As you know, the City of Brentwood currently sponsors two deferred compensation supplemental retirement savings plans for full-time employees. These plans are established pursuant to Section 457 of the Internal Revenue Code and allow eligible employee to deposit a portion of their pre-tax earnings into tax-deferred, access-restricted retirement savings accounts. Employee contributions to their individual savings accounts are made through voluntary payroll deductions and can be made in any amount up to the statutory limit established annually by the IRS. These plans are separate from the defined benefit retirement pension plan the City provides all full-time employees through the Tennessee Consolidated Retirement System (TCRS).
The two plans currently sponsored by the City are administered by Nationwide Retirement Solutions (NRS) and International City Management Association Retirement Corporation (ICMA-RC). After two years of continuous full-time City employment, the City will match dollar-for-dollar the employee's contributions to one of these supplemental retirement plans up to a maximum of 3% of the employee’s base compensation. Since July 2011, matching contributions made by the City to eligible employees are directed into separate 401(a) accounts owned by individual employees and administered by the service provider of their choice.
As the sponsor of the plans, administered by NRS and ICMA-RC, the City has the full and sole fiduciary responsibility for maintaining the plan, meeting regulatory requirements, educating participants, prudently selecting and monitoring service providers, and controlling plan expenses.
Currently, combined assets held in trust for employee participants in both the NRS and ICMA-RC plans are approximately $20 million. Fees paid by employee participants consist of both administration and record keeping fees paid to plan administrators and fund fees charged directly by the various investment funds available in the plan portfolio. The total amount of these fees for any individual participant will vary based on the investment option selected, but in aggregate total approximately $180,000 annually for both plans. These fees are paid entirely by employee participants. The City does not pay any plan expenses.
Part of the City’s efforts to fulfill its fiduciary responsibility involved issuing a Request for Proposals (RFP) in August 2017 to solicit proposals from qualified service providers for administration, recordkeeping, education, enrollment, and investment management services for the deferred compensation plans sponsored by the City of Brentwood.
Four separate qualified service providers submitted proposals by the RFP deadline including the two current administrators, Lincoln Financial Services, and TIAA. Staff also evaluated the option of joining the State’s deferred compensation program through the Tennessee Consolidated Retirement System’s Plan (TCRS) and administered by Empower.
Staff conducted an initial evaluation of each proposal for completeness in response to RFP requirements, qualifications of professional personnel, financial reputation and demonstrated past performance of the firm in similar work, conversion time specified for performance of the contract, employee training, and education materials. The next step in the evaluation process focused on the competitiveness of the fee structure of each proposal.
To ensure a meaningful comparison of fees associated with each proposal, staff provided a detailed breakdown of the current makeup of investment options to each of the service providers submitting proposals. This breakdown showed the current balance of each investment option (fund) selected by employee participants making up the total portfolio of approximately $20 million. Proposers were asked to map the current investment options to the corresponding funds recommended in their investment lineup and disclose the total fees associated with each. Four of the five proposers completed this analysis with Lincoln Financial declining to submit the requested detail.
The first thing apparent to staff was that accepting any of the proposals submitted through the RFP process would significantly reduce total fees charged to employee participants. This is primarily a result of the economy of scale or volume created by consolidating the total portfolio with one administrator. See table below.
| FEE COMPARISON |
SERVICE
PROVIDER |
CURRENT
NRS & ICMA-RC (Combined) |
TIAA |
Nationwide |
ICMA-RC |
TCRS |
| FEES |
$179,778 |
$134,327 |
$114,006 |
$103,043 |
$85,432 |
| SAVINGS |
NA |
$45,451 |
$65,772 |
$76,735 |
$94,316 |
The TCRS proposal had the lowest aggregate fee structure resulting in significant annual savings to members of over $94,000 compared to the amount currently charged to participants. It should be noted however, that not all investment options (funds) in TCRS’s proposed mapping strategy resulted in lower fees. Approximately six funds actually had higher associated fees. However, members always have the option to choose other investment options in the proposed lineup if fees are a concern.
In addition to a significant overall reduction in plan expenses, there are other compelling reasons to adopt the deferred compensation plans offered through TCRS. These additional reasons include the following:
The convenience to employees of having both components of their retirement benefits under one administrator. The defined benefit (pension) plan is already administered by TCRS and having the deferred compensation savings plan under the same record keeper would enable employees to have a more comprehensive understanding of their retirement outlook.
- The City’s fiduciary responsibility as described above would be significantly minimized as the State of Tennessee would replace the City of Brentwood as the plan sponsor. As a municipal subdivision, under State Law the City of Brentwood is eligible to join the State’s plan as a participating employer. The City would continue to be responsible for collecting employee’s voluntary contributions to the plan and accurately submitting those contributions to the Plan Sponsor on a timely basis for the exclusive benefit of participants and their beneficiaries.
- City staff currently plans to recommend to the Board of Commissioners the adoption of the TCRS Hybrid Pension Plan for future employees hired after April 2019 (projected). Though the details of this change are discussed under separate cover, it is worth noting that if the Hybrid plan is adopted, all future employees will have 401(k) accounts with TCRS. The 401(k) will receive the City’s required pension contribution, the employee’s contribution, and the City’s 2% match. In order to do this, the City will have to include TCRS as an additional service provider.
MARKET VALUE ADJUSTMENT
As staff further considered the option of consolidating the deferred compensation plans and transferring all assets to TCRS, both of the current service providers were advised of this potential course of action. During discussions, we were notified by Nationwide that should the City terminate the existing contract and transfer assets to another service provider, participants invested in their Fixed Account (a fund with a guaranteed return) would be charged a Market Value Adjustment (MVA), which is basically a fee for early withdrawal. This MVA only applies to funds invested in Nationwide’s Fixed Account and does not apply to the other variable accounts. ICMA-RC does not offer a similar investment option as the Nationwide Fixed Account so there are no fees charged for terminating the contract with them.
Currently, assets invested in the Nationwide Fixed Account exceed $3.8 million for 118 current and former employees or approximately 19% of the total portfolio of $20 million. The total amount of the required Market Value Adjustment is currently estimated at $138,000.
In lieu of paying the MVA fee, these participants would have the option of transferring 20% of their account balance annually and complete the total transfer over a five-year period. However, during this transfer period, participants (or their beneficiaries) would only have access to the amount of their account balance that had completed the transfer to the new administrator. They would not have access to the remaining balance until it was transferred to the new administrator. For example, in the first year participants could transfer 20% of their account balance, in the second year another 20% and so on until the entire balance was transferred after the fifth year. However, during this transfer period if an employee either left employment or became deceased, they or their beneficiary would not have access to the remaining portion of their account balance that was retained by Nationwide and had not yet been transferred to the new administrator.
In many cases the five year transfer period would not create significant issues for our members, especially those planning to continue to work and not needing access to their account balance during this period. However, we feel that requiring these members to pay the MVA is not a viable alternative.
|
Unlike the other providers, fees associated with the TCRS proposal are not based on receiving the entire portfolio currently administered by NRS and ICMA-RC. Fees will be the same if only new participants enroll or if current participants transfer their account balances from either of the current service providers. Specifically, TCRS fees are not contingent on receiving all the assets currently held by NRS and ICMA-RC.
Were it not for the MVA fee, consolidation of the existing Nationwide and ICMA-RC plans under TCRS would be the most advantageous strategy for the City and its employees. However, given the substantial cost associated with the MVA, staff believes the best alternative is to allow the legacy plans to remain in place for all existing assets, and adopt the TCRS plan for all future contributions and any voluntary transfers. Accordingly, staff’s recommendation is as follows:
- Adopt the deferred compensation plan offered by TCRS and administered by Empower for all new employees beginning with the established effective date. This will include all new employees hired into the TCRS Hybrid Pension Plan.
- Freeze the existing deferred compensation plans administered by NRS and ICMA-RC for current participants. These members will have the option to transfer their account balances to the TCRS plan if they choose, but will not be required to consolidate their account balances with the TCRS plan. However, these members will be required to direct all future contributions to the TCRS plan administered by Empower.
Staff recommends adopting Resolution 2018-69 and companion Resolution 2018-68 to adopt the deferred compensation plans offered through TCRS and administered by Empower.
This Resolution 2018-69 authorizes the creation of an Internal Revenue Code Section 457 Plan administered by Empower, the State of Tennessee’s deferred compensation administrator. This account is established to receive future voluntary contributions from current employees participating in the TCRS Legacy Pension Plan. It will also receive current employee’s voluntary in-service transfers from the NRS and ICMA-RC Section 457 plans.
The accompanying Resolution 2018-68 authorizes the creation of an Internal Revenue Code Section 401(k) Plan administered by Empower, the State of Tennessee’s deferred compensation administrator. This separate account is established to receive:
- City matching contributions for eligible (current) employees who are enrolled in the TCRS Legacy Pension Plan and contribute to the Section 457 account.
- The City’s required contribution for (future) employees hired in the TCRS Hybrid Retirement Plan.
- Voluntary contributions for future employees enrolled in the Hybrid Retirement Plan.
- City matching contributions for future employees participating in the TCRS Hybrid Plan and making voluntary contributions to the 401(k) Plan.
|