CITY AND COUNTY OF HONOLULU DEFERRED COMPENSATION PLAN COMMITTEE MEETING MINUTES OF THE QUARTERLY MEETING OF THE COMMITTEE A meeting of the City and County of Honolulu Deferred Compensation Plan Committee was held on Friday, August 4, 2017, commencing at 10:02 a.m., at the Mayor s conference room, 530 South King Street, 3 rd floor, City Hall, Honolulu, Hawaii. Present: Staff: Guests: Nelson H. Koyanagi, Jr., Director (Director of Department of Budget and Fiscal Services (BFS) & Committee Chair) Donna Leong (Corporation Counsel (COR) & Committee Member) Carolee Kubo (Director of Department of Human Resources (DHR) & Committee Member) Douglas Chun (Committee Member Michael Golojuch (Committee Member) Joan Bolte (Internal Control Chief Accountant & Committee Member) Peter Biggs (BFS Deputy Director) Vera Onouye (Chief, DHR Employment and Personnel Services Division) Jennifer Tobin (Chief, DHR Benefits, Research, and Transactions Branch) Lynn Wakatsuki (Deputy Corporation Counsel) Laura Shimada (Deferred Compensation Plan Committee Administrator and BFS Administrative Services Officer Selectee) Georgette Lau (BFS Personnel Assistant) Gavin Gruenberg (Vice President Institutional Clients, VOYA Financial Retirement Solutions) Jared Nakamoto (VOYA - Hawaii Case Manager) Bill Tugaw (President/CEO - SST Benefits/NFP) Paul Hackleman (SST Benefits/NFP) I. CALL TO ORDER With quorum present Nelson H. Koyanagi, Jr. (Nelson) called the meeting to order at 10:02 a.m. and presided as chair of the meeting. Georgette Lau acted as secretary of the meeting. II. INTRODUCTION OF ELECTED COMMITTEE MEMBERS Nelson introduced the newly elected Committee members in attendance Douglas Chun (Douglas) (Active Employee Member) and Michael Golojuch (Retiree Member). Kenneth Harris (Active Committee Member), who was unable to attend the meeting, was also acknowledged for his re-election. Nelson also introduced Laura Shimada, BFS Administrative Services Officer Selectee and staff to the Committee. 1
III. IV. MINUTES OF PREVIOUS MEETINGS Action Committee members reviewed the minutes. Bill Tugaw (Bill) of SST Benefits /NPF noted that on page 5 of the minutes, Burtus should be amended to Virtus. The Committee unanimously adopted a motion by Carolee Kubo, seconded by Donna Leong, to approve the minutes, as amended, of the May 19, 2017 quarterly meeting. PUBLIC COMMENTS Information Nelson Koyanagi asked if there was any public input. No one from the public attended the meeting. V. VOYA REPORT Information/Action A. Quarterly report Gavin Gruenberg (Gavin) reviewed the quarterly report which included information from January to June 2017. For the benefit of the new Committee Members, Gavin explained that one of the areas he covers is a chart that shows how the City s plan compares to other plans of similar size. 1. Gavin highlighted the following: The use of matching contributions has been growing as reductions in/elimination of defined benefit (DB) plans occur, matches increase. Roth usage is continuing to grow in the City and over half of all peer group plans have Roth component. Gavin noted that there has been some talk that the tax cuts will include the Rothification of retirement savings all contributions would be on a post-tax basis. Gavin does not know whether this idea has legs or not, but discussions in Washington D.C. are continuing. The City s plan allows for hardship withdrawals (called unforeseen emergency withdrawals in government plans) as do 80% to 85% of our peer group. The Plan does not have a loan component while the majority of comparable plans do allow loans. Auto enrollment is listed in the chart. The City does not have auto enrollment as it is prohibited by State law (similar laws exists in other states). Gavin noted that auto enrollment can be negotiated, but the unions would have to agree. Douglas Chun asked why Unions would reject such a proposal. Gavin mentioned that it could be due to a lack of understanding about the plan many still view Deferred Compensation as the voluntary plan. Bill Tugaw of NFP Retirement also noted that if the proposal comes from management, the Unions may wish for an incentive to adopt it, but if labor brings it up, then management will likely agree and no incentive may be required to implement. Majority of plans have written investment policies as does Honolulu. Over 80% of the peer group has it and its best practice. 2
Honolulu has 28 investment options, we are a little above the peer groups. Bill Tugaw noted that over time, there may be opportunities to consolidate funds if some are not performing well. 4.1 was the average number of investment options, which is a little below our peer groups (4.5 to 5.7). However, If we pull out participants who are in target date or life style funds, we were at 5.3. Gavin also reviewed other information in the report: Participant activity we ended the period with 8,749 participants. With new accounts at 276 for the period, we are on pace to pick up 550 new accounts this year, which is just slightly less than last year. A chart of plan participants by age groups show that we are growing in participation in all age groups, except the 40 to 49 group. It is especially good to see the growth in the under 30 and 60+ age groups. The $14.6 in contributions for the first six months in 2017 compares well with last year s figures. Distributions, however, also increased with $19.9 million compared to $14.8 last year. There was a negative net cash flow for the plan YTD. Participants seem to be pulling out monies and placing them in private investment options (i.e. IRA s). Voya tries to educate participants as to advantages of staying in the Plan, but it is an individual s choice. There was a discussion on the monies leaving the plan and what can be done to help employees as they make choices on what to do with their monies when they retire. Paul Hackleman (Paul) noted that one idea that came out of a presentation at NAGDCA was to try to convince people who are rolling over their monies into another plan to leave a small amount in their City account. This way if they find out the fund they moved their monies to is not what they expected, they have the option to move the monies back. They do not have this option if they close their City account. Paul talked about revisiting the rollover checklist, but right now things are not settled with the U.S. Department of Labor (DOL) s fiduciary rules. Asset transfers at $1.7 Million, rollovers into the plan from existing or new participants, are good to see. Participant Balances in almost all the age groups, except for those in their 30 s, is above the Voya average often significantly above. Very favorable market returns in 1 st half of the year; ended the period at $624 million in plan assets. Donna Leong (Donna) noted the high percentage of assets in the stable value fund (23.7%). Gavin mentioned that it has actually been up in the mid-30 s in the past. Gavin said that generally the City s plan has less than other public plans in stable value. Gavin pointed out one of the funds Templeton Global Bond Fund. We are currently in the Class A fund which as a fee of 90 basis points. However, the fund pays Voya 40 basis points of revenue share, which Voya then refunds to participants. Therefore, the net fee for participants is 50 basis points. Now, the zero revenue share class 3
of the fund Class R6 is at 49 basis points one basis point less than the net cost of the Class A share. Gavin advised that with the Committee s okay, they can move our funds to the Templeton R6 Class and save our participants one basis point. Nelson asked what the process is to change. Gavin responded that they will send participants information 30 days in advance of the change and then make the change after the 30 days has elapsed. B. Gavin Gruenberg provided the Stabilizer update. Highlights included: As was expected, the Federal Reserve raised interest rates 0.25% in June. Voya anticipates that rates will continue to increase. Duration of the portfolio is at 4.00 which is slightly shorter in duration than the benchmark, but that is by design. Overall there has been very little change in the asset allocation between Quarters 1 and 2. Compared to the benchmark of 92 basis points, the portfolio gross was 1.35% in the second quarter. Very healthy book value compared to market value with a ratio of 101.16%. Gavin Gruenberg and Bill Tugaw provided information on the Market vs. Book Value Market Value = Total Value of the bonds purchased by the manager in the portfolio. Book Value = Contributions of members (their balances) + the crediting rate. It is good to see Market Value equal to or in excess of the Book Value (100% or more) Each quarter the Voya manager sends information to SST so SST can make a recommendation on whether or not to change the crediting rate and if the recommendation is to change it, then what the change should be. The Committee has set the following process for changes in the crediting rate. a. If the recommended change (whether up or down) is more than 25 basis points, the Committee has to act on the change. b. If the recommended change is less than 25 basis points, the change can be made without Committee action. Gavin noted that the Voya manager has been maintaining the market value even with interest rates rising and the bonds lowering. C. Communication/Education Campaign Update. Gavin provided an update on the Communication/Education Campaign s 2 nd Quarter activities: Boost a campaign to encourage people to increase their contributions was launched with an email Voya sent out to 3,042 participants. The next day 4 people came in to increase their contributions. Restart a campaign to get employees who previously contributed to the plan, but who stopped their contributions at some point, to start-up their 4
contributions, was also launched with a post card being sent out to 719 participants. Voya will report on the results of this campaign at the November meeting. Enrollment a campaign to encourage employees to enroll in the plan is the one outstanding campaign from the 2 nd quarter. Voya asked if the City had some imagery that could be used for this campaign such as families with children in Ala Moana Park. The images would have to be ones that Voya is allowed to use (releases may be required). Donna suggested that Jenny reach out to the City s Communication Team to see if they have images that could be used such as images of Kaimana the monk seal pup. For the 3 rd quarter which includes National Retirement Security Week, Gavin mentioned they plan to have a live Q&A event. The event will include an option for sponsors who allow Facebook access the City does not. Action: Donna Leong moved that the City change from Templeton Global Bond Fund Class A fund to the Templeton Global Bond Fund Class R6 Fund, which will result in a net 1 basis point decrease in fees for our participants. Mike Golojuch seconded the motion and passed unanimously. D. Other issues National Retirement Security Week Gavin shared Voya s 2017 Theme Retirement Planning for All Ages. Gavin noted that this year s theme resulted from Voya integrating its Be Good to Yourself campaign with NAGDCA s Your Whole Story theme. Bill Tugaw noted that there had been discussions on the excess reserves and Voya s ability to dial down its reimbursement to the City by, for example, 3 basis points. This should be very easy to do, the Committee would just have to tell Gavin what the amount should be and to make the change so the dollars would not have to go into the plan and then be given back later to participants. Nelson asked that this be placed on the agenda for the next quarterly meeting. VI. SST BENEFITS/NFP CONSULTING REPORT Information/Action A. Watch List Update - Bill Tugaw conducted the watch list update review and noted the following: Fidelity Advisor New Insights The fund is getting much better. Manager Bill Roth (who manages 40% of the portfolio) got into energy as a value buy which was a drag on performance now it is rebounding. Bill noted that this fund s current score is a 6 and to be taken off the watch list is must score between 7 and 10. Bill anticipates this fund will be off the watch list in the next quarter. TIAA-CREF Social Choice Equity this fund is also improving. Bill noted that the fund screens the stocks it selects from so from a universe of 2,600 stocks, it can only select from 1,200 approved stocks. Even with this 5
being the case, Bill is comfortable with the fund and views it as a viable investment. The fund s current score is a 6. Bill thinks that next quarter it will improve and can be taken off the watch list. Allianz NFJ Dividend Value Bill noted that this fund is designed so if the markets turn down, it will be a big performer. However, there hasn t been a down market in a long time so their style is out of favor. NFP/SST did talk with the portfolio manager and the manager admitted that mistakes were made they picked some stocks they thought would do well, but they didn t. This fund s current score is a 5 and it has been a 5 for a while. The short term results for the fund are good, but the market is taking off. Bill recommends the fund stay on the watch list, but if there is no change by the next quarter, NFP/SST will provide alternatives for the Committee s consideration. Ridgeworth Mid Cap Value Equity (has been acquired by Virtus Fund Advisors LLC and the new fund name is: Virtus Ceredex Mid-Cap Value Equity) Bill notes that the manager, Don Worrell, will remain even with the ownership change. Don Worrell has been the fund s manager since 2001. Bill mentioned that the current fund score is a 7 and the recommendation next quarter may be that it come off the watch list. Bill did note, however, that Morningstar does not like Virtus because Virtus increases the expense ratio. If they do that NFP/SST will recommend changes, but it hasn t happened yet. On a motion duly made by Carolee Kubo, seconded by Douglas Chun), and unanimously carried, the Committee voted to approve the Watch List as recommended. B. Legislative and Regulatory update Bill covered the News & Views and noted the revised format. Bill noted that the lead article in News & Views is about Cyber Security Concerns. Bill noted that The Employee Retirement Income Security Act of 1974 (ERISA) Council made a recommendations on cybersecurity to the DOL and that the DOL was looking at the recommendations. (ERISA requirements are not applicable to the City s plan, but they are viewed as best practices.) Bill mentioned that they know of a couple of plans that have been attacked with some experiencing attempts to change mailing addresses or requesting loans. Bill asked Gavin about Voya s efforts to maintain security and Gavin noted that Voya just had internal training on it and that it is an area of great concern and a considerable amount of resources are being allotted to it. Voya does a lot of internal work even conducting phishing campaigns on their employees if a person clicks on the link, they receive additional training. Gavin noted that Voya also uses a group certified as ethical hackers to see what vulnerabilities there may be in the VOYA system so they can be addressed. Gavin said he could organize a presentation on cybersecurity for the Committee. Bill mentioned it could also be the focus of the next 457 University. Donna 6
recommended that DHR, BFS and DIT be invited when we have the presentations. Paul noted as part of the Washington Update that there has been a lot of efforts to address the DOL fiduciary rules and given all those initiatives there is uncertainty on how the DOL rules will eventually settle. Bill noted that the NAGDCA conference will focus on behavioral economics which is something the Committee has previously discussed. Bill provided some background on Rothification which Gavin also covered in his report. The background is that when the new federal administration (Administration) came out with their tax reform papers, it talked about the protected areas being 1) charitable gifts and 2) mortgage interest that was it; no mention of retirement plans. However, verbally, the Administration mentioned retirement plans as also being protected. Bill noted that as discussed in 457 University, when Washington needs money, they cut back on retirement things right now, Washington wants money so they may be considering having the retirement contributions be after tax contributions. C. Fee Policy Statement Paul reviewed the draft Fee Policy Statement. Paul noted that because Committees cannot put fees on autopilot, NFP/SST developed a draft policy statement. Paul acknowledged that this was a very rough first draft, but he thought it was a good idea for the Committee to participate in a policy level discussion on the idea of having a Fee Policy Statement. If a decision is made to adopt such a statement, it would enable the Committee (if questioned), to show it thought about the issue at a strategic level. A statement will be added to the draft that the policy is to be reviewed at least annually. Paul wanted to find out whether the Committee believes it would make sense to get a group together to review the policy and have NFP/SST work closely with Voya especially on the communication to participants. They want to make sure Voya can provide the information desired. Paul indicated what they would need to know from the Committee is: 1) does this make sense for the Committee to pursue and 2) does it make sense for NFP/SST to work with Voya on the policy. Gavin noted he has not seen other plans doing this, but it is nice to have. Peter Biggs (Peter) asked if this covers plan expense fees rather than individual mutual fund fees. Paul noted that fund fees are looked at during the plan review. Peter noted it would make sense to cover plan expense fees in a fee policy. Nelson agreed with Peter that it makes more sense if the focus is on what Gavin talked about rather than regular expenses. Paul agreed that should be expressed. Donna expressed the concern that you can overregulate something. Donna mentioned that she can understand having a fee policy for fee changes, but wondered whether there is a best practice about the universe of policies needed so we don t overregulate, but we regulate appropriately. Donna asked that this be considered at the 7
next meeting and that NFP/SST provide information on what other fundamental components would be needed for the policy D. Other issues - none After SST s Report, SST and Voya were excused. VII. OTHER BUSINESS Information/Action A. Consulting Services RFP status Lynn Wakatsuki and Jennifer Tobin reported that responses have been received. However, the responses have not yet been opened as they are trying to gather all the Attestation documents from the Committee members and staff. Lynn also noted that the working group for the RFP consisted of Nelson Koyanagi, Ken Harris and Chase Masuda. Since Chase is no longer on the Committee, she noted we would need a replacement for him. Nelson asked for volunteers to serve on the Committee and Douglas Chun volunteered. He will take Chase Masuda s place in the working group. Joan Bolte volunteered as an alternate should one be needed. B. Election Results Jennifer reported on the Election Results: The election was certified on June 20, 2017. Kenneth Harris and Douglas Chun were elected as Active Employee Members and Michael Golojuch was elected as the Retiree Member. The number of ballots distributed was 8,444. The number of valid votes cast was 851 for a response rate of 10.1%. The total cost for the election was $24,640.83 ($8,246.07 for Phase I and $16,394.75 for Phase II. Jennifer also noted that she, Kim and Lynn discussed ways to improve the Election process the next time and Kim documented the discussion with a short list of items that may be considered in the future. Jennifer was asked to follow up and provide information on how the numbers (percentage of votes cast) compared with the last election. Jennifer was also asked to attach the list of items to the minutes. C. Interim Gift Guidelines Lynn Wakatsuki reported that the Interim Gift Guidelines were adopted by the Committee on August 6, 2015 and were also adopted in 2016 to cover the NAGDCA conference. A draft permanent gift guideline is being presented for the Committee consideration. The draft provided took into consideration the ERISA and gift policies from New York and other governments in trying to identify the kinds of things that are treated as reasonable. Donna noted that the gift guidelines came about because when she attended her first NAGDCA conference she was being invited to expensive dinners by Voya and others and guidelines were needed because the Committee has fiduciary responsibilities. Donna identified what must be covered by the guidelines 1) that it cover the Committee members and staff, 2) that it defines what a gift is and 3) that it identifies exceptions to the policy which is important. Donna noted that the draft policy treats certain gifts as being reasonable and/or insubstantial (these are the exceptions). Under the draft gifts with an aggregate value of less than $250 in a calendar year were included in the reasonable/insubstantial category and could be received by a Committee member staff. The $250 exceeds the City Ethics 8
Commission standard (the Committee is not covered by the Ethics Commission requirements). However, $250 is the ERISA standard. There was discussion on item 6 on the list of reasonable/insubstantial gifts this item covers meals or refreshments brought into a meeting site during a working meeting as a result of the discussion the value under which the gift would be considered reasonable/insubstantial was increased from $20.00 to $25.00 in consideration of the general cost of providing such meals. Donna noted it was important for Committee members to understand that if a gift is being given to have a Committee member vote a certain way, it is a conflict and the gift cannot be accepted even if it is under $250. Nelson will call a special meeting, before NAGDCA, to discuss the draft guidelines. D. National Retirement Security Week This was discussed during Voya s report. VIII. REPORT ON ADMINISTRATIVE EXPENSES Information There was no report. IX. EXECUTIVE SESSON (as required) There was no Executive Session X. NEXT MEETING DATE Information A. Friday, November 17, 2017, 10:00 a.m. to 12:00 p.m. XI. ANNOUNCEMENTS There were no announcements. X. ADJOURNMENT There being no further business, the meeting was adjourned at 12:13 p.m. Respectfully submitted, Georgette Lau Acting Secretary 9