HomeMy WebLinkAbout10.F.1. Change to Deferred Compensation Providers 10.-F: 1
City of Shakopee
Memorandum
TO: Mayor and City Council
Mark McNeill, City Administrator
FROM: Kris Wilson, Assistant City Administrator
SUBJECT: Change to Deferred Compensation Providers
DATE: July 13, 2012
Action Sought
A motion to offer the Minnesota Deferred Compensation Plan to all benefits - eligible employees
and to discontinue offering and transfer all account balances from accounts with Nationwide
Retirement Solutions.
A motion to offer both pre -tax and post -tax deferred compensation plans to all benefits - eligible
employees.
Introduction
The Council is asked to authorize multiple changes to the City's deferred compensation benefit
offerings.
Background
The City currently provides all benefits- eligible employees with the opportunity to participate in
a deferred compensation plan. Similar to a 401k in the private sector, a deferred comp plan, or
"457 plan" as they are known by the tax code, provides a tax- favored means of saving for
retirement. Deferred compensation is an optional benefit for those employees that wish to save
more for retirement than just what is going into their pension. Unlike our employee pensions,
which have an employer contribution as prescribed by state law, there is no City contribution to
employees' deferred compensation plans.
Currently the City offers deferred compensation plans from two providers — Nationwide and
ICMA -RC. A total of 82 employees are currently contributing to an account established with
one or the other. We also have accounts for former employees that are no longer contributing
but have yet to draw down their entire balance.
I began investigating a possible change to our deferred comp providers late last year for three
reasons:
1) Multiple instances of employees reporting poor and outright rude customer service when
interacting with Nationwide.
2) An onslaught of change notices and requests for employer approval to make changes to
our Nationwide plan documents. We outsource management of this benefit for several
reasons, including the fact that we do not have the time or expertise in -house to manage a
retirement plan. Yet the plan management that has been required continues to increase.
3) I became aware that the City is required to offer the Minnesota Deferred Compensation
Plan managed by the Minnesota State Retirement System (MSRS) if any eligible
employee requests it. I was aware of the fact that many other cities offer the MSRS plan,
but did not know until last fall that we would be required to do so if anyone asked. To
date no employee has requested this plan, but given the requirement, it seems wise to
look into it proactively rather than having to be reactive in the future.
Following the rise of the above issues, we decided it was also time to compare the fees our
employees are paying with our current providers to those charged by competing deferred comp
providers. The two existing providers have been in place for many years and had not been
evaluated for at least the past seven years. We worked with the retirement division of Financial
Concepts, Inc. (FCI) to conduct this review. FCI's insurance division serves as our broker of
record and advises us on our employee insurance benefits, such as medical and dental insurance,
making their retirement division a logical choice to advise us on this project.
The results of FCI's comparison found that the fees charged by Nationwide are higher than any
of the 6 other plans we gathered proposals from. ICMA -RC was also found to be above average
in the fees charged, but expressed a willingness to lower our current fees based on the results of
our comparison.
All plan fees are deducted from the individual employees' accounts and can vary depending on
the investment options selected, but the following is a comparison of the average cost in fees as a
percent of the account balance.
PLAN COST as a
of ASSET
Current Nationwide 1.60%
ICMA -RC 1.49%
VALIC 1.15%
ICMA -RC 1.04%
Proposed MetLife 0.91%
Principal 0.83%
MSRS 0.32%
In addition to our work with FCI, the City was also approached by a local financial advisor
interested in submitting a proposal for managing the City's deferred comp plans. While this
would have kept the City's business local, the proposal came in at an average cost of 1.12% for
20 investment options from the Principal line -up considered above as part of the FCI analysis.
Additionally, our employee group is significantly larger than any group this financial advisor has
had experience with.
Employee Input
In recent weeks, all benefits- eligible employees were surveyed to gather input on the factors
most important to them in the selection of a deferred compensation plan. The results of this
survey are attached for your information. Overall, the historical performance of investment
options was listed as the most important factor by 33% of survey respondents, followed by range
of investment choices and fees charged. 67% of employees responded that they would prefer to
have their deferred compensation managed by an entity experienced with public- section deferred
compensation, while 26% responded that they would prefer a large national company with a
range of conveniences, and 7% preferred to go with a local option.
Recommendation
Based on all of the information collected, it is my recommendation that the City discontinue its
deferred compensation plan with Nationwide Retirement Services and instead offer the plan
managed by the Minnesota State Retirement System (MSRS). The MSRS plan is one we are
required to offer if asked and has the lowest available fees. While MSRS has a relatively small
range of 11 investment options for those wishing to select their own breakdown, they are high
quality options. There are also target date investment options which automatically adjust your
portfolio as you approach a designated retirement age. Decisions as to which funds are available
in the plan are made by the Minnesota State Board of Investments.
Secondly, I would recommend that the City continue to offer the ICMA -RC deferred
compensation plan at the new, lower rate offered. This will provide a large plan option for those
employees that desire numerous investment options. Both plans will provide us with a
representative who will come out quarterly to meet one on one with employees who have
questions, however, the ICMA -RC representative is able to provide more comprehensive
financial planning advice, whereas the MSRS representative can provide guidance only on 457
plans.
Lastly, along with this change, I recommend that the City start offering employees their choice
of the traditional pre -tax 457 plan or the newer after -tax Roth 457 plans that have become
available in the past year. The after -tax plan may be beneficial to some employees who have a
lower tax rate currently but anticipate their tax rate rising in the future. Both ICMA and MSRS
offer traditional and Roth plans for our employees to choose from.
If approved by Council, the transition to the City's new offerings would take place as soon as
administratively practical — likely between now and September 30. Employees that currently
have a Nationwide Account would be given their choice of transferring to either of the two new
offerings, with assistance in completing the necessary paperwork and all funds transferred
directly from one plan to the other so as not to impose any tax penalties on the account holder.
The ICMA -RC plan would be established as the City's default plan for those employees that do
not make a selection between the new offerings, as it is the closest in size and structure to the
Nationwide plan they are currently in.
Informational meetings will be held for all interested employees and we will reach out to our past
employees to help them understand the transition and their options as well.
NOTE: The City's paid -on -call firefighters currently have what are known as "OBRA" accounts
managed by Nationwide. This action does not impact those accounts, which would remain with
Nationwide for the time being. A change to the plan manager for these accounts may be
considered in the future once the transfer is complete for the 457 accounts of full -time
employees.
Budget Impact
As only employees' money goes into the deferred compensation plans; there is no notable budget
impact for the City — only the staff time to oversee the transition.
Relationship to Vision
A quality package of employee benefits contributes to Goal E: Deliver effective and efficient
public services by a staff of well- trained, caring and professional employees.
Requested Action
If the Council concurs, it is asked to offer a motion to authorize the offering of the Minnesota
Deferred Compensation Plan to all benefits - eligible employees, to discontinue the plan currently
offered through Nationwide and to transfer all current Nationwide accounts to one of the City's
new or remaining providers.
Additionally, the Council is asked to offer a motion to authorize the offering of both pre -tax and
after -tax deferred compensation plans for benefits- eligible employees.
4 r Ak
41 is Wilson
Assistant City Administrator
Deferred Compensation SurveyMonkey
1. Do you currently have a deferred compensation plan through the City? (All benefits - eligible employees are invited to
complete the survey, regardless of whether or not you currently participate in a deferred comp plan.)
Response Response
Percent Count
Yes I 1 95.2% 40
No [ I 4.8% 2
answered question 42
skipped question 1
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2. I am currently ... .
Response Response
Percent Count
Less than 2 years away from o
retirement ( I 4.7 /0 2
3 to 5 years away from retirement 1, 1 20.9% 9
6 to 10 years away from retirement 1 1 18.6% 8
More than 10 years away from o
. �..• .._.nr� 55.8/0 24
retirement
answered question 43
skipped question 0
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3. The most important factor in the selection of a deferred comp provider should be:
Response Response
Percent Count
Fees charged I- -- ) 14.3% 6
Range of investment options 23.8% 10
Historical performance of
, ...... 33.3% 14
investment options
Usability of website for monitoring
account and managing investments ( 9.5% 4
Accessibility of an identified
account representative to answer
19.0% 8
questions, establish new accounts,
provide investment advice, etc.
answered question 42
skipped question 1
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4. While not the most important factor, the following are at least somewhat important to me:
Response Response
Percent Count
Fees charged I 60.5% 26
Range of investment options ( 48.8% 21
Historical erformance of
p 60.5% 26
investment options
Usability of website for monitoring
34.9% 15
account and managing investments
Accessibility of an identified
account representative to answer o
27.9 /0 12
questions, establish new accounts,
provide investment advice, etc.
answered question 43
skipped question 0
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5. Which of the following statements best reflects your opinion:
Response Response
Percent Count
It is important for the City to
offer two or more deferred
compensation plans so that 1 1 69.8% 30
employees have a choice of
providers.
I don't want to have to compare
and choose between multiple plans.
I would rather have the City
30.2% 13
research options and offer just one
plan that is determined to be the
best available.
answered question 43
skipped question 0
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6. I would prefer to have my deferred compensation plan managed by:
Response Response
Percent Count
A local investment advisor. 1 7.1% 3
An entity experienced with
deferred compensation for ( ,.m — 66.7% 28
public sector employees.
A large, national organization with
extensive tools, 24/7 phone 1.. „. ,- .... 1 26.2% 11
support, etc.
answered question 42
skipped question 1
7. I would like to offer the following feedback regarding the City's current deferred compensation plans or plan providers
(Nationwide and ICMA -RC).
Response
Count
19
answered question 19
skipped question 24
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Q7. I would like to offer the following feedback regarding the City's current deferred compensation plans or plan providers (Nationwide and ICMA -RC).
1 I have no experience with Nationwide. I have liked ICMA -RC, and would like to keep it in the mix. Jul 2, 2012 12:23 PM
2 I like Nationwide Jul 2, 2012 8:45 AM
3 The Nationwide Plan has been good for me. Jun 28, 2012 8:30 AM
4 I believe the ability to have two companies for investment opportunities is important and needed. Jun 27, 2012 8:13 PM
5 Have always liked what I have received from Nationwide. Would hate to lose them. Jun 27, 2012 11:38 AM
6 I find this approach interesting since I recently just changed my investment plan managers due to less fees. Jun 27, 2012 9:04 AM
7 Nationwide is very impersonal Jun 26, 2012 4:08 PM
8 Some 457's let you borrow against them for college and other situations...this would be an important consideration for Jun 26, 2012 12:58 PM
me. I would also like to have some after tax investment options...I thought this became a new option for city's recently.
9 Not happy at all with Nationwide, I have received little to no help from our representative when I needed someone to help Jun 26, 2012 9:14 AM
with a claim for unforeseen emergency. When I checked with employees who have ICMA and they had to request
something similar ICMA helped them and had their check to them within a short period of time thereby backing up their
statement that you could pull investments for unforeseen emergencies.
10 Not satisfied with current Nationwide rep. - unable to get a hold of him and does not return emails or calls, and takes a long Jun 26, 2012 8:28 AM
time to make changes to investments as directed.
11 I've been happy with ICMA thus far. I have not met with a rep of Nationwide or ICMA when they visit, but I plan to meet Jun 26, 2012 8:26 AM
with the ICMA rep in the future.
12 If we can rollover our other plans I'm all for it. Jun 26, 2012 8:15 AM
13 ICMA has provided excellent service, portability and experienced staff that is available to answer questions and deal with Jun 26, 2012 8:03 AM
unique "life situations"
14 I prefer to stay with Nationwide. Jun 26, 2012 7:02 AM
15 Its working just fine. Its not broken. Jun 26, 2012 6:28 AM
16 n /a. Jun 25, 2012 11:45 PM
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Q7. I would like to offer the following feedback regarding the City's current deferred compensation plans or plan providers (Nationwide and ICMA -RC).
17 currently with Nationwide and I feel that switching companies would not be worth the effort. There is currently no problem Jun 25, 2012 10:48 PM
with them, so why switch. Risk vs reward says stay with what we have.
18 nationwide has high management fees and their performanace of funds is not that great. Jun 25, 2012 9:42 PM
19 local doesn't mean better. would rather have a larger company with experience than choose a company just because Jun 25, 2012 9:07 PM
they are in shakopee.
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