Retirement Plan Advisory Committee
November 9, 2012
A meeting of the Retirement Plan Advisory Committee (RPAC) was held on November 9, 2012 via video conference between the Las Vegas System Administration Office and Great Basin College.
Present: Michelle Kelley, Chair, Benefits Manager BCN; Kent Ervin, UNR Faculty Representative; Pat La Putt, Benefits Manager BCS; Carla Henson, Retiree Representative; Spencer Stewart, NSC Faculty Representative; Mike Hardie, WNC Faculty Representative; Patricia Hughes, DRI Faculty Representative; Alan Schlottmann, Faculty Senate Representative; Paul Thistle, UNLV Faculty Representative; and Frank Daniels, Great Basin College Faculty Representative
Also Present: George Dombroski and Henry Stone (NSHE); Dan Pawlisch, Ruth Schau and Brian Abshire (Hewitt EnnisKnupp)
The meeting was called to order at 8:05 am.
Following introductions, Michelle Kelley gave an overview of the comprehensive plan review that the RPAC has been engaged in since 2007 for the benefit of new members. She explained that the intent of the Committee is to create a new tiered investment structure and that the purpose of today’s meeting is to evaluate candidate funds for Tier 1.
Kent Ervin gave some background on the work of the Investment Management Subcommittee. He explained that since the retention of Hewitt Ennis Knupp, the Subcommittee had engaged in the development of a process for monitoring the performance of the various funds, had developed an Investment Policy Statement, and had developed a set of goals to guide a redesign of the Retirement Program. He explained that the Subcommittee had agreed that the big decisions that now lie in front of us regarding the structure of the investment lineup require the input of the larger Committee and that the Subcommittee therefore dissolved itself following its August 24 meeting. In effect, the RPAC is now serving as the Investment Management Committee as per the Investment Policy Statement.
Dan Pawlisch gave an overview of the Committee’s fiduciary responsibilities. He explained that although the NSHE Retirement Program is not subject to the Employee Retirement Income Security Act of 1974 (ERISA), the NSHE Investment Policy Statement states that the RPAC intends to be guided by ERISA’s fiduciary best practices. Hank Stone clarified that the Committee will be responsible for monitoring the designated investments within the Program (Tiers 1 through 3), however will not monitor the investments included in the Program’s mutual fund window if one is offered to supplement the investment tiers.
Stone explained that a small group has been engaged in an educational campaign about the proposed changes with the various faculty senates and has begun holding town hall meetings on campuses. He said that broad participation in the process is welcome and he encouraged RPAC members to invite interested faculty members to participate in the process.
Dan Pawlisch provided background on the safe harbor relief from liability provided to fiduciaries by ERISA’s qualified default investment alternatives (QDIAs). He described the various types of QDIAs, of which target date funds are the most prevalent.
Hank Stone explained that by adopting ERISA the RPAC is somewhat shielding itself from liability by being able to argue that NSHE’s plans are subject to the safe harbor protections. He further explained that there is an expectation that eventually there will be no exemptions from ERISA, and that Governmental entities may become subject to the provisions of ERISA in the future . In the meantime, by adopting ERISA the RPAC is demonstrating it is exercising due diligence. The process, in effect, becomes the protection. Not having and following a process is dangerous.
There was discussion about the fact that over 50% of the Retirement Program’s current funds fail to meet or exceed their benchmarks. Mike Hardie explained that in the past the RPAC relied on the advice of the vendors who have vested interests in fund selection. That’s why there has been a proliferation of fund offerings.
There was a discussion about the RPAC member’s individual liability for poor investment decisions. Hank Stone explained that there is no indemnification offered by NSHE. Dan Pawlisch again explained that the use of QDIAs provides the Committee relief from poor investment outcomes and recommended that NSHE continue the use of target date funds as the QDIAs. Brian Abshire observed that people in QDIAs generally do not rebalance their portfolios. Target date funds offer the advantage of automatically rebalancing asset allocations over time.
There was a discussion about the merits of balanced funds vs target date funds as the Program’s QDIAs. Paul Thistle cited a recent Putnam study arguing that a balanced fund offers better protection against outliving one’s savings than a target date fund because target date funds don’t have an aggressive enough equity allocation after retirement. A counter argument was made that most available balanced funds have a too small an equity allocation for younger participants (typically 60% equity/40% fixed income). Kent Ervin suggested that for those preferring a balanced fund, one could be offered in the specialty fund tier. A consensus emerged that target date funds were the more appropriate vehicle for the majority of NSHE participants
There was a lengthy discussion about the relative merits of “To” glide paths that rebalance assets through the years of employment but stop at retirement and “Through” glide paths that continue to rebalance assets even after the retirement date is reached.
MOTION: Mike Hardie moved to recommend to the Chancellor or his delegated authority, as appropriate, to continue to use target date funds as the QDIA. Carla Henson seconded. The motion passed unanimously.
Discussion ensued about the merits of actively vs passively managed target date funds. Dan Pawlisch and Brian Abshire recommended that the choice of target date funds be guided by a moderately conservative glidepath that limits equity exposure for retirees and employs an indexing approach to investing.
They further identified four fund managers meeting the above criteria for the Committee to consider:
Ø JP Morgan
Brian Abshire compared the product characteristics of the various funds for the Committee. There was a long discussion about the comparative glidepaths of the recommended funds and the stability of those glidepaths over time.
For purposes of considering how the various funds may work in a restructured administrative environment with potentially a single recordkeeper or a master administrator, it was observed that:
Ø Fidelity funds could only be offered on Fidelity’s platform,
Ø TIAA-CREF funds could not be offered on a Fidelity platform,
Ø JP Morgan and Vanguard funds are available on all platforms.
There was a debate over whether the higher equity exposure of the TIAA-CREF target date funds offer greater protection against the risk of outliving one’s savings versus the higher TIPS exposure of the Vanguard funds. A consensus emerged favoring the TIPS exposure of the Vanguard funds.
MOTION: Mike Hardie moved to recommend to the Chancellor or his delegated authority, as appropriate, that Vanguard target date funds be selected as the QDIA. Kent Ervin seconded. The motion carried by 6 votes to 2.
There was a lengthy discussion about whether to implement the Vanguard target date funds before or after the execution of an RFP for administrative services. A consensus emerged towards early implementation because:
Ø It would save participants $200-$300 annually in fees
Ø It would force the vendors to prove they could administer the Vanguard funds on their platforms
Ø It would start to acclimate participants to the idea that NSHE and not the vendors decide which funds to offer
Ø It would move us in the direction of equivalency of fees
MOTION: Paul Thistle moved to recommend to the Chancellor or his delegated authority, as appropriate, that Vanguard target date funds be installed as the QDIA effective January 1, 2013 or as soon as administratively practicable. Alan Schlottmann seconded. The motion passed unanimously.
MOTION: Mike Hardie moved to recommend to the Chancellor or his delegated authority, as appropriate, that existing target date fundholders be “mapped” to the Vanguard target date funds effective January 1, 2013 or as soon as administratively practicable, subject to the right of fundholders to affirmatively elect to stay in their current target date fund. Alan Schlottmann seconded. The motion carried by 7 votes to 1.
It was agreed that if all three current vendors cannot administratively implement the actions taken by the Committee at this meeting, the actions will not go forward.
The meeting was adjourned at 2:30 pm.
Prepared by: George Dombroski, Retirement Plan Alternative Manager