Deferred Compensation FAQ12/31/13

City and Borough of Juneau (CBJ)

Deferred Compensation (457 Plan) Review and Request for Proposal (RFP) Process

Frequently Asked Questions – December 31, 2013

CBJ initiated three 457 Plans in the 1980s. The governance documents and investment options have not been updated to meet the current industry standards for fiduciary duties. In most instances the fees paid for program administration and investing participants’ money is higher than currently available options.

CBJ undertook a total Plan review to better understand the cost, investment structure and service offerings available in the marketplace as well as to review best practices for retirement plans. We have conducted a competitive proposal to determine if we can improve our existing program. The goal is to deliver a product that will be good for all participants. Consolidation to one recordkeeping vendor may be the outcome of the RFP process. Regardless of the final plan structure, however, we expect this process to lead towards beneficial outcomes and additional value for participants.

Below are some questions we have received and our answers.

1.Question: I retired from CBJ in 2006. I have reached the age where am receiving IRS Mandatory Required Distributions (MRD). Should my current provider not be selected as a CBJ provider, I ask that retired employees already receiving MRD’s be allowed to continue their existing provider rather than transfer assets to a new or different provider.

Answer: If the CBJ selects a new provider(s), participants that are in distribution, including those using a mandatory required distribution protocol, will continue to receive payments according to their prior arrangement, without missing payments.

2.Question: Why is it beneficial to have fewer investment options?

Answer: Over the past 20 years a series of studies have been done on the impact of offering a large number of investment options in a voluntary defined contribution plan, like the CBJ’s 457 Plan. These studies have consistently shown that increasing the number of investment options beyond 25-30 can lead to decreasing plan participation and confusion; the more funds to choose from, the fewer employees participate. Surveys and focus groups have revealed that many potential participants are overwhelmed or intimidated with all of the choices, and simply do not enroll, or struggle to make investment allocation decisions once enrolled in the Plan.

In reviewing the current CBJ’s 457 Plan, most participant assets are concentrated in 15 funds. For instance, ICMA-RC has 53 fund options, in which the top 15 funds have 82% of the assets. The Hartford option has 32 funds in which the top 15 funds have 93% of the assets. Equivest-AXA has 53 funds and 96% of the assets are in 15 funds.

3.Question: Why will it not be up to the employee whether or not they want to stay with their current investment company? And why does the employer get to decide which investment company is available to employees?

Answer: The CBJ’s IRS Code Section 457 Deferred Compensation Plan is an employer sponsored retirement plan under the law, and employers who sponsor such plans have a fiduciary responsibility to understand and oversee their plan for the exclusive benefit of the participants.

4.Question: Is it smart to have only one company to choose from?

Answer: Consolidating to one record keeper is one potential outcome. It has been shown in many similar cases that a single vendor can provide an optimized set of participant services while help lowering participant costs and providing institutional quality investment options. Many governmental plans have shifted towards the single vendor model because of the better quality retirement program that can be developed. Corporations and even the Federal government use a single vendor model today. The Plan will continue to utilize multiple different investment funds, which will provide a wide variety of quality choices.

5.Question: What other public employers have gone through a process like this?

Answer: In Alaska, the City of Anchorage, the Alaska Railroad, and the State of Alaska have all taken a similar path in the oversight of their 457 Plans. In the Pacific Northwest, the cities of Seattle, Tacoma, Spokane, Kent, Richland, Renton, Bellevue, Shoreline, Portland, Eugene, Gresham and many other public employers have conducted processes like these in the past ten years.

6.Question: I have my 457 money invested in a program that will charge me a fee if I transfer my money to another provider. If the CBJ consolidates to a single provider and my money gets transferred, am I going to have to pay this cost?

Answer: The CBJ is aware of the surrender charges or “contingent deferred sales charges” associated with some of the providers to the Plan today. The CBJ will review two scenarios in this process; one being the absorption of the charges by the new provider and the second being the absorption of the charges by the plan. Under no scenario will the participant have to pay the surrender costs.

7.Question: What other specific benefits might we expect from the CBJ’s RFP process for the 457 Plan?

Answer: In addition to lower fees, the CBJ anticipates eliminating the potential for participants or CBJ to have to pay surrender charges or other “back end fees” in the future. The CBJ also expects to be able to provide new services to participants that will help them in choosing investment options, planning for taking distributions from the Plan, and in understanding how their other retirement programs (and their spouse’s) relate to the 457 Plan. This process will help provide greater transparency to participants and will make it easier to save for your retirement future.

8.Question: Although recently retired, I have maintained my participation in the CBJ plan. I have continued to meet with my representative and receive valuable advice at no cost to myself. Will this service continue for free?

Answer: Going forward CBJ will require any new provider to provide onsite counseling and advice with any cost being included in the base fees. The current services being received are not free. All participants either paid a fee up front (possibly deducted from an investment return) when they selected their investment option or have ongoing monthly fees that are much higher than currently available in the marketplace.

9.Question: Currently I receive service from a local provider and have the option of meeting directly with that representative. Will this service continue to be available if a new provider is selected?

Answer: The RFP process does include a local preference, however, if a non-local provider is selected, we will require that face-to-face meetings be provided to all participants at the same or a higher level as current providers.

10.Question: I currently have a guaranteed interest income on my contributions that may be higher than provided in a new plan.

Answer: Two of our existing plans have had participants who entered into annuity contracts that guarantee minimum rates of interest income on contributions. For participants that have a guaranteed interest rate of 3 or 4%, in the current low interest rate environment, any new guaranteed investment income rate will be lower than your current rate. However any investments you have in stock and bond mutual funds is likely to be much lower under a new contract (increasing net returns in this area). The types of guaranteed interest funds that are being considered going forward, while paying lower interest rates today, have performed very well relative to their peers and the interest income increases if interest rates go up.

11.Question: My existing annuity contract provides a death benefit that assures the original value of my contributions will be paid out even if my current account value is below that level.

Answer: The current fee structure results in a high cost for this type of protection. If this type of insurance is important to you this can be obtained directly from your current provider separately from the CBJ DC plan or from other insurance agents.

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