Memorandum                                    

City of Lawrence

Human Resources

TO:	Tom Markus, City Manager Casey Toomay, Assistant City Manager
FROM:	Michelle Spreer, Benefits Specialist Lori Carnahan, Human Resources Manager
CC:	Diane Stoddard, Assistant City Manager Bryan Kidney, Finance Director
Date:	June 29, 2017
RE:	457 Deferred Compensation Plan

Executive Summary

A formal Request for Proposal (RFP) was issued on December 15, 2016 for administrative, recordkeeping and investment services with respect to the 457 Deferred Compensation Plan (457 Plan). Five companies were invited for an on-site interview: Transamerica, Nationwide, Mass Mutual, ICMA-RC and The Standard.

As more fully described below, in the interests of better meeting the City’s fiduciary duties and providing more comprehensive participant services, HR Staff recommends the City terminate its existing provider arrangement with Transamerica and establish a new arrangement with Nationwide.

Hays Financial

With the approval of Tom Markus on September 29, 2016, The City of Lawrence entered into an agreement with Hays Financial (Hays) to provide ongoing consulting services for the City’s 457 Deferred Compensation Plan (457 Plan). An interview panel selected Hays after holding on-site interviews of 4 different companies. Hays exceled in the employee communication and education piece and arrived to the interview prepared with suggestions on how we could improve the fund lineup in our plan. The annual fee for Hays is $44,000. The first years’ fee is being paid from our Expense Budget Account (EBA) with Transamerica. The EBA is an account to which Transamerica deposits the excess revenue sharing dollars they collect from the investment products used by our plan. After this account is depleted, the consulting fees will be built into the plan fees and paid for by the participant.

The first project for Hays was distributing the (RFP) for administrative, recordkeeping and investment services for the 457 Plan.

History

The 457 Deferred Compensation Plan was established in 1974 and later amended to comply with Section 457(b) of the Internal Revenue Code. The Plan is an optional, supplemental retirement program for full-time regular, part-time regular, and extraboard employees.  Upon enrollment, eligible employees defer income to participant accounts and invest account assets in the Plan’s fund portfolio.  The City sponsors the Plan but makes no matching contributions. Approximately 37% of eligible employees actively participate in the Plan through current payroll reduction contributions.  Current Plan assets exceed $25 million. See page 4 for detailed plan information.

Plan administration and recordkeeping have been provided by Transamerica (formerly Diversified) since July 2007. The current arrangement provides for a 0.44% asset-based administrative fee ($112,640 annually), which is charged against participant accounts.  Participants receive quarterly account statements, with access to their accounts either online or through a toll-free call center.  A Transamerica investment representative visits various City buildings upon request for scheduled meetings with individual employees but is not licensed to provide investment advice.

RFP Process

The RFP was sent to 13 vendors. Nine proposals were received, including a proposal from our incumbent, Transamerica. The proposals were evaluated by Hays based on administrative, recordkeeping and investment fund services criteria. Of those 9, HR staff selected five companies for an on-site interview: Transamerica, Nationwide, Mass Mutual, ICMA-RC and The Standard.

The companies were interviewed by HR Staff, Hays and a feedback panel which consisted of employees from multiple city departments, including Utilities, Planning & Development Services, Parks & Recreation and Fire Medical. HR staff, Hays and the feedback panel unanimously chose the top three in this order: Nationwide, Mass Mutual and ICMA-RC.

With the assistance of Hays and the input of the feedback panel, HR staff determined that, while not the lowest cost proposal, the most comprehensive service arrangement is available through Nationwide.  Factors supporting this determination include, but are not limited to, enhanced participant services/communications/education, company size and expertise in the 457(b) arena, open architecture of available funds and targeted strategies for increasing employee participation levels.  

See the comparison of the top three vendors on the next page. 

Nationwide	Mass Mutual	ICMA-RC
7,500 public sector plans	3,200 public sector plans	9,000 public sector plans
$65B in assets	$13B in assets	$48B in assets
Open architecture	Open architecture	Preferred pricing with 120 fund families – not open architecture
Guaranteed interest account 2.25%	Guaranteed interest account 3.45%	Guaranteed interest account 2.03%
Market value adjustment if plan leaves. No adjustment if employee terminates or for internal moves	No market value adjustment on guaranteed account	12 month 'put' (if plan leaves, cannot access funds for 12 months).  No adjustment if employee terminates or for internal moves
KPERS/KPF Fully integrated into website.  'My Interactive Retirement Planner' for participant - can build in spouses info as well	Map My Benefits - for employees, can link in other benefits online	Retirement readiness report for participant.
Nationwide knew that KPF did not contribute to SS (factored into website design)	Participants can bring KPERS statements. Educational specialist will manually load info into account	KPERS info not built into website. Educational specialist can help enter info into account.
Educational specialist out of KC area. 4 other clients. We would be their largest.	Educational specialist assigned to plan has 3 other clients. We would be his largest. KC area.	Education specialist in KC area. 30 other accounts but only one other account that does on-site visits
Education specialist can travel to each work location and can accommodate shift workers (early morning/late evening appts)	Education specialist can travel to each work location and can accommodate shift workers (early morning/late evening appts)	Education specialist can travel to each work location and can accommodate shift workers (early morning/late evening appts)
Additional 18 educational specialists over the phone that will be trained specifically on City's plan	80 educational specialists on staff that are trained in gov't plans. Not all local.	12 educational specialists across the country.
Call center open 6 days a week	Call center open 5 days a week	Contact center open 5 days a week
24 on-site educational days	Unlimited on-site educational days	12 on-site educational days
Appointment scheduler online - introduced a year ago. Traffic for educational sessions has more than doubled	$300 million spent on technology in last 10 years	Mobil access to enroll with 6 clicks
Account Manager has 18+ years working with public sector clients	Account Manager has 27 years’ experience with government clients	Account Manager has 24 yrs experience in public sector
2 business day black out period (weekend transition). Liquidate on Thursday by Monday can see funds/money (Transamerica blackout period unknown)	Up to 2 business weeks blackout for conversion (one week of that is cushion for unforeseen problems) (Transamerica blackout period unknown)	5 business day blackout period (Transamerica blackout period unknown)
Admin Fee .18% ($46,080)	Admin fee .18% ($46,080)	Admin Fee .115% ($29,440)

As illustrated below, employees have $2,051,343 invested in the Stable Value Fund (guaranteed interest account). Nationwide offers guaranteed interest of 2.25%. There is a market adjustment to this fund should the city cancel our contract with Nationwide. There is no market adjustment for employee terminations or internal changes (moving from Stable Value to Target Date fund, for example). 

Plan Participation Information

Eligible employees	800
Participants (current and former employees)	426
Active Participants (contributing employees)	344
% Eligible workforce actively participating	37%

Plan Asset Information

Asset Class	Balance	% of plan assets
Cash	$747,716.07	3%
Stable Value	$2,051,343.21	8%
US Equities	$16,667,582.58	62%
International Equities	$1,938,662.06	7%
Bonds	$4,460,735.01	17%
Target Date Funds	$992,637.40	4%
Total	$26,858,676.33	100%

Staff felt that while Mass Mutual and ICMA-RC had many similar strengths, Nationwide’s participant services including website and retirement readiness tools, particularly the ability to integrate the KPERS/KPF benefits was superior. Other notable strengths of Nationwide are the open architecture concept, number of educational days as well as the plan for transition. Staff was also concerned with the limitations of ICMA-RC’s 12 month ‘put’ on the Guaranteed Interest account. This ‘put’ means if the city decides to discontinue doing business with ICMA-RC, any participant with funds in that account would not have access to their money for 12 months. 

Action Requested

Staff requests approval to initiate termination of the current Plan provider arrangement with Transamerica and establishment of a new provider arrangement with Nationwide.  Upon receiving approval, staff will provide notice of termination to Transamerica, commence contract negotiations with Nationwide and initiate conversion activities with respect to a transfer of Plan assets to occur on or about 90 days from a final contract.