ea.ch ~i_ty of -V-:i.rgirria. B Subject: Deferred Compensation Board- RFP for record-keeping services VRgov.oom April 5, 2019

Transcription

1 ~i_ty of -V-:i.rgirria. B ea.ch VRgov.oom OFFICE OF THE CITY MANAGER (757) (757) FAX MUNICIPAL CENTER BUILDING 1, ROOM COURTHOUSE DRIVE VIRGINIA BEACH, VA April 5, 2019 The Honorable Robert M. Dyer, Mayor Members of City Council Subject: Deferred Compensation Board- RFP for record-keeping services Dear Mayor and Council Members: The Deferred Compensation Board has authorized the issuance of a Request for Proposal (RFP) to solicit services to provide record-keeping and Stable Value Fund (SVF) management for the deferred compensation plan for the City. The current contract renewal expires November 5, As briefed in the December 2017 City Council and School Board joint session, the City's 457 Deferred Compensation Plan (VB457) was to be transferred to the Commonwealth of Virginia 457 (COV 457) managed by the Virginia Retirement System. However, the Stable Value Fund could not be liquated at its book value, so the decision was made to delay the transition until the interest rate environment improved. Since that time, the market value has not matched the book value. It is anticipated that by issuing a new RFP requiring a new SVF investment strategy to be implemented over the course of not-to-exceed three years, the SVF will be liquidated at book value and employees will not lose the principal of their investment in the SVF. Currently, hybrid employees are already in the COV 457 plan and employees in the current City Plan may contribute new funds to the COV 457 or the VB457 or both. The Interim Director of Finance will provide a short briefing on this issue on April 9, Employees will be briefed this week and the RFP will be posted this month. A copy of the memorandum from Ms. Kelly to me providing more detail and a copy of her briefing document is attached. If you have any questions, please contact Alice Kelly at DLH/AMK/lb Enclosures cc: Thomas M. Leahy ill, Deputy City Manager Alice M. Kelly, Interim Director of Finance

2 C ity e>f -V-irgirria. Bea.ch FINANCE DEPARTMENT (757) (757) FAX VBgov.com MUNICIPAL CENTER BUILDING 1, ROOM COURTHOUSE DRIVE VIRGINIA BEACH, VA INTER-OFFICE MEMORANDUM DATE: April 5, 2019 TO: FROM: Alice M. Kelly, Direct r of Finance, Interim Lrfl ~ SUBJECT: Deferred Compensation Board - RFP for record-keeping services The Deferred Compensation Board, a ten member board whose membership is set forth in City Code, discussed record-keeping services at their January 2019 meeting as the current contract renewal with Empower expires November 5, As you may recall, at the December 2017 City Council and School Board joint session, a briefing was given detailing the transfer of the City's 457 Deferred Compensation Plan (VB457) to the Commonwealth of Virginia 457 (COV457) managed by the Virginia Retirement System. However, the Virginia Beach Fixed Income Fund, referred to as the Stable Value Fund (SVF}, investments could not be liquidated at their book value so the decision was made to delay the transition until the interest rate environment improved. Since that time, the market value has not matched the book value. Attached is a chart from Empower comparing the market to book value of the SVF. The Deferred Compensation Board evaluated several options to retain record-keeping services and improve the SVF performance including: 1. Status quo - Continue with Empower for short extensions and with the hope that the SVF market to book divergence closes; 2. Issue a Request for Proposal (RFP) for record-keeper.and SVF manager with that process requiring the SVF have a guarantee of full book value liquidation at the end of a three year term; 3. Issue a RFP for record-keeper and a second RFP for SVF manager with the SVF having a guarantee of full book value liquidation after three years; 4. Transition variable assets to COV457 Plan and record-keep and manage the SVF separately until such time as the market to book ratio improves. This option was discarded as previously rejected by VRS.

3 David L. Hansen, City Manager Deferred Compensation Board - RFP for record-keeping services April 5, 2019 Page2 The Deferred Compensation Board discussed options and voted for #2 to issue a RFP to solicit services to provide record-keeping and SVF management for the defined contribution plan for the City. It is anticipated that by issuing a new RFP that requires a new SVF investment strategy to be implemented over the course of not-to-exceed three years, the SVF will be able to be liquated at book value and employees will not lose the principal of their investment in the SVF. The RFP will be posted within a month and a decision by the RFP selection committee will be made late summer. In total, there are 5,030 participants in the VB457 Plan from either the City, Schools or Sheriff's Office with a total of $276 million in the plan as of January 31, Of the total number of participants, 3, 168 are active City, School or Sheriff employees with 1,862 no longer with the system ( either retired or left employment). The number of active participants contributing to the plan is 2,531 or 80% of total active participants. Active participants contributing to both the VB457 and the COV457 plans are 96 or 3%. As such time as this material is provided to City Council, employees will be briefed on the next steps regarding the RFP (attached), the potential change of record-keepers, and three-year timeframe for the new contract. AMK/lb Enclosures cc: Thomas M. Leahy, Deputy City Manager

4 Virginia Beach Custom Stable Value Fund Tracking of Market-to-Book ratios Date Market Value* Book Value M/B % 3-yr Treasury 28-Feb-18 $ 104,260, $ 106,570, % 2.42% 22-Mar-18 $ 103,831, $ 106,142, % 2.43% 26-Mar-18 $ 104,132, $ 106,498, % 2.44% 28-Mar-18 $ 104,276, $ 106,448, % 2.41% 29-Mar-18 $ 104,475, $ 106,635, % 2.39% 4-Apr-18 $ 104,374, $ 106,594, % 2.42% 11-Apr-18 $ 104,117, $ 106,322, % 2.45% 18-Apr-18 $ 103,888, $ 106,400, % 2.57% 25-Apr-18 $ 103,396, $ 106,267, % 2.64% 2-May-18 $ 103,453, $ 106,182, % 2.64% 7-May-18 $ 103,604, $ 106,261, % 2.64% 14-May-18 $ 103,363, $ 106,231, % 2.70% 21-May-18 $ 103,211, $ 106,177, % 2.73% 29-May-18 $ 103,713, $ 105,899, % 2.43% 4-Jun-18 $ 102,585, $ 105,273, % 2.64% 11-Jun-18 $ 102,553, $ 105,295, % 2.66% 18-Jun-18 $ 102,679, $ 105,390, % 2.67% 25-Jun-18 $ 102,614, $ 105,264, % 2.63% 2-Jul-18 $ 102,580, $ 105,184, % 2.65% 9-Jul-18 $ 102,631, $ 105,188, % 2.66% 16-Jul-18 $ 103,038, $ 105,581, % 2.67% 23-Jul-18 $ 102,980, $ 105,659, % 2.72% 31-Jul-18 $ 102,515, $ 105,178, % 2.77% 15-Aug-18 $ 102,294, $ 104,699, % 2.68% 31-Aug-18 $ 101,386, $ 103,799, % 2.70% 14-Sep-18 $ 100,928, $ 103,666, % 2.85% 30-Sep-18 $ 100,592, $ 103,345, % 2.88% 15-0ct-18 $ 100,473, $ 103,464, % 2.94% 31-0ct-18 $ 101,357, $ 104,385, % 2.93% 15-Nov-18 $ 101,558, $ 104,517, % 2.92% 30-Nov-18 $ 101,702, $ 104,474, % 2.83% 15-Dec-18 $ 100,847, $ 103,435, % 2.72% 31-Dec-18 $ 101,923, $ 103,973, % 2.46% 15-Jan-19 $ 101,983, $ 104,039, % 2.51% 31-Jan-19 $ 103,197, $ 104,798, % 2.43% 15-Feb-19 $ 102,340, $ 104,036, % 2.50% 28-Feb-19 $ 102,708, $ 104,354, % 2.50% 15-Mar-19 $ 103,000, $ 104,273, % 2.39% 31-Mar-19 $ 103,288, $ 103,975, % 2.21% MV/BV $$ Difference $ 2,309, Shortfall $ 2,310, Shortfall $ 2,365, Shortfall $ 2,172, Shortfall $ 2,159, Shortfall $ 2,220, Shortfall $ 2,205, Shortfall $ 2,512, Shortfall $ 2,871, Shortfall $ 2,729, Shortfall $ 2,656, Shortfall $ 2,867, Shortfall $ 2,965, Shortfall $ 2,186, Shortfall $ 2,688, Shortfall $ 2,742, Shortfall $ 2,711, Shortfall $ 2,649, Shortfall $ 2,604, Shortfall $ 2,556, Shortfall $ 2,542, Shortfall $ 2,678, Shortfall $ 2,662, Shortfall $ 2,404, Shortfall $ 2,412, Shortfall $ 2,738, Shortfall $ 2,753, Shortfall $ 2,991, Shortfall $ 3,027, Shortfall $ 2,959, Shortfall $ 2,772, Shortfall $ 2,587, Shortfall $ 2,050, Shortfall $ 2,055, Shortfall $ 1,600, Shortfall $ 1,695, Shortfall $ 1,645, Shortfall $ 1,273, Shortfall $ 686, Shortfall * Note: Market Value figures are based upon current pricing. Actual redemption values may be slightly higher or lower.

5 Deferred Comp Investments Not Transferring to COV 457 Anytime Soon For non-hybrid employees contributing to the City's Deferred Compensation Plan, VB 457, transferring your accounts from Empower to the new VRS Commonwealth of Virginia {COV) 457 has been further delayed. The transfer is not expected to take place until three years from now. What has caused further delay? As the economy improves, the Federal Reserve has been raising interest rates. Unfortunately, these increases have had a negative effect on Stable Value Funds everywhere. Currently, employee investments in the Stable Value Fund (entitled Virginia Beach Fixed Income) cannot be sold at book value. This means the City cannot transfer the accounts and maintain the amount you contributed. The market value-what your investments are worth today-has not matched the book value due to the Federal Reserve's rising interest rates. As we shared with everyone in May 2018, the City's Deferred Compensation Board decided that transferring funds from the VB 457 to COV 457 shouldn't happen until the Stable Value Funds offer the best value for our participants. Due to the rising interest rates, they now see that a new strategy is needed. How are we addressing the issue? The Deferred Comp. Board will be issuing a Request for Proposal (RFP) to find a business to serve as our record keeper and to manage the Stable Value Fund. We want to issue a new contract-not to exceed three years-to a record keeper offering lower rates (than what we have now) and a new investment strategy for the Stable Value Funds. By doing this, the City feels we'll be able to transfer the funds at book value and employees will not lose the principal of their investments in the Stable Value Fund. But, this will take some time-thus, the delay in making the transfer. Our current record keeper is Empower. Their contract was extended to November 2019 to ensure continuity, thus providing an Empower representative to continue to assist deferred compensation participants until the new contract begins. Delay does not impact contributions This delay in no way impacts your current contributions to the VB 457 or the COV 457. The City still plans to transfer all of our deferred compensation accounts to the new COV 457 once the Stable Value Funds reach book value. They don't want to transfer some accounts and not others. They want all to be transferred together. In the meantime, employees can feel comfortable continuing to contribute to the VB 457 or the COV 457. The choice is yours. If you have any questions about this, please contact Finance/Payroll at

6 City s Deferred Compensation Plan Plans to transition from the VB 457 to the COV 457* *Commonwealth of Virginia, administered by Virginia Retirement System

7 Defining a plans are supplemental defined contributions retirement plans for governmental employees Similar to 401(k) Voluntary contributions pre taxed Tax deferred and Roth Options Defined by IRS Code 2 2

8 Deferred Compensation key component of financial independence Current VB 457 established by City Council March 23, person board, financial advisor (Segal) & auditor Plan is funded by revenue sharing and explicit fund fees Hybrid Retirement Plan spurred evaluation of City/School 457 Plans (January 1, 2014) Current VB 457 contract expiring: Empower Retirement (June 30, 2018 extended to November, 2019) 3 3

9 Initial Path Forward Deferred Compensation Board voted to move City s VB 457 Plan to COV 457 Plan Sept. 13, 2017 Briefings to City Council and School Board Dec. 12, 2017 City Council actions Feb. 6, 2018: COV 457 Adoption Agreement Sheriff Cash Match Program (401a) School Board authorized VRS Adoption Agreement Feb. 13, 2018 Transition process was expected to take four months and be completed no later than June 30, 2018 Issue with the discontinuance of the Virginia Beach Fixed Income Fund a Stable Value Fund to ensure a full book value settlement. 4

10 Stable Value Fund (SVF) A conservative investment fund made of fixed income investments with preservation of principal and interest Due to interest rates rising, the Market value for SVFs has been less than Book value Deferred Comp Board took a wait and see approach but with interest rates and the transaction fees, timing (up to 60 days) is unlikely that the status quo would enable the transfer to be at full Book value 5

11 Deferred Comp. Board Reviewed Various Options 1. Status quo: Continue with Empower for short extensions with the hope the SVF market to book divergence closes 2. Issue a Request for Proposal for record keeper and SVF manager with that process requiring the SVF to have a guarantee of full Book value at the end of a three year term 3. RFP for record keeper and separate process for SVF manager with the SVF having a guarantee of full book value after three years 4. RFP will help ensure that employees will be receiving favorable fees and rates 6

12 Things that won t change Deferrals through payroll deduction pre tax Investment offerings including Target Date Options Board Oversight of the Plan 7

13 Next Steps Communication provided today to employees/participants Issue RFP and evaluate If new vendor is selected, transition to new record keeper At end of the new contract term, transition to COV 457 plan 8

14 COV 457 Council Decision Next two slides explain decision to move to the COV 457, as approved by City Council Will discuss if needed 9

15 Overview of the COV 457 Plan Professionally managed and based on best practices Collective Investment Trusts instead of mutual funds White Labeling instead of named fund Explicit fees instead of implicit fees Fund selection and record keeper are separately managed VRS regularly reviews record keepers and utilizes a competitive procurement process to obtain services Current record keeper is ICMA RC VRS manages investments separately from record keeper Significant cost savings Fund fees are generally lower due to the size of the COV 457 Plans and use of passively managed funds Over $2.95 billion under management compared to $280 million for City A dedicated representative for employee education 10 10

16 Advantages for Managed Participants Cost savings avoid 45 basis points for management paid today (in addition to the fund fees) Target date funds provide the do it for me all in for 8 basis points (plus annual record keeping fee of $30.50) On site representative can assist with understanding options Example of saving for a $100,000 portfolio: Current average fund fee of 60 basis points plus management fee of 45 basis points Annual cost of $1,050 Under COV 457 target date fund fee of 8 basis points plus $30.50 annual record keeping fee= $ Annual savings of $ from fees Over 30 years the participant will have the additional value of investments of about $74,000 over that period (assuming 6% return) 11