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TO: Mayor Thomas J. Weisner
FROM: Brian W. Caputo, City Financial Officer/City Treasurer
DATE: January 17, 2014
SUBJECT:
A Resolution Authorizing the Execution of an Investment Fiduciary Service Agreement for the Implementation of Fund Menu Option 2B of the Section 457 Deferred Compensation Plan Offered by the City of Aurora Through Nationwide Retirement Solutions and Other Related Actions.
PURPOSE:
To obtain the City Council's approval of the attached resolution that would authorize the execution of an investment fiduciary service agreement for the implementation of fund menu option 2B of the Section 457 deferred compensation plan offered by the city through Nationwide Retirement Solutions and other related actions.
BACKGROUND:
Section 457 of the Internal Revenue Code permits local governments to offer tax-deferred retirement savings plans to their employees. The City of Aurora currently offers four plans. Those plans are offered through the following vendors:
1. Illinois Public Pension Fund Association (IPPFA).
2. ING Life Insurance and Annuity Company.
3. Nationwide Retirement Solutions.
4. Waddell & Reed Financial Services.
The four vendors offer approximately 150 investment options (funds) across a broad range of asset classes (i.e., stable, fixed income, small-cap stocks, medium-cap stocks, large-cap stocks, balanced, and global/international).
In 2003, pursuant to Resolution No. R03-487, the city established its Deferred Compensation Administration Committee. The committee is comprised of:
Chief Financial Officer/City Treasurer (chair)
Director of Human Resources
Corporation Counsel
The committee is charged with evaluating new deferred compensation plans that have been proposed for offering to city employees. In addition, the committee assesses proposed changes to deferred compensation plans already offered to employees.
DISCUSSION:
The city has offered a Section 457 deferred compensation plan through Nationwide Retirement Solutions since 1987. Recently, Nationwide developed two new plan designs to enhance its deferred compensation program. Attached is a summary of the major features of the current plan design (Option 1) and the two new alternative plan designs (Options 2 and 3).
The fiduciary support included in Options 2 and 3 is a significant enhancement. The fiduciary, Morningstar, will independently select and monitor investment fund options. Morningstar is a widely recognized and well respected provider of investment management services.
Options 2 and 3 will change the menu of funds offered through the Nationwide plan. It will reduce the number of plans offered from 43 to 32. The styles and/or investment objectives of some of the funds included in the current Nationwide menu overlap. The new Option 2 and 3 menus will eliminate the redundancy. The menu of funds offered under Options 2 (which has two subtypes) and 3 are largely the same.
It is important to note that, if Option 2 or 3 is selected, some plan participants will be required to move their assets to other funds offered under Nationwide's Options 2 or 3 or funds offered by one of the city's other three deferred compensation plans. However, we estimate that only about 25% of plan participants would need to move their assets. According to The Bogdahn Group, the city's investment management consultants for deferred compensation plans, such a movement of assets is less than is typically encountered when a deferred compensation plan is redesigned. The movement of assets will be made easier by a default "mapping" of certain funds included in the current plan to comparable funds included on the Option 2 or 3 menu if a participant does not have a specific preference on the Option 2 or 3 menu.
Option 3 has the advantage of the lowest administration fees. Administrative fees under Options 1 and 2 range from 1.25% to 2.37% and 1.26% to 2.62%, respectively. Option 3 administrative fees range from 0.70% to 0.90%.
While Option 3 has the lowest administration fees, it also has a fixed account that does not guarantee a 3.5% return as does the current fixed account and the fixed account under Option 2. The fixed account with the guaranteed 3.5% return is very popular with current Nationwide plan participants. About 40% of the Nationwide assets in the plan are invested in the guaranteed 3.5% fixed account. Also, the city offers other deferred compensation plans that emphasize lower administrative fees (i.e., the IPPFA and Waddell & Reed plans).
The Deferred Compensation Administration Committee has reviewed background materials on the Nationwide plan redesign. The committee has also attended a presentation by Nationwide representatives. Based upon the information gathered, the committee believes that Option 2 is the best choice for the employees participating in the Nationwide deferred compensation plan. Moving to Option 2 will serve to:
● Gain the fiduciary support of Morningstar Associates,
● Streamline investment options, and
● Retain the popular 3.5% guaranteed fixed account.
The Bogdahn Group has also reviewed the Nationwide plan redesign options and recommends Option 2.
While selecting Option 2, we also recommend that the Schwab Personal Choice Retirement Account (PCRA) - self-directed brokerage account - be added to the menu of funds. The Schwab PCRA will permit the plan participants who desire it the opportunity to select investments not included in the Nationwide standard plan menus. This account will be of interest to more sophisticated investors. In addition to management and/or brokerage fees that apply to individual investments purchased through the Schwab PCRA, plan participants with a Schwab PCRA will pay an annual fee of $50 to Nationwide for access to this investment option. By way of comparison, the IPPFA and ING plans also charge a $50 annual fee for access to their self-directed brokerage accounts.
As mentioned above, Option 2 has two subtypes: Option 2A and Option 2B. The only difference between these subtypes is that Option 2A includes the T. Rowe Price Blue Chip Growth Fund as a large-cap growth equity fund and Option 2B includes the Fidelity Contrafund in that same asset class. Our current fund menu includes the Fidelity Contrafund. Approximately 20% of the plan's assets are invested in that fund. Consequently, selecting Option 2B and retaining the Fidelity Contrafund would require fewer plan participants to move their assets in the course of the plan redesign.
The long-term performance of the Fidelity Contrafund has been better than the T. Rowe Price Blue Chip Growth Fund with respective ten-year annualized returns of 10.20% and 8.81%, respectively. The Fidelity Contrafund is also less volatile than the T. Rowe Price Fund. The Fidelity Contrafund charges lower fees as well. The gross expense ratio (roughly equivalent to annual percentage cost of investment management and related fees) for the Fidelity Contrafund is 0.74 while the ratio for the T. Rowe Price Fund is 1.28.
Attached is a comparative summary of the funds included in Option 1 and Option 2B. The list of funds in Option 1 includes the value of the city employee assets invested in each fund as of December 31, 2013.
IMPACT STATEMENT:
Not applicable.
RECOMMENDATIONS:
That the City Council adopt the attached resolution that will authorize the execution of an investment fiduciary service agreement for the implementation of fund menu option 2B of the Section 457 deferred compensation plan offered by the city through Nationwide Retirement Solutions and other related actions.
cc: Alderman O'Connor, Chairman
Alderman Mervine
Alderman Bohman
Alderman Peters, Alternate
CITY OF AURORA, ILLINOIS
RESOLUTION NO. _________
DATE OF PASSAGE ________________
title
A Resolution Authorizing the Execution of an Investment Fiduciary Service Agreement for the Implementation of Fund Menu Option 2B of the Section 457 Deferred Compensation Plan Offered by the City of Aurora Through Nationwide Retirement Solutions and Other Related Actions.
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WHEREAS, the City of Aurora has a population of more than 25,000 persons and is, therefore, a home rule unit under subsection (a) of Section 6 of Article VII of the Illinois Constitution of 1970; and
WHEREAS, subject to said Section, a home rule unit may exercise any power and perform any function pertaining to its government and affairs for the protection of the public health, safety, morals, and welfare; and
WHEREAS, the City offers several Section 457 deferred compensation plans to its employees; and
WHEREAS, the City sponsored a Section 457 deferred compensation plan (the "Plan") through Nationwide Retirement Solutions ("Nationwide') since 1987; and
WHEREAS, Nationwide has offered to redesign the Plan to provide fiduciary support and other enhanced features ("Option 2B"); and
WHEREAS, Nationwide offers a self-directed brokerage account (the "SDBA") for sophisticated investors; and
WHEREAS, the City has determined that it is in the best interests of its employees to redesign the Plan to incorporate Option 2B and include the offering of the SDBA
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Aurora, Illinois, as follows:
Section 1. The Mayor of the City of Aurora is authorized to execute the attached investment fiduciary service agreement.
Section 2. The self-directed brokerage account shall be offered as an investment option under the Section 457 deferred compensation plan that the City sponsors through Nationwide Retirement Solutions.
Section 3. The Chief Financial Officer/City Treasurer is authorized to take other actions as necessary to implement Sections 1 and 2 above.
PASSED AND APPROVED on ______________.
AYES ____ NAYS ____ NOT VOTING ____ ABSENT ____
____________________________ __________________________
Alderman Bohman, Ward 1 Alderman Garza, Ward 2
____________________________ __________________________
Alderman Mesiacos, Ward 3 Alderman Donnell, Ward 4
____________________________ __________________________
Alderman Peters, Ward 5 Alderman Saville, Ward 6
____________________________ __________________________
Alderman Hart-Burns, Ward 7 Alderman Mervine, Ward 8
____________________________ __________________________
Alderman Bugg, Ward 9 Alderman Johnson, Ward 10
____________________________ __________________________
Alderman Irvin, At Large Alderman O'Connor, At Large
ATTEST:
____________________________ __________________________
City Clerk Mayor