CFA CFP CPE

1. Important Reminder!!! Be sure to sign the “Sign-In/Sign-Out” sheet outside of the room when applying for Continuing Education Credits for the following certifications. (Check the appropriate certification) • CFA • CFP • CPE

2. Current Trends in RFPs and Using a Consultant on Your Plan Moderator: Brian McCleave, Prudential Financial Panelists: Michael Hermanson, City of Tucson, AZ Jayson Davidson, Arnerich Massena & Associates, Inc. Andrew Ness, Mercer Investment Consulting

3. Current Trends in RFPs and Using a Consultant for Your Plan Jayson Davidson Arnerich Massena & Associates, Inc.

4. “Most Plan Sponsors Need a Consultant.”Jayson DavidsonConsultant

5. Do We Need a Consultant? • Assess Time Commitment • Expertise • Budget

6. Consultant Selection Process Thorough Due Diligence is Required • Request for Proposal (RFP) • Reference Checks • Interviews • Contracts

7. Consultant Selection Process • Depth of Knowledge • Depth of Team and Resources • Rapport with Committee • Alignment of Consultant and Client Philosophies • Independence

8. Proper Registration and Disclosure • SEC / State Securities Regulations • Form ADV Part II In Late 2005, the SEC and DOL put together a list of questions dealing with Consultant conflict of interest…

9. Evaluate Conflicts of Interest • What are the relationships with money managers or service providers? Describe those relationships. • Do you receive any payments from money managers? Describe the extent of these payments.

10. Evaluate Conflicts of Interest • Are there policies or procedures in place to address conflicts of interest or to prevent payments or relationships from being a factor when you provide advice to your clients?

11. Evaluate Conflicts of Interest • If you allow plans to pay your consulting fees using the plan’s brokerage commissions, do you monitor the amount of commissions paid and alert plans when consulting fees have been paid in full? If not, how can a plan make sure it does not over-pay its consulting fees?

12. Evaluate Conflicts of Interest • If you allow plans to pay your consulting fees using the plan’s brokerage commissions, what steps do you take to ensure that the plan receives the best execution for its securities trades?

13. Evaluate Conflicts of Interest • Do you have any arrangements with broker-dealers under which you or a related company will benefit if money managers place trades for their clients with such broker-dealers?

14. Evaluate Conflicts of Interest • If you are hired, will you acknowledge in writing that you have a fiduciary obligation as a investment adviser to the plan while providing the consulting services we are seeking?

15. Evaluate Conflicts of Interest • Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide the plan? • What percentage of your clients utilize money managers, investment funds, brokerage services, or other service providers from whom you receive fees?

16. Other Consulting Services to Consider Consultants May Assist Committee in Development and Decisions Regarding: • Investment Policy • Selection of appropriate asset classes • Investment fund option selection, monitoring and replacement

17. Other Consulting Services to Consider • Determination of appropriate benchmarks and peer groups for the asset classes and the investment fund options. • Monitor and report on adherence of investment fund options to the Investment Policy.

18. Other Consulting Services to Consider • Periodic performance reporting of each investment manager versus appropriate benchmarks and peer groups. • Periodic due diligence on existing investment fund options and the investment managers as well as the fund companies responsible for managing the investment fund options.

19. Other Consulting Services to Consider • Due diligence on any potential new investment fund options and the investment managers as well as the fund companies responsible for managing the investment fund options.

20. Current Trends in RFPs and Using a Consultant for Your Plan Utilizing a Consultant During the RFP Process Andrew Ness Mercer Investment Consulting

21. What Do Plans Want From a Consultant? • Experience with similar work • Knowledge of the current market • Advocate for the Plan • Workhorse to support the project • Expert advice

22. How Can a Consultant Assist with the RFP? • Planning • Drafting • Evaluating • Negotiating • Implementation

23. Planning for the RFP • Facilitating goal setting for the RFP • Setting a workplan in place • Foresight for potential issues • Consideration of new products or services Deliverable(s): Timeline, defined goals

24. Drafting the RFP • Plan background information • Thorough scope of services • Detailed questionnaire • Transparent fee proposal • Distribution list • Issue RFP and Q&A process Deliverable(s): Draft of RFP, distribution list, assist with Q&A

25. Evaluating the Proposals • Evaluation committee guidelines • Minimum criteria • Evaluation methodology • Evaluation form template Deliverable(s): Evaluation template and guidelines

26. Evaluating the Proposals (cont.) • Evaluation criteria • Company qualifications & background • Recordkeeping and administrative services • Participant services • Investments • Fees and charges • Contract terms • Selecting Finalists & reference checks (site visit?) Deliverable(s): Evaluation report

27. Negotiating with the Vendors • Finalist interviews • Limit to firms with a legitimate chance of winning • Identify areas of weakness in each proposal • Outline the topics for discussion at the interview • Give the vendors a chance to improve (refine) the proposal • Get the enhancements in writing! • Board presentation Deliverable(s): Interview agenda, facilitate vendor selection

28. Implementing Plan Changes • Contract terms • Transition plan • Communicating the changes • Regular status updates • Issue resolution Deliverable(s): Contract review, communications review

29. Use the Consultant’s Strengths: • Experience with similar work • Knowledge of the current market • Advocate for the Plan • Workhorse to support the project

30. The City of Tucson RFP Experience“A Tale of Consolidation” Michael A. Hermanson, CPA Manager City of Tucson Retirement Programs

31. Investment environment has evolved significantly Technology has evolved significantly EGTRRA tax law changes - operating implications to the City Plan, improved distribution flexibility for all plans On-going fiduciary responsibilities requirements for review of investment options and fee structures Why are we writing a Request for Proposal?

32. Investment / Diversity Administrative Issues Trustee / Fiduciary Concerns Three Primary Components to a Deferred Compensation Plan

33. Consolidation of all the City’s three Section 457 Deferred Compensation plans into a simplified plan that achieves cost effectiveness without giving up sufficient investment options, efficient administration and ease of use and understanding by City employees for the benefit of their retirement Covey’s “Begin with the End in Mind” is crucial Vision Statement

34. The goal is to combine at least our two outside providers, leaving a streamlined efficient plan with one third-party plan administrator company The objectives include: Reduction of fees by parlaying / utilizing economies of scale for lower investment fees & plan administration fees Enhance Retirement and Investment Planning Education Program Goals and Objectives

35. simplify the City employee investment decision making process continue to offer diverse investment options eliminate duplication of investment options (9 exactly the same not counting index funds) enable City staff to streamline service to City employees offer enhanced employee education & asset allocation advice from one source provide market value on all investment options (City plan not reported on market value - would require unit accounting system) Objectives Continued. . .

36. Three different plans 2 are nationally known, highly recognizable firms City Plan (fixed income with) Complicated and confusing for employee to understand the difference between the plans – (conserv. tendancy) Duplication of investment options between plans Asset allocation more complicated for employees using more than one plan Current 457 Plans

37. Less efficient & more complicated for City staff to administer three different plans (annual limit. testing) Current administration for each plan is different hardship withdrawals, QDROs, death benefits Not utilizing economies of scale by combining of assets Paying higher fees for two third-party administrators Difficult to determine fees paid, fee disclosures complicated City’s Plan not marked to market for plan participants Current 457 Plans Continued. . .

38. Some National firms do not currently administer Section 457 plans Some offer Section 457 plan administration, but no education component Others have it all…. Estimated average total fees around 40 bps Excellent employee education possible Preliminary Research on Third-party Administrators

39. Fund Fees Can Vary: 1. sales charges or “loads” 2. operating (expense ratio) investment advisory & other costs of running the fund 12b-1 fees pay for marketing and distribution costs of fund Possible Market Value Adjustments on Annuity Products, or 5 years restrictions on payouts Retirement Administration Fee (third-party) Fees - Calculated as Percentage of Average Assets Invested

40. Fees Impact Asset Accumulation “There is virtually no evidence to suggest that funds with higher expense ratios do better, before expenses. Which therefore suggests they will do worse, after expenses.” William Sharpe, recipient of the Nobel Prize in Economic Sciences

41. Example of Impact of Fees Assumes a $20,000 investment for 20 years with an average annual return of 8% before expenses in a tax-deferred account. Fund A’s expense ratio is .30% and Fund B’s expense ratio is 1.20%. The difference between the two amounts in 20 years is $13,623 which is nearly two-thirds of the value of the original $20,000 investment.

42. Comparison of Retirement Accounts Using Two Different Fee Assumptions (Firm A compared to Firm B)

43. Estimated Savings in One Year

44. City Plan was the first 457 Plan option for City of Tucson, managed internally - established 1975 Current third-party plan administrators hired in 1980s 2nd Outside Provider Plan Added - 1983 3rd Outside Provider Plan added - 1987 Change and or consolidation has not been considered because of established long term employee accounts and relationships History

45. 1 - Make no changes 2 -Combine all three plans into one third-party plan administrator 3 -Combine both two third-party plans into one plan and keep the City plan separate Available Options - Alternative Strategies

46. Fee savings to employee by replacing our two outside providers (over $571,000 in one year - 1% x $57.1 million) Streamline investment options, lower expense ratios Investment planning & education consolidated with one service provider City Plan (Considerations for “foaming the runway”) Possible replacement with cost effective fixed income index mutual fund or transfer to a friendly, “similar” low risk approach Inverted Yield Curve Approaching (Sept. 2005) Participants have grown to appreciate the feeling of no-brainer, investment without risk approach that the City Plan had Main Reasons / Issues to Consider

47. Current systems do not provide unit accounting for participants (which is needed to report market value per account and to more accurately account for transfers in and out) Systems currently not able to account for rollovers into City plan separately (new tax law allows rollovers into 457) Current City resource requirements include tax law compliance (often complicated & unclear) plan changes are difficult to implement in the City Code hardship withdrawals, QDROs, death benefits record keeping efforts City Plan - Challenges

48. Advantages to employee Increased diversification Competitive fixed income investment returns Separate accounts for each plan participant at market value Asset allocation planning and rebalancing can occur with one plan administrator for all Sec. 457 investments Transfers easier and more flexible when all at same service provider Overall RFP Considerations that can turn into advantages for consolidation

49. Advantages to City Legal and tax expertise established at third-party plan administrator Consistency of administration - one plan document instead of three Eliminate need to revise plan documents at City level Eliminate need to do hardship withdrawals at Board level (establish review procedures) Fewer Board meetings required? (a joke?) City Plan - Advantages to Consolidate Continued. . .

50. Overcoming employee concerns with change Establishing effective education to show significant benefits fee savings can enhance asset accumulation for retirement streamlined and easier to understand and plan Establish easy to understand transition Disadvantages/Challenges to Consolidate