Investment Management Subcommittee of the
Retirement Plan Advisory Committee
August 23-24, 2012
A meeting of the Investment Management Subcommittee of the NSHE Retirement Plan Advisory Committee was held on August 23 and 24, 2012 at the Las Vegas NSHE System Administration Office.
Present: Kent Ervin, Chair; Michelle Kelley; and Pat La Putt
Also Present: George Dombroski (NSHE), Carla Henson (NSHE), Dan Pawlisch (Hewitt EnnisKnupp) and Ruth Schau (AON Hewitt)
August 23, 2012
The meeting was called to order at 9:00 am.
Dan Pawlisch provided an overview of the capital markets in the second quarter of 2012.
Pawlisch provided a detailed review of the performance of the investment funds during the second quarter of 2012. The Committee asked Dombroski to provide HEK with older asset trend data (p. 3), that the overall top ten funds table (p. 4) be changed to the top 20 to capture some non-TIAA-CREF funds, and suggested that future review/watch lists differentiate between market benchmark and peer group underperformance. The committee asked that participant numbers and cash flow by funds be included.
Pawlisch reviewed eleven funds that Aon Hewitt has recently rated as “Sell”: Fidelity Magellan, Fidelity Stock Selector Small Cap, Fidelity Value Fund, Fidelity Blue Chip Value, Fidelity Stock Selector Small Cap, Fidelity Value Strategies, Fidelity Overseas, CREF Bond Market, CREF Global, CREF Growth, and CREF Stock. Pawlisch indicated that the RA/GRA contract with TIAA-CREF requires offering TIAA Traditional, CREF Money Market, and CREF Stock as a bundle; those provisions would prevent NSHE from following its Investment Policy Statement in the case that it ever needs to replace these investment options. Schau and Pawlisch noted that the TIAA Traditional crediting rate for RC/RCP contracts without the bundling requirement is currently higher than for RA/GRA contracts. The adequacy of the global stocks peer group benchmark for CREF Stock was discussed; Ervin asked Pawlisch to research whether a more appropriate peer group universe for a 70% domestic/30% international equity fund could be devised by HEK.
Pawlisch reviewed the quarterly fees analysis. The administrative fees reflect excess revenue reimbursement currently under final negotiation with Fidelity (0.11% minimum administrative revenue requirement going forward, table on p. 50) and TIAA-CREF (0.12% minimum, p. 60). Ervin questioned whether 12b1 fees for CREF variability annuities are to be included as administrative revenue; Pawlisch indicated that TIAA-CREF does not include them. The 0.78% administrative revenue requirement in the VALIC table (p. 88) includes GPS fees and fund 12b1 fees remitted to VALIC. Pawlisch stated he would attempt to get more consistent participant numbers (versus account numbers) from the vendors. Pawlisch also noted the disparity between management fees and other administrative expenses for TIAA-CREF institutional Lifecycle mutual funds versus the other institutional mutual funds, a question for TIAA-CREF representatives.
Dombroski reviewed the status of a list of vendor follow up items from previous meetings and the second quarter Retirement Program enrollment statistics. The Committee confirmed its interest in the enrollment statistics and instructed Dombroski to send quarterly reminders to Michelle Kelley for enrollment data from the North that is not automatically generated. Dombroski was also asked to consolidate loan information from the vendors. Finally, Dombroski was asked to link the NSHE website to the new Fidelity microsite.
There was discussion about the unexpected addition of Fidelity funds to the TSA lineup by virtue of the language in the TSA recordkeeping services agreement that defines available funds as all Fidelity funds approved for 403(b) plans. Dombroski was asked to coordinate with Henry Stone a change to the agreement to limit the availability of funds. Dombroski was also asked to coordinate with Stone changes to other plan agreements to eliminate the need to periodically update the available funds in those plans.
Dombroski was asked to update the Committee at the next meeting with the utilization of independent registered investment advisors by Fidelity clients.
August 23, 2012
AM Meeting with Fidelity guests for this segment: Brian Young, VP, Managing Director
Fidelity Marceil Shepherd, Plan & Guidance Cons.;
Tamara Guiso, Communications Cons.;
Jeff Mower, VP Regional Manager:
Brad Nielson , Client Service Manager ;
Scott Bruce , VP Account Executive;
Elizabeth Heffernan , VP, Product Mgt
Brian Young presented Fidelity’s service review for the six month period ending June 30, 2012. The Committee asked for a report on the number of people defaulting to the target date funds and for a quarterly update on new loan defaults.
As a follow up to a previous meeting, Brad Nielsen described Fidelity’s lost account services. He said a third party conducts searches using the Social Security Administration, the US Postal Service, and the credit bureaus. He said there is a “lost shareholder” report on the plan sponsor website. The Benefits Mangers asked Nielsen for a listing of the reports on the website that might be useful to NSHE.
Elizabeth Heffernan presented information about Fidelity’s annuitization options and processes.
There was discussion about the level of commitment from Fidelity’s consultant assigned to the NSHE account. Brian Young said that the level of commitment is driven by demand. If there is demand, Fidelity will respond accordingly. Jeff Mower said he is hoping to have a dedicated consultant for NSHE in Las Vegas.
In response to Kent Ervin’s query, Fidelity reported that transactions involving Pre-99 plan monies are kept segregated from other participant assets.
There was discussion about the status of the plan sponsor and participant disclosures. Fidelity reported that non-ERISA participant disclosures are being delayed until it is determined if they will enjoy the same exemption for reporting based on 12/31/11 data.
Kent Ervin asked that future reports include a consolidated report for the RPA 401a, Pre-99 403b, and excess benefits 415(m) plans as these are viewed by NSHE as parts of the mandatory RPA.
Fidelity responded to the committee request to comment on its recordkeeping capabilities.
August 23, 2012 TIAA-CREF guests for this segment: Blake Earl, Sr. Relationship Mgr;
PM Meeting with Greg Johnson, Dir. Inst. Relationships;
TIAA-CREF Patricia Harte, Managing Dir West Reg.;
Kathy Hussain, Dir. Employee Comm.;
Paul Jackson, Product Management
Blake Earl presented the service review for the first half of 2012. There was discussion about the possibility of TIAA-CREF offering recordkeeping with full open architecture. TIAA-CREF responded that it is possible to provide consolidated reporting based upon other vendors’ willingness to share data. There was discussion about whether or not certain TIAA-CREF funds would have to be offered. Kent Ervin asked, for example, if it would be possible to substitute a different money market fund for the CREF Money Market Fund if NSHE wished.
Kent Ervin asked that future reports include a consolidated report for the RPA 401a , Pre-99 403b, and 415(m) plans as these are viewed by NSHE as parts of the mandatory RPA plan.
There was discussion about why some TIAA-CREF mutual funds reported low management fees and high other administrative expenses and some reported the opposite. There was also some questioning about the reported fees for the lifecycle funds and about discrepancies in the fees reported in the communications with HEK and those reported in the disclosure documents. Blake Earl was to follow up with a response.
Paul Jackson discussed TIAA-CREF’s $1 billion commitment to technology enhancements and presented a demo on the multi-vendor recordkeeping platform under development at TIAA-CREF.
Kathy Hussain presented TIAA-CREF’s employee communication strategy to drive engagement and participation.
TIAA-CREF responded to the committee request to comment on its recordkeeping capabilities.
The meeting was adjourned at 5:00 pm.
August 24, 2012
The meeting was called to order at 8:30 am.
Impressions and concerns were shared about the previous day’s vendor presentations. There was general consensus that both Fidelity and TIAA-CREF will cooperate in the RFP process and that there should probably be some agreement on the desired fee structure before the RFP is developed. There was agreement that NSHE will want guarantees in the RFP for dedicated consulting services in both North and South.
There was agreement that TIAA-CREF is making positive strides to stay competitive in the evolving defined contribution plan marketplace.
August 24, 2012 AM VALIC guests for this segment: Gary Petrytus, VP Relationship Mgt;
Meeting with VALIC Erik Jensen, District Manager ;
Vu Dao, Senior Account Manager;
Mark Dunn, District Manager;
Troy Dryer, VP Relationship Mgt.;
Richard Turner, Deputy Gen. Counsel
Gary Petrytus presented the VALIC service report for the first half of 2012. He reported that continued progress has been made in migrating people from annuities to mutual funds (up to 48% from 41% a year ago). Petrytus reported that there are seven investment consultants serving NSHE.
Petrytus updated the Committee on the revisions it has agreed to regarding the GPS enrollment process. NSHE approved the process and requested that it be implemented effective September 1, 2012.
Richard Turner updated the Committee on the new plan sponsor and participant disclosures. He echoed the dilemma reported earlier by Fidelity regarding the ambiguity surrounding the reporting effective date for non-ERISA plans.
Kent Ervin asked that market benchmarks be included in future GPS portfolio performance reports. Ervin also asked if compensation incentives for consultants could be redesigned so as not to encourage consultants to recommend that participants stay in annuities. Petrytus will follow up with ideas. Finally, Ervin requested a consolidated report for the RPA (401a/403b) and Excess Benefit (415m) plans.
George Dombroski was asked to obtain copies of what inter-provider account balance transfers look like from all three vendors.
VALIC responded to the committee request to comment on recordkeeping capabilities. VALIC was asked to provide a sample statement showing personal rates of return and to provide a sample model of consultant salary and incentive elements for plans where they are not paid by commission.
Following the meeting with VALIC the Committee met privately to review and to take appropriate actions. The Committee noted that VALIC expressed a strong willingness to provide whatever services that NSHE should require, but that their current fees with NSHE are not competitive with the other two vendors.
Schau discussed the process for preparing a Request for Proposals. Kelley and La Putt suggested that BCN Purchasing be used to administer the RFP.
The Committee discussed the HEK quarterly performance report and watch review list. Kelley and La Putt suggested that introductory language be drafted to inform participants what to do with the reports. Kelley and La Putt recommended that the color coding of the watch/review list be removed before posting. Ervin favored posting the report with the colors to indicate the fund monitoring discipline as described and to provide this information to participants.
MOTION: Kelley moved to publish the 2nd quarter performance report without any color, to develop language for future reports to explain what actions the average participant should take upon reviewing the report, to instruct Dombroski to draft an email to participants to inform participants that NSHE has retained an investment consultant, an Investment Policy Statement has been developed, and investment performance reviews are available. La Putt seconded. The motion passed 2-1, with Ervin dissenting.
La Putt suggested that a comment and feedback form be added to the NSHE Retirement Program website.
MOTION: Ervin moved to accept the HEK performance review report including the investment watch list. The motion was seconded and passed 3-0.
The Committee discussed the eleven funds that HEK has rated “sell”. As previously requested by the Committee, HEK provide a draft letter to holders of the funds to inform them of the HEK rating downgrades. Ervin asked whether the AonHewitt InBrief reports on these funds could be disseminated to participants. Pawlisch indicated that because HEK has provided them to the Committee, it understands that they can be made available under open records requirements on the NSHE website, but that the reports should not be sent directly to participants. Ervin suggested that instead of the advisory letters to individual holders of these funds that a more general message to all participants be expanded to inform them of the availability of the performance review and AonHewitt fund reports.
MOTION: La Putt moved to request that Dombroski and Pawlisch work together on a general communication piece from NSHE announcing the availability of the performance reviews including InBrief reports on the NSHE website, to provide the communication to all three vendors for distribution to all participants including active, inactive and retired employees. This would be in addition to the similar e-mail announcement discussed earlier. Kelley seconded. The motion passed 3-0.
Dombroski and Pawlisch were to provide a draft communication for committee review within the next two weeks.
Ervin noted the 133 funds on the watch list, with some under consideration for replacement according to the Investment Policy Statement and investment monitoring guidelines. He suggested that instead of acting on these individually to meet our fiduciary responsibilities, the RPAC should undertake fund searches for an entirely new investment option lineup and tier structure. Kelley noted that fund searches need to be timed after town halls meetings with faculty. Schau and Pawlisch indicated it would be helpful to have the lineup set before an RFP goes out because it would help determine pricing, with the understanding that inclusion of proprietary annuity products might depend on the outcome of the RFP.
Ervin noted some of the reasons for taking action establish a new overall fund lineup: the current selection of over 270 funds is confusing to many participants; 133 of the 290 investment alternatives are currently failing to meet key quantitative and qualitative monitoring criteria; seven mutual funds and four variable annuities are under consideration for replacement according to NSHE’s Investment Policy Statement and Investment Management Guidelines; it is the fiduciary responsibility of NSHE to consider proper action on the funds under review; participants will benefit from access to new fund alternatives before decisions are made on the continuation of current funds; deferring decisions on fund replacements pending changes in plan design, the investment tier structure, and new fund offerings will avoid disruptions that may not be in participants’ best interests; competitive searches for funds are likely to produce savings in expenses and the potential for better performance; and having a full proposed mutual fund lineup may provide the best opportunity for competitive pricing from recordkeepers.
MOTION: Ervin moved to recommend that the RPAC develop a new lineup of investment funds and conduct fund searches, with a target date for full implementation by 1/1/2014. The motion was seconded and passed 3-0.
The committee considered the new funds recently added to the Fidelity TSA plan under NSHE’s service agreement.
MOTION: Ervin moved that because the NSHE Investment Policy Statement specifies that NSHE is responsible for the selection and monitoring of investment funds, the Committee recommends to the Delegated Authority that the service agreement with Fidelity for the TSA 403(b) plan be changed to prevent any new additions of funds without explicit approval and instruction by NSHE. Michelle Kelley seconded. The motion passed unanimously.
The Committee briefly discussed how administrative expense reimbursements be returned to participants, but deferred action to the RPAC or Delegated Authority.
The Committee noted that the lists of funds available have not been formally updated recently, other than through RPAC and IMS meeting minutes.
MOTION: Ervin moved to recommend to the Delegate Authority that the Plan Document appendices that list the funds available for each plan be updated or changed to refer to the Investment Policy Statement as appropriate. Motion failed with no second.
Kelley asked Dombroski to work with Hank Stone to update the plan documentation. Ervin suggested that a professional compliance review of the plans should be conducted. Kelley indicated that a legal review of the plan documents has been done.
The distribution of DOL participant fee disclosures was discussed. The Committee suggests that the disclosures be posted on the NSHE website, when available, rather than sent directly to participants. Pawlisch stated that the disclosures from the vendors have been delayed because of conflicting SEC and DOL regulations for ERISA and non-ERISA plans.
The agenda item on vendor service reporting requirements was deferred because of a broader discussion of the role of the Investment Management Subcommittee versus the full Retirement Plan Advisory Committee. The subcommittee members felt that the full committee should be involved in investment vendor reviews in order to become fully engaged and informed about related plan design and RFP issues. Carla Hansen stated she felt much more comfortable about the process after attending the IMS session. The possibility for a longer in-person RPAC meeting or retreat to work on a new fund lineup was discussed.
MOTION: Ervin moved to recommend that the Investment Management Subcommittee be dissolved and that future quarterly investment performance reviews, as well as an annual review with the vendors, include the entire membership of the Retirement Plan Advisory Committee. La Putt seconded. The motion passed unanimously.
The meeting was adjourned at 12:30 pm.
Prepared by: George Dombroski, Retirement Plan Alternative Manager