciary and until you understand what the dynamics are that really affect programs like this one way or the other, I just don't think you're able to do your job adequately.
>> as far as a time line, should this -- should this committee make a determination that an r.f.p. Is appropriate, by when does that decision have to be made in order to effectively consider in advance of the December 11th, 2008? We're currently in a circumstance where we will undoubtedly renew our contract because we don't have the feet on the ground to run with an r.f.p. So what is the time frame by which we would have --
>> I think by February of 2008 is the recommendation to the court. And go from there.
>> in anticipation of that very question, Commissioner eckhardt, we developed a tentative time line for -- what we did is we worked backwards because there will be a certain anlt of time to where if you go with the different vendor, we will be educating employees and then having the mapping or the switching from nationwide to another vendor, if indeed that's the way that it happens. Nationwide can -- if nationwide is selected, then you don't need that time.
>> hold on. How can we make that conclusion that we may end up with just one vendor? I still am not sold on the idea that there may be a possibility to have two vendors serving Travis County. I really don't know all the dynamics yet to say why we can't have it that way. If it comes down that, I keep hearing one, one, one, one, but it may be multiple. I don't really know. I do not know the answer to that question. And we may just end up with one, but those folks that may be satisfied with what nationwide is doing for them, my god, I think they ought to have the right to stay with them, in my opinion. And of course, by the same token, those folks that are displeased or not satisfied with nationwide, maybe there's somebody that can offer something that nationwide is not offering. I don't really know because the r.f.p. Has not been issued. There's a whole lot of loosens in this thing. I'm just -- I still don't have an answer to a lot of my questions.
>> we agree. And that's what would be brought back to you in February, the pros and cons of issuing an r.f.p. Or not to issue. Of having multiple providers or having an exclusive provider, those sorts of things would be discussed within the committee and recommendations brought back to you with a final decision from the court.
>> I had a couple other questions just because I'm -- I figure since I have you all here that I might look for some info. I was intrigued by the idea the market value adjustment and I was wondering if that's industry standard or if it -- if that was something that we would anticipate being in any contract or if that was unusual to this contract?
>> market value adjustment is typically normal in an insurance company fixed account product. It is not necessarily normal in other types of products that provide the fixed account investment piece in a plan like this. But even though it's normal, the variable is that the formula differs considerably as you go from company to company. Nationwide has a fairly strange formula, and it's considered pretty oppressive by the industry, although just because of what the financial markets have done of late, all of the market -- if you were to trigger a market value or adjustment today, they all appear to be pretty oppressive. So the answer to your question in a nutshell is yes, they are normal, but could you negotiate them away? And the answer to that is yes, be you could.
>> and because I'm new to this and I'm just learning how market value adjustment works, it's essentially only applies to the 60 counts and it is almost like a prenuptial agreement. If you divorce your fixed accounts, you as an employee pay a fairly hefty penalty. Well, you as an employee pay a pretty hefty penalty if the county divorces that account.
>> I'd liken it to the early withdrawal of a cd from your bank. Have you a two-year cd, you take it out a year early, the book has to come up with the noun pay you. They're going to penalize you for that early withdrawal. And that same principle applies to an insurance company fixed account. But typically the employee is not hurt by that. It's the assessment is on a county wide basis and what would normally happen is that if the account be were moved to a different administrator, that administrator would pay the charge and then build it into their cost of doing business. That gets back to what Commissioner Davis was talking about before as far as can you get a better deal? Is what you're getting in the marketplace better than what we have today? And obviously paying off a market value adjustment become a significant criteria in assessing that issue.
>> so that's good news. If just hypothetically there was, say, a 300,000-dollar market adjustment penalty, you could negotiate with your new provider to absorb that in their operating costs? I'm just rephrasing what you said.
>> they would write write a check to nationwide, move all the assets and you would be done with it. Another alternative with the nationwide contract is actually rather than writing the check for a market value adjustment, moving the fixed account assets over to a new provider at 20 percent a year over a five-year period of time where you don't pay any market value adjustment, but the money -- you still pretty much have multiple administrators for a five-year period of time. No new money goes to nationwide, but the existing money goes over to a new plan at 20% a year.
>> and would that new plan also be the fixed account variety or of the mutual -- variable mutual funds vairt?
>> you would have mutual funds. You need a fixed option, whether that's an insurance company's general account for stable value fund, the new administrator would have one or the other.
>> I see.
>> the one thing we want to make sure with a new administrator is that you never have to deal with a market value adjustment or any type of exit penalty again.
>> that's good. That would be good news. Also, I understand that -- I'm trying to understand some of the options that are available. Is there a penalty for rolling your 457 over to an ira in our current contract in.
>> no, ma'am.
>> there isn't? Okay.
>>
>> [inaudible - no mic].
>> I see, be okay. After you've left Travis County, irrespective of how many years you have in service with Travis County, you can roll it to an ira without penalty.
>> yes, ma'am.
>> but if you are currently an employee, there is a penalty based on the number be of years you've been in the plan.
>> no.
>> you constant do anything with -- you can't do anything with it. It has to stay where it is. If you say that you're roll ing it without penalty, that may -- there might be some people who would disagree and they might be called nitpickers, but basically the characteristics that relate to 457 plans and what you can and can't do with them are different than the characteristics that relate to a 401 k. And to the extent that you might see the difference in those characteristics as a penalty of moving it, then yes, you might incur a penalty in the sense that new rules apply to the money.
>> that aren't as advantageous as the old rules and therefore are considered a penalty. Okay.
>> it's one of those nitpicking (indiscernible).
>> [ laughter ]
>> I got caught on this thing once before saying you could do it without penalty and somebody said no, no. And I said wait a minute. Let's not be getting people out there thinking that --
>> I understand.
>> that it's exactly the same to have it one in the other. Different rules apply to the different accounts.
>> is the 457 plan the only way to invest your pretax salary? I understand there's some way you can split the baby with the schwab account.
>> that becomes all part of the 457.
>> that's part of the 457?
>> and again the i.r.s. Code that allows for public entities to be able to defer pretax. I'm not aware of any other program.
>> so can you sort of ad hoc expand your --
>> there are some public employers, for example, the state of Texas and the city of dallas, who have grandfathered 401 k plans that were in case before the law change understand 1986. But if you didn't have it in place by then, 457 is all you can do.
>> are there ways to expand your investment options inside the 457 rubric at the county by utilizing the schwab account through nationwide? Or are you confined to the nationwide menu?
>> we had discussed that component the last time around. It's called a self directed brokerage option. And it would allow employees to go into an outlet like schwab and basically buy any fund that they wanted to buy with their 457 money. And if the county were to go out to bid, it's something we would consider the next time around or even if they didn't go out to bid, it's something we should probably consider.
>> we could implement it now, but we found the fees on that, $50 a grade, I think, were kind of expensive.
>> somewhere in all of this we look at maybe diversifying -- as far as whoever is looking at trying to get some of the county's a little more than $31 million as of today as far as investment opportunities, it would have to be somewhere along the line where something does not become profitable to that particular carrier. My question if we're going to look at multideals in this, how would that decision be made whereby you may have maybe three interested parties in this r.f.p. That nt part of the business and you may have one? I don't know how many you end up with, but somewhere along the line there has to be a cutoff point. I guess they make that determination, I guess, those people that are putting in for it and how this thing would actually pan out. I guess my question is how is that determined?
>> that's an interesting question because you could structure an r.f.p. To actually require that a proposer bid on two different scenarios. Scenario 1 being an ex-be anexclusive provider in the county. And my experience is when you ask for the nampls way, the exclusive provider relationship becomes compelling. The numbers change so dramatically that it's almost incomprehensible.
>> the numbers change?
>> expense wise, investmentwise, everything changes dramatically.
>> okay. Strictly in the exclusive type setting more so than the other provider.
>> yes. And Commissioner, using banks as an example, if you opened a thousand dollar savings account at frost bank and they paid you 2.8%, it's probably a lot different than if you had $100,000 to invest at frost bank. You're probably going to get a better rate of return. And it goes back to the whole leverage concept when you have $31 million that you're bargaining with with a single provider, you're going to get a better deal than if you try and drop that stuff all over. But we could structure the proposal -- structure the r.f.p. Any way you want to make sure that the court is confident and comfortable with the outcome.
>> I fully understand and it makes a lot of sense, but it does seem like the larger the amount of money that have you to invest, the better return you're going to get. And if you separate it and go and put little amounts here and there, whether it's through this 457 or whether you just go out in the market and take a risk.
>> the concept of leverage in this business is extraordinary. It really is. I don't want to oversell it. It's hard to undersell it too. It really makes a big, big difference.
>> in regard to that, is there any thumbnail -- I appreciate that it's unlikely to be able to get a fund administrator to tell you what a contract is worth to them because of all the additional relationships regarding mutual funds and annuities and whatnot, but is there a thumbnail for knowing roughly how much these contracts are worth to those who are bidding on them?
>> yes.
>> and?
>> we used to go through -- I've spent 28 years on the provider side of the business and prior to doing any bid we'd put together a balance sheet on what our income stream would be, how much money we'd make off of that, what our expenses were. So they can get it pretty close to the exact penny. And over an extended contract term of five, six or seven years they can pretty much tell you what it's worth to them and what they're willing to spend to secure that.
>> is it realistic to ask a provider what it's worth to them?
>> absolutely.
>> and have we ascertain that had from nationwide?
>> we did on the mutual fund side. The problem is on their fixed account, which is a general account product, they don't disclose expenses. So you have to kind of estimate what their expenses are. But they did disclose what their revenue streams were to us on each one of the mutual funds that are currently in the plan.
>> and on the fixed, is that because it's similar to a trade secret as to how thaish they're structuring it?
>> yes. In general if there's really no account, it's a promise of nationwide to pay and all of the assets are co-mingled in nationwide life insurance. It's a kind of difficult concept to get your arms around. But yes, it boils down to proprietary trade secret for them.
>> just in terms of the committee's work in their time frame, is there a possibility of an extension of nationwide's contract without a full year's renewal, or is that even something to explore?
>> you know, personally my job is to be objective as possible and to not lead people into a particular direction. I think people will come up with the right decision if they're given the right information.
>> nationwide may come out in an r.f.p. Being far and away the best of the providers. I'm not saying that. I'm just trying to speed up the -- if useful, to speed up the process for us to get the information to make the most informed choice.
>> based on what happened in relation to our negotiation the last time, we were moving from one plan design to another with the same provider, so we weren't even dealing with two providers. Even with that kind of a situation where we were talking about the exact same people doing it and we were just changing the plan design, we could not implement that in less than three months. If you figure between three to six months to prepare an r.f.p. And to evaluate it and to select another provider and to negotiate a contract, and then you figure another at least three months and it may be more like four or five months when you've got two providers trying to -- the word they use, migrate the funds from one plan to another, you're going to end one it being one or two months that you'd be short of the full year if you didn't extend the nationwide contract.
>> okay. So best case scenario we're looking at nine months anyway. So a year's extension.
>> I'm not saying that I have feelings one way or the other about whether that's the best thing to do. I just think that that's the practical ramifications of all your choices.
>> okay.
>> the city of plano migrated to a single vendor. That plan is a little over $50 million and it took them over 120 days to accomplish that. Typically I think 120 days is a good rule of thumb. You could probably force snob do it in 90.
>> and why did they go from three to one?
>> the whole leverage deal. It was a much better deal than what they currently had, much, much better.
>> and of course it remains -- you're able to maintain market competition through an exclusive provider relationship if you do put it out for competitive bid on some sort of scheduled basis. And what is that recommended scheduled basis?
>> typically I recommend five years. I think the industry changes -- it will change so much in five years you won't even be able to recognize it. And it gives a provider a good opportunity to get established and get people excited about the program and do the right type of job. Anything less than five years I think you have a lot of problems attracting interest from the industry. And anything more than that, then I think you put yourself in a difficult -- you compromise --
>> you go (indiscernible).
>> so the oversight committee will look at all these issues?
>> that's what we plan to do.
>> and bring us a report and recommendations?
>> yes.
>> probably try to meet with us separately before the open court discussion?
>> yes.
>> Commissioner Daugherty, then Commissioner Gomez?
>> judge, I would just hope that we don't find ourselves in the same spot that we did last year, which I don't think there's anyone that questions that we are better off with one provider. I mean, that's a no brainer. But where we got boxed in last year, and I hope that we don't go there this year, is that there were some people that you weren't going to move them away from nationwide regardless. You just weren't going to move them. I don't know for what reason. Because there certainly were enough questions that were asked that made some people pretty uncomfortable. So I would hope whenever February rolls around that we are not back at that spot because if that's the case, then it's a keep your provider that you got. You go and get comfortable with just hammering away with that provider. And there's nobody -- there are probably very few people who think we don't have a better deal from a fee standpoint because that was really the thing that became glaringly clear last year is that once people really found out what had happened with the fees and when you don't look at something for 25 years, guess what? Somebody says do you know what, they don't look at the fees. And that's exactly what happened. And now we looked at the fees and nationwide has gotten right with the fees. But there are concern -- and I don't know, susan. Are you comfortable with giving what you gave us to al, to our consultant? Just to see? Because there are legitimate points that need to be made. And al is going to know exactly where people are coming from whenever he starts reading these kind of, here are real life examples of questions that I have. So do you mind him getting a copy that have?
>> and thanks to the -- (indiscernible).
>> I appreciate the fact that she took the time. People complain, but they don't really take the time, and some of the -- it one person's opinion and there may be others that think differently. But I think one of the things no nart what we decide to do or the best thing, I think one thing is certain, and that is there wasn't enough communication with the employees that were in these plans. I know even in my own office, even though we had people on the committee, people were stunned that they were being put into other funds. They were very surprised and not pleasantly. So some of that might just have been a communication, that people were taken aback by that.
>> and some of that may have been a positive thing. We'd have to look at the particular funds because we wanted funds that were comparable, but not as expensive.
>> we'll look at these issues and figure out what's working well and what's not. And if something's not working well and there's a better way to do it, we need to see what the recommendation is. And I guess -- so we have known that there were issues out there, it's just the time has come for us to surface them, have the committee research, discuss, get consultants' expert advice, put a document together that hopefully shows all of them and has recommendations in it and baifng basically we respond to t.
>> I think we need to get that out to the employees that have invested. We always assume, and I make the mistake myself, if I'm down here talking to y'all that my employees know what's going on, be and they don't. They're not watching television, they're doing their job.
>> what!!?? They're not watching the hit show on channel 17!!??
>> we need to do a better job be of getting the people whose money is involved in the decision.
>> okay. The committee will do its work and submit a report to the Commissioners court in January.
>> February.
>> between now and then, have the reports ready hopefully by January.
>> the goal is February. Bring it back for court recommendation in February. Make sure we have time to get all our ducks in a row. We'll be meeting in January to finalize our recommendations.
>> but the recommendation that you're talking about is here's how we need to move forward. And that might be -- the recommendation might be that we are going to put out, we truly are going to put out an r.f.p. And that recommendation may come back that, guess what, we're not going to put out an r.f.p.
>> also an investment policy and the role of the committee and all those kinds of things we would put in that document and so everyone's aware and get recommendations from the court on what we'll do next and how we'll proceed.
>> so you need us to approve the new deferred compensation time line.
>> yes, sir.
>> plus the r.f.p. Time line. These are separate, right?
>> yes, sir. The r.f.p. Time line is tentative. I've not shared this with purchasing or with the committee. What we did is we worked backwards from December of '08 and said how long would we need to have for each of these issues? So what we need is just the approval of the committee's time line.
>> we've got months and years, so if we -- if we're a few weeks early, fine. If we're a week or two late, it should still fall within the same month. It should be pretty close.
>> I'll second that. And in addition to that, I just kind of wanted to say Commissioner Daugherty, don't be surprised if I'm one of those that will say, I don't want any change. Mainly because I'm just not a gambler, y'all. And you kind of know that this is one of those kinds of savings accounts that you put money away and you never see it, so you don't miss it. And so that's just the way it works for me. And as long as I don't get charjtd too many fees -- as long as I don't get charged too many fees and I know it's growing a little at a time, it's growing faster than if I take some and go gamble, take agriculture real risk that I'm going to get a quick return. It just doesn't work that way for me. It may work that way for some other folks. I want a sure thing.
>> then you're in the wrong business. These aren't sure things.
>> I know. But this is sure. This is the way it's working for me, it's growing a little bit at a time and I'm not losing anything.
>> there's a motion and a second to approve both of these time lines.
>> [overlapping speakers]. All in favor? That passes by unanimous vote. Y'all get enough direction from us? Add today's comment to last week's comments.
>> [ laughter ]
>> thank y'all.
>> we did not put a court member on the committee, did we, and that was my choice? That sounds fine to me.
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Last Modified:
Wednesday, October 17, 2007, 18:30 AM