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, November 17, 2017, commencing at 10:11 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), left at 11:39 am Carolee Kubo (Director of Department of Human Resources (DHR) & Committee Member) Douglas Chun (Committee Member) Michael Golojuch (Committee Member) Kenneth Harris (Committee Member) Joan Bolte (Internal Control Chief Accountant & Committee Member) Vera Onouye (Chief, DHR Employment and Personnel Services Division), arrived at 10:30 am 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) Gavin Gruenberg (Vice President Institutional Clients, Voya Financial Retirement Solutions (Voya)) Jared Nakamoto (Voya - Hawaii Case Manager) Bill Tugaw (Managing Director NFP Retirement (NFP)) Scott Dauenhauer (Senior Consultant NFP) Vince Learned (Plan Advisor NFP) I. CALL TO ORDER With quorum present Nelson H. Koyanagi, Jr. (Nelson) called the meeting to order at 10:11 a.m. and presided as chair of the meeting. Laura Shimada (Laura) acted as secretary of the meeting. II. MINUTES OF PREVIOUS MEETINGS Action Committee members reviewed the minutes for the March 21, 2017 Special Committee Meeting, August 4, 2017 Quarterly Meeting, and September 8, 2017 Special Committee Meeting. Nelson Koyanagi noted that for the August 4, 2017 meeting minutes there were a few corrections. The Committee unanimously adopted a motion by Carolee Kubo, seconded by Douglas Chun, to approve the 1
March 21, 2017 Special Committee meeting minutes, the August 4, 2017 quarterly meeting minutes as corrected, and the September 8, 2017 Special Committee meeting minutes. III. PUBLIC COMMENTS Information Nelson Koyanagi asked if there was any public input. No one from the public attended the meeting. IV. VOYA REPORT Information/Action A. Quarterly Report - Gavin Gruenberg (Gavin) reviewed the quarterly report for the period January 1, 2017 to September 30, 2017. Gavin stated that there is a new format for the report and this is the first time everyone is seeing this format. Highlights included: Plan Pulse is a sheet that allows the Committee to gauge the direction and health of their plan by reviewing how key plan statistics have increased, decreased, or stayed the same over time. Plan Pulse compares the period of January 1, 2016 to September 30, 2016 against the period January 1, 2017 to September 30, 2017. Plan Assets increased and that had a positive impact. Participant Accounts increased and that had a positive impact. Employee Contributions increased and that had a positive impact. Employer Contributions does not apply to City s plan Overall Distributions increased and that had a negative impact. Loan Requests did not change so no impact. Plan Statement is a comparison by period. Contributions went up, Distributions went down, and Other Activity went up. From September 2013 to September 2017, the total plan assets appreciated by $56 million for a total of $645,170,609.94. Participation is a key indicator of the success of your plan. At the beginning of the period there were 8,628 participants, 446 new accounts, 223 closed accounts for a total of 8,851 accounts. There were 538 terminated employee accounts with a balance of less than $5,000. Gavin stated that the Committee may want to push out accounts with less than $5,000. Donna Leong (Donna) asked how much would that cost. Gavin responded there would be no additional cost and 538 out of 8,628 accounts would not have much impact. Accounts under $1,000 could be cashed out and accounts with $1,000 to $5,000 could go to an IRA account. Participants by age group: The under 30 and 60 plus age groups are growing. There are 7 unknown accounts. They are unknown because there is nothing in the record keeping system for these accounts and these types of funds are usually in a trust account. Average deferral rates for the plan is good with 9.3% which is higher than the industry benchmark of 6.6%. The average is based on 265 people. 2
Contributions by percentage will boost the amount deferred by participants. The ability to contribute to the plan on a percentage basis is relatively new and nearly 6,000 contribute to the plan today when you include both percentage and flat dollar contributors. There were 37,274 total inquiries using the internet, 14,997 by mobile phone. There were no inquiries by VRU, participants dial in to an 800 number after hours or CSA (customer service associate) inquiries. Of the total number, there were 2,244 unique internet inquiries and 453 unique mobile phone inquiries. Unique means it was not a repeat inquiry. Bill Tugaw (Bill) asked if they can capture the calls here. Gavin said they have the information but can add it to the next report as Voya typically provides this reporting at the Annual Meeting in February of each year. For the transaction activity, the summary shows that 2017 is going up. The net cash flow for September 2016 was $1.6 million and in September 2017 it was just under $6.3 million. The pre-tax and Roth contributions are going up. For the withdrawal summary, which include rollover to IRAs, first quarter was $4.3 million, second quarter was $7.25 million, and third quarter was $5.3 million. Five companies, one was American National, were the main recipients with many other companies receiving smaller rollover amounts. Gavin can provide the list of the 5 companies. Donna asked if the companies are going after our people. Bill Tugaw (Bill) said yes, independent advisors are going after retirees to get them to move their retirement money. Donna asked if the retirement information is readily available. Carolee Kubo (Carolee) responded yes. Donna asked if it is available to the public. Carolee responded no, the information is only available to the Committee, not the public. Under other activity, a total of $2.1 million assets were transferred into the plan. Employee contributions are continuing to increase. Roth contributions are growing, it was $937 million in 2013 and it was $2.68 million in 2017. The average participant contributions and contributing participant counts have been increasing. The colors on the charts show an upward trend. The average participant balance is trending up. There was a dip in 2015. For the age group comparison, our plan is great compared to the benchmark. Donna asked why we are higher. Gavin said that our participants are deferring more money. Jared Nakamoto (Jared) added that people in the City are more investment minded. Their mind set makes them more inclined to defer money for retirement. Jared said Voya tries to encourage them to defer more by telling them that their ERS retirement is for their regular expenses like rent, mortgage, utilities, and the money they defer is their play money. 3
Douglas Chun (Douglas) commented that the high numbers are especially commendable because of Hawaii s high cost of living. Bill said the community here is more engaged so you get higher participation. Joan Bolte (Joan) commented that people here are more aggressive with their investments. Jared said yes and they stay aggressive longer. The death claim distributions increased significantly. The population is aging and this will continue to be an upward trend. Hardship withdrawals peaked for a couple of years but are more stable now. Minimum distributions are increasing and periodic payments have been increasing although last year was higher than this year. Lump sum withdrawals were stable but jumped up this year. Bill noted that may be because of the fiduciary rule that s going to take effect. 69% of our participants have a diversified retirement portfolio. The number of investment options vary from 1 investment to plus 10 investments with the largest number, 3,589 participants, having only 1 investment option. After the single investment participants, the next largest group, 2,527 participants, fall in the asset allocation class. Donna asked whether Voya reaches out and recommends that participants change their investment options, especially if there is a large dollar amount. Jared responded that they could but all of the investment funds are good, which is in part due to NPF, so they haven t reached out. Joan pointed out that the Vanguard Target Retirement 2045 fund has the largest number but many of our employees are in their 50s. Gavin said they will look at the target date numbers in the funds by age and will examine the data and come back next quarter with more information. The contribution limits for 2018 is $18,500 which is a $500 increase over 2017. B. Stabilizer Update - Gavin provided an update on the Investment Portfolio. The manager has out-performed the last quarter. The portfolio gross was 1.01% over the benchmark of 0.72%. In 2008-2009 there was a change in manager and the new management team has added value since that change. As of 9/30/17, the market to book ratio was at 101.29%. We want to be par (100%) or a little above. C. Communication/Education Campaign Update - Gavin provided an update on the Communication/Education Campaign s 3rd Quarter activities: Beneficiary Update: Working with staff on a campaign to get participants with no beneficiary on file to designate a beneficiary. Enrollment Campaign: Working to finalize the brochure to encourage employees to enroll in the plan. D. National Retirement Security Week summary - Jared provided an update on the campaign. It was a good year. There were 101 participants who signed in for the seminars. Last year, there were a total of 84. 4
Of the 101 who signed in, there were 67 individuals, some attended multiple sessions, compared to the 59 individuals in 2016. The week before the seminars, UPW conducted a series of meetings about a one-time dump in to deferred compensation for a lump sum payment. They had 80 people who wanted to do it and got 2 more during the retirement seminars. The 2014 campaign had the highest number of participants with 129 attending. E. Cyber Security Session - Gavin provided information Voya prepared on cybersecurity awareness. Laura Shimada (Laura) stated that it wasn t necessary for him to review the information. The item was placed on the agenda because the Committee wants to schedule a presentation with other interested departments and Gavin said he would be happy to do that. F. Excess Reserves Gavin asked if the Committee wants to revise the fee reimbursement amount. Bill noted that with fee equalization, we were able to that and NFP can help. Bill said that other employers will do it for a holiday where the participants don t pay the fee for a quarter. Gavin said they just need to know the amount and will reduce the fee accordingly. Nelson said we will take a look and get back to you. V. SST BENEFITS/NFP CONSULTING REPORT Information/Action A. Semi-Annual Fund Review Bill began the review by explaining that on all charts, yellow caution signs are funds that are on the watch list or funds they want to put on the watch list. Those with green check marks are funds that can come off the watch list and ones with red stop signs are funds that will be recommended for deletion. An index fund has an expense that is not in the benchmark the index is following and should be slightly negative against its benchmark returns and should be light gray rather than red. He also said that the number of participants in the fund shouldn t be considered when deciding on a fund, what s happening with the fund is more important. Bill explained that the Expenses section (Tab 7) has the fee equalization model and fees charged are credited back to the participant invested in the fund by Voya s record-keeping system. In each mutual fund in the portfolio, we ve got the lowest net expense ratio share class paid by participants available. Voya s and the City and County of Honolulu s (City) combined revenue requirement is currently being charged to participants at 0.18% (18 basis points), 0.12% is Voya s contractual revenue requirement and 0.06% is being collected by Voya as the administrative expense of the City. We could reduce the City s revenue requirement to reduce the current overfunding and pass the savings on to the participants. 5
Bill explained that Tab 8 contains the City s 457(b) Portfolio Snapshot. The Snapshot contains the mutual fund positions only and doesn t contain the Stabilizer assets. It s a very balanced portfolio. Vince Learned (Vince) covered the Third Quarter Market Review (Tab 2) and said the markets are performing extremely well. Domestic equity markets are at all-time highs and were a positive 4.6% for the third quarter. International equities were also performing very well and outperformed domestic equities with third quarter returns of 5.5%. The broad market fixed income market eked out a positive 0.8% return with High Yield leading the fixed income market with a positive 2.0% return. Scott Dauenhauer (Scott) covered the Executive Summary (Tab 3) and said our plan performance is good compared to the benchmark. B. Watch List Update Scott conducted the update review and noted the following: American Funds Growth Fund of America: He mentioned that fund manager Ronald Morrow is retiring and Mark Casey is replacing him but did not recommend action at this time. Fidelity Advisor New Insights - The team, led by Will Danoff, has outperformed the peer group over 1 and 3 year periods, but continues to trail the index (which has been tough to beat). The absolute performance has been outstanding as both domestic and international markets continue to move higher. New Insights holds almost 11% in international and has a market cap that is $67 billion, substantially smaller than the index and peer at $81 and $119 billion, respectively. Financial Services still represent a large overweight to the index. Scott recommends this fund remain on the watch list due to risk/return characteristics and peer group ranking. TIAA-CREF Social Choice Equity Scott noted that low expenses and low turnover give this fund an edge. Social Choice is essentially an ESG index fund. The fund beats the peer group over all time periods and only trails the index by about the expense of the fund. Scott recommends this fund remain on the watch list due to risk/return characteristics and peer group information ratio. Allianz NFJ Dividend Value Scott noted that this fund is trailing the peer group year-to-date, it is beating both the peer and index over 1 year by period 200+ and 300+ basis points, respectively. The fund has struggled in the past few years but had a great 2016, has had some very good months in 2017 and is beating the index. NFJ is a fundamental value manager and has a good process in place, but the market has not been its friend in the recent past. This seems to be changing and though the 3 and 5 year numbers are poor, we continue to believe sticking with this fund will yield dividends. Scott recommends this fund remain on the watch list due to risk/return characteristics and peer group ranking. Virtus Ceredex Mid Cap Value Equity (was Ridgeworth Mid Cap Value Equity) Scott notes that management has not changed and neither have the fees. NFP will continue to monitor to see if this changes. Scott 6
recommends this fund remain on the watch list due to risk/return characteristics Lazard Emerging Markets Equity Scott notes this fund is trailing the peer and the index. This is not the first time we have seen this fund diverge significantly from the index and it won t be the last. The biggest source of underperformance has been the underweight to China. Scot recommends that Lazard be placed on the watch list. On a motion duly made by Douglas Chun, seconded by Kenneth Harris, and unanimously carried, the Committee voted to approve the Watch List as recommended. C. Legislative and Regulatory update Bill briefly covered the information in News & Views. Bill noted the change in contributions amount. It will be $18,500 for 2018. Bill noted that the federal fiduciary rule became effective in June 2017 but the DOL asked for an 18-month delay before putting the penalties in place. Scott noted that DOL will enforce the rule for if there is a willful disregard for the fiduciary rules so it is bests to act as if the rule is in place. Bill noted there is a house bill to give jurisdiction of the rule to the Securities and Exchange Commission (SEC) and take it away from the DOL. Bill noted that the federal tax reform bills do not have Rothification in the bills and the 10% penalty when hit age 59-1/2 for 457 was removed. There is a catchup provision on the table that lobbyists may be able to have removed. There are concerns by realtors if the mortgage interest deduction question changes from $1 million to $500K. If this provision stays, then we will have to look at other areas that need to be addressed. They are shooting to pass the bill before Christmas. D. Fee Policy Statement Bill said that NAGDCA brought it up at the last conference as something that is good to have but they can revisit this at a later date. Nelson said we will defer for now. Donna had lots of comments but she had to leave. E. Other issues Bill provided copies of NPF s NAGDCA 2017 Conference Highlights. After NFP s Report, NFP and Voya were excused. VI. OTHER BUSINESS Information/Action A. NAGDCA 2017 Conference Highlights - Everyone who attended said it was very informative. Carolee said the last speaker at NAGDCA was very entertaining. 7
B. Consulting Services RFP status Laura reported that staff and the Working Group met to review the proposals. Reference questions were sent to the references of certain companies and we were waiting for responses. C. Other Issues - none VII. REPORT ON ADMINISTRATIVE EXPENSES Information There was no report. VIII. NEXT MEETING DATE Information Annual and First Quarter Friday, February 23, 2018 8:00 a.m. - 12:00 pm Annual Meeting: 8:00 a.m. 9:55 a.m. First Quarter 10:00 a.m. 12:00 p.m. Second Quarter Friday, May 18, 2018, 10:00 a.m. 12:00 p.m. 457 University Training Thursday, August 9, 2018, 9:00 a.m. 3:00 p.m. Third Quarter Friday, August 10, 2018, 10:00 a.m. 12:00 p.m. Fourth Quarter Friday, November 16, 2018, 10:00 a.m. 12:00 p.m. IX. ANNOUNCEMENTS There were no announcements. X. ADJOURNMENT There being no further business, the meeting was adjourned at 12:00 p.m. Respectfully submitted, Laura Shimada Secretary 8