Investment Management Subcommittee of the
Retirement Plan Advisory Committee
February 22-23, 2012
A meeting of the Investment Management Subcommittee of the NSHE Retirement Plan Advisory Committee was held on February 22, 2012 at the University of Nevada Reno and continued on February 23 at the Reno System Administration Office.
Present: Kent Ervin, Chair; Michelle Kelley; and Pat LaPutt
Also Present: George Dombroski (NSHE) and Dan Pawlisch (Hewitt EnnisKnupp). Ruth Schau (Hewitt EnnisKnupp) attended on February 23 only.
February 22, 2012
The meeting was called to order at 10:16 am.
The minutes of the January 10 meeting were unanimously approved.
The Committee met privately to discuss questions for the providers. There was discussion about the future meetings with the three providers. It was agreed that semi-annual vendor meetings will continue but focus on service issues instead of investment performance since Hewitt EnnisKnupp (HEK) will be monitoring investment performance.
February 22, 2012
Meeting with TIAA-CREF
TIAA-CREF guests for this segment: Joe Baumann, Managing Consultant; Stephen McDonald, Client Portfolio Mgr.;
Thomas Carmody, Sr. Dir. Strategic Svcs; Patricia Harte, Managing Dir. Institutional Relationships
Patricia Harte introduced herself as the replacement for John Middlebrook. She discussed coming technological innovations including a new website coming in March and a new plan sponsor website to be phased in starting in April.
Thomas Carmody discussed his role in helping clients engaging in strategic changes. He discussed the trend in moving to a single record keeper. He said that TIAA-CREF would entertain open architecture plan administration for NSHE with no proprietary TIAA-CREF funds.
Stephen McDonald conducted an investment review for the second half of 2011. There was discussion about the concentration of money in TIAA Traditional. TIAA-CREF said NSHE’s concentration in Traditional is higher than typical. Michelle Kelley asked for a report on the various ages of the tranches in Traditional. McDonald indicated a market benchmark for the TIAA Real Estate annuity would be available soon.
There was a long discussion about the evolution of TIAA-CREF mutual funds vis-à-vis higher cost annuities. The Subcommittee expressed an interest in migrating money to mutual funds to capture cost savings for participants. TIAA-CREF reiterated that account balances from previous contributions would not be “mappable” to mutual funds. TIAA-CREF was asked about a mutual fund alternative for Traditional and responded that the most similar mutual fund would be the Stable Value Fund which has a return of approximately 1% compared with 3% in Traditional.
Joe Baumann conducted the 2011 service review. There was discussion about the value of loan data offered online. There was discussion about long waits for counseling or for follow up reports from counselors. Mr. Baumann was asked how TIAA-CREF can expect to service employees and retirees without an office that people can go to. Mr. Baumann agreed to initiate an internal conversation about adding an office in the North.
There was discussion about TIAA-CREF’s plans for helping clients prepare for new DOL fee disclosure requirements. TIAA-CREF said the focus is on ERISA clients at the moment but will have a plan for assisting non-ERISA clients before July.
Kent Ervin shared with TIAA-CREF that based on HEK’s first investment performance report many TIAA-CREF funds are tripping into the “watch list” category based on 5-year performance. Dan Pawlisch said he would share with TIAA-CREF the peer groups and benchmarks he uses to measure TIAA-CREF funds performance against.
February 22, 2012
After the TIAA-CREF presentations, the Subcommittee met privately to review. Action items for follow-up by staff with TIAA-CREF include:
1) TIAA-CREF to report on assets in TIAA Traditional by vintage of the contracts.
2) TIAA-CREF to investigate possibility of including personal rate of return on TIAA Traditional assets on account statements.
3) TIAA-CREF asked for additional information on the loan statistics report, including numbers of participants who have defaulted in the past.
4)Request to improve TIAA-CREF administrative support for identifying loan applications who have defaulted in the past and therefore are not eligible for a new loan.
5) TIAA-CREF to provide consolidated fee expenses report for 12/31/2011 (and in future reports) for all NSHE plans combined.
6)TIAA-CREF to follow-up on concerns about response times for Wealth Management representatives.
7) TIAA-CREF to confer with HEK on watch list and monitoring criteria for investment alternatives.
8)TIAA-CREF to provide information on consolidation service for DOL participant fee disclosure
9) TIAA-CREF to provide listing of new reports on the revised plan analyzer administrative website
10) Michelle Kelley to request invitation for HEK representative to attend TIAA-CREF client conference.
11) George Dombroski to provide committee with copy of the information TIAA-CREF provided regarding administration of accounts with unknown addresses or beneficiaries.
12) TIAA-CREF to be informed that the level of NSHE assets should allow service plan improvements, including a physical representative presence in both North and South.
Dan Pawlisch presented a 2011 market overview and his fund performance report. HEK was asked to add HEK’s medium-term economic outlook to the market overview. A rather large fraction of NSHE investment alternatives need heightened monitoring because of quantitative performance criteria, fewer for the qualitative criteria. In a discussion of the fund monitoring guidelines, the committee suggested that action such as a fund replacement search should be considered for a particular fund should when both the quantitative and qualitative criteria reach “red” status. Dan Pawlisch will revise the guidelines with suggested language.
The vendor plan summaries (“scorecards”) were discussed briefly. Dan Pawlisch suggested using Replacement Income Ratios as a measure of participant success, and was asked to develop a metric that could be used with various vendors.
February 22, 2012
PM Meeting with Fidelity
Fidelity guests for this segment: Brian Young, VP, Managing Director; Kevin Roy, VP Investment Services; Doug Villing, Planning & Guidance Cons.; Marceil Shepherd, Plan & Guidance Cons.; Tamara Guiso, Communications Cons.
Brian Young presented the 2011 service review. Mr. Young offered to reach out to the participants invested in only one fund to discuss the need for diversification. Mr. Young also announced that as a result of an increase in the record keeping revenue credit by a number of K Class funds from 0.15% to 0.20%, Fidelity is increasing its annual revenue credit to NSHE from $40,000 to $100,000. The credits can be used to offset plan expenses or be reallocated back to participants. Fidelity was asked to provide the agreement revision for review.
There was a conversation about participant loans. Mr. Young reported that 22% of participants have outstanding loan balances, for Fidelity overall.
Tamara Guiso presented an overview of Fidelity’s communication plan for the year. A promotion of voluntary contributions to 403b accounts and a communication about updating beneficiary designations was discussed. Sample text for a NSHE communication to participants will be provided to Michelle Kelley. Fidelity also offered to provide an after-hours seminar for pre-retirement participants; Michelle Kelley will coordinate this with UNR’s retirement week events.
Kevin Roy presented the fund investment results for 2011, including an overview of the funds deserving attention due to poor performance or manager changes:
Small Cap Stock Fund – manager change Nov 2011, returning to focus on small caps
Equity Income Fund, manager change and style change Oct 2011
Growth & Income (frozen) manager change
Magellan – manager change Sept 2011 and long-term performance issues
Value Fund – trailing 5-year performance
Mid Cap Stock Fund – 5-year performance and manager change
Overseas Fund –3&5-year performance and Jan 2012 manager change
Freedom Funds – trailing recent performance
There was a discussion about Fidelity’s readiness to comply with the new fee disclosure rules. Fidelity indicated they will be focusing on the ERISA clients in the April-June timeframe. After that they will focus on non-ERISA clients who wish to comply. Fidelity reported that non-ERISA clients are tending to think that they will only send disclosures to active participants via email. Fidelity offered to package a fee disclosure website for all three NSHE vendors.
Following the presentation by Fidelity the Subcommittee met privately to review. Action items for follow-up by staff with Fidelity include:
1) Fidelity to provide sample communications regarding 403b contributions and updating beneficiaries.
2) NSHE to review updated microsite and approve before it goes live.
3) Amendment of agreement to raise Fidelity contribution to NSHE expense account from $40K to $100K.
4) Fidelity to conduct outreach campaign to participants who hold money market funds as their only investment.
5) Fidelity to provide information on DOL fee disclosure and consolidation service to George Dombroski and Dan Pawlisch.
The Subcommittee recommended that DOL participant fee disclosures for all three vendors be placed on the NSHE website when they become available.
Dan Pawlisch resumed the performance review and discussed the fee and expense reports for the three vendors. Pawlisch was asked to correct the report on VALIC to include an estimated expense ratio for the Fixed Account, and to make sure that and GPS fees are included in the per-account cost estimates.
There was discussion about the poor long-term track record of Fidelity Magellan fund and its management issues. HEK has issued a “sell” recommendation on Magellan. The Subcommittee debated whether or not to embark on a communication to Magellan fund investors regarding the fund’s poor performance and prospects. Michelle Kelley moved and Pat LaPutt seconded a motion for NSHE to develop an e-mail communication to the 274 holders of the Magellan fund. The communication would quote HEK’s evaluation of the fund and suggest that participants consider alternatives and/or seek advice. Dan Pawlisch will draft the HEK evaluation text for sharing with participants and work with Michelle Kelley on the communication. Fidelity will be asked to monitor response rates.
The meeting was adjourned at 5:20 pm.
February 23, 2012
The meeting was called to order at 9:10 am.
The Subcommittee met privately to discuss questions for VALIC prior to their presentation.
There was discussion about whether or not to discontinue future contributions to the annuity funds because of their high cost. There was agreement that it’s a good idea but the effort will be too disruptive at the present time in light of the significant plan redesign that is being contemplated.
There was discussion about a participant communication that had previously been contemplated to alert VALIC participants to the high cost of the death benefit in VALIC annuities. It was agreed that a broad communication would be too complicated and that a tailored, one-on-one communication would be required to be effective. Once again it was decided that embarking on such a communication campaign at this time would not be prudent.
February 23, 2012
AM Meeting with VALIC
VALIC guests for this segment: Gary Petrytus, VP Relationship Mgt; Erik Jensen, District Mgr. Southwest Dist.;
Vu Dao, Senior Account Manager; Robynne Parry, Director Investments
Gary Petrytus presented the 2011 service report. He called to the Subcommittee’s attention the decrease in the proportion of participant money invested in annuities relative to mutual funds. The Subcommittee asked how much of the decrease was attributable to affirmative reallocations by participants and how much was the result of investment results. VALIC did not know the answer to the question.
Robynne Parry presented the 2011 investment performance report, including VALIC’s recommended additions to, deletions from and continuations on the watch list as contained in their report. She informed the Subcommittee that the Lou Holland Growth Fund is being acquired by American Beacon in order to improve the fund’s distribution. It will keep its focus and strategy. There will be an expense reduction from 1.79 to 1.34 basis points.
There was a discussion about VALIC’s efforts to comply with new disclosure regulations. VALIC said that the Subcommittee could expect a template packet for the participant fee disclosure soon. The Subcommittee questioned why no fee is indicated in VALIC’s report for the fixed income funds. Gary Petrytus responded that VALIC’s position is that there are no fixed income fees to report as defined by the regulations. The Subcommittee asked VALIC to disclose to NSHE the administrative expenses and M&E fees on the Fixed account. VALIC was asked to confirm that the fees reported for the T. Rowe Price Funds and for Vanguard Life Strategy Fund is the average of the underlying fund expenses.
The Subcommittee observed that about 25% of participants in the Medical Resident/Postdoctoral Scholar plan use GPS. VALIC was asked if the use of GPS for this group of essentially temporary employees is appropriate. The Subcommittee wondered if these participants end up using GPS unintentionally. VALIC responded that they believe there is value in GPS and that participants must opt out of GPA after their retirement analysis is complete. Otherwise, they are assumed to have elected to continue GPS.
It was observed that despite several requests to have GPS fees included in the fund performance report it is still not reported. Also, VALIC was asked to include in future reports the composition of the 7 GPS portfolios.
The Subcommittee observed that the migration of assets from annuities to mutual funds is going slower than hoped for. VALIC was asked if the disparate form of compensation for annuity and mutual fund advisors is operating as a disincentive for annuity advisors to fully inform annuity investors about the advantages of mutual funds. VALIC responded that compensation is exactly the same for both groups of advisors and therefore compensation plays no role in their counseling.
VALIC was asked for a report on investment changes for non-GPS participants.
Gary Petrytus informed the Subcommittee that VALIC is 3-4 months away from coming back to NSHE with specific recommendations on how to reduce plan expenses.
The Subcommittee asked for an update on the conversion of the Global Equity Fund that was reported in August. VALIC reported that the conversion is complete and it went very smoothly.
Following the meeting with VALIC the Subcommittee met privately to review. Action items for follow-up by staff include:
1) Requested fee disclosures for Fixed Accounts.
2) Inclusion of loan fees and any other participant fees in the fee disclosure report.
3) In GPS portfolio performance tables provide performance net of GPS fees.
4) Provide report on the mutual funds or annuities invested in by the GPS portfolios as of the report date.
Michelle Kelley made a motion to recommend to the RPAC that no new GPS enrollments be offered to participants in the Medical Resident/Postdoctoral Scholar Plan. Pat LaPutt seconded. The Subcommittee approved the motion unanimously.
There was discussion about standardization of the vendors’ reporting on loans and defaults. Ruth Schau was asked to create a template for the vendors to use.
Ruth Schau made a presentation on the types of vendor service standards that are negotiated into service agreements. Michelle Kelley and Pat LaPutt will work with Schau on a service performance monitoring tool.
There was a discussion about strategies for setting record keeping fees in a plan redesign. Options presented by Dan Pawlisch include a percentage-of-assets fee, at flat per-participant fee (across all account types), and a hybrid with a percent of assets capped at a maximum amount per participant. The Subcommittee expressed strong interest in the hybrid option, but wants to see numbers. Pawlisch was asked to provide an analysis of these scenarios are the next IMS meeting, with estimates of the percentages and fee amounts or cap that would raise the same estimated required record keeping and administrative expenses for the NSHE Plans.
Summary of action items for HEK:
1) Dan Pawlisch will work with Henry Stone on contract language for revenue sharing agreements with the vendors.
2) HEK will work with NSHE on due diligence for monitoring legacy assets with American Century and T. Rowe Price, including a determination of whether these are individual or group contracts.
3) Dan Pawlisch will provide a modified version of the quarterly report for posting to the NSHE website, with market overview and performance report, but without the fund watch list this time because changes to the monitoring guidelines are pending.
4) Dan Pawlisch to revise the investment monitoring guidelines to align with Subcommittee discussions.
5. Dan Pawlisch to develop metric for Retirement Replacement Income Ratios.
6) Ruth Schau to provide template for loan statistics reports.
7) Ruth Schau to work with Michelle Kelley and Pat La Putt on suggested items and formats for service reporting by vendors.
8) HEK to comment on and suggest questions for the NSHE participant survey to be distributed in April.
The meeting was adjourned at 1:50 pm.
Prepared by: George Dombroski, Retirement Plan Alternative Manager