457(b) Plan Administration RFP
Summary Report
March 28, 2013
Presented by:
Jonathan P. Slinger, CFA
Table of Contents
Table of Contents ............................................................................................ 1
Introduction ..................................................................................................... 2
Review of Process........................................................................................... 3
Investments .................................................................................................. 4-5
Persistency Credit ........................................................................................... 6
Participant Communication and Education ...................................................... 7
Recordkeeping and Administration .................................................................. 8
Plan Sponsor Service ...................................................................................... 8
Organizational Capabilities and Stability .......................................................... 9
References .................................................................................................... 10
Fees .............................................................................................................. 11
Revenue Sharing........................................................................................... 12
Conclusion .................................................................................................... 13
1
Introduction
Buck Consultants, with assistance from Contra Costa County’s Employee Benefits Services Unit (“Staff”)
published a request for proposal (“RFP”) for investment and administration services in connection with the
County’s tax-qualified 457(b) deferred compensation plan. Buck views ICMA-RC as having submitted the
most attractive proposal for the services covered by the RFP. This report provides a high level overview of
the RFP process, additional commentary and analysis, Buck’s recommendations, and comparisons of
ICMA-RC with the incumbent vendor, Mass Mutual.
2
Review of Process
The evaluation followed a comprehensive and documented process involving multiple steps including:

Buck Consultants drafted an RFP for review by Staff and Committee.

Committee and Staff reviewed the draft RFP and provided input.

The RFP was distributed to seven vendors, five of which ultimately submitted a proposal.

Vendors were given the opportunity to submit written questions to the County. Answers to all of
these questions were distributed to the seven vendors that received the RFP.

Five vendors submitted proposals in response to the RFP addressing a lengthy questionnaire and
requests to provide multiple attachments with additional information. The following five vendors
submitted proposals: ING, Great West, ICMA-RC, Prudential and Mass Mutual.

Buck reviewed proposals and presented a report to the Committee on strengths, weaknesses and
other features of the submitted proposals.

ING was removed from consideration after quoting an uncompetitive level of fees.

Three vendors (Great West, ICMA-RC, and Prudential) quoted a lower level of fees than what was
initially offered by Mass Mutual.

Vendors were offered the opportunity to provide a lower fee quote prior to finalist selections.

Great West’s revised fee quote contained a requirement that the County offer a fee-based managed
account service within the Plan as a condition of the fee quote. Great West was removed from
consideration as a result of this requirement (question #64.b of the RFP addressed this topic and
Great West’s original response was either ambiguous or not responsive).

At this stage Buck recommended inviting ICMA-RC and Prudential for finalist interviews based on
the quality of their proposals and the level of fees. The County also decided to extend an interview
invitation to Mass Mutual.

ICMA-RC, Prudential and Mass Mutual were all asked to provide written answers to follow-up
questions in advance of finalist interviews with the Committee.

Buck conducted reference checks.

ICMA-RC, Prudential and Mass Mutual each gave separate 90 minute finalist interviews and
answered committee questions.

Committee members individually scored the prospective vendors based on original proposals,
Buck’s reports to the Committee, answers to follow-up questions provided by vendors, and finalist
presentations.
3
Investments
The County’s Plan currently offers a number of funds managed by The Hartford as well as other managers,
and all proposers were asked to confirm whether they could offer the County’s current menu of investments.
In addition, proposers were also asked to provide the County with complete flexibility to select nonproprietary investment options; this arrangement is often described with the phrase “open architecture.”
The clear advantage of an open-architecture approach is that it allows a plan sponsor to select funds from
different investment managers and combine them into an investment menu that offers a high quality
investment option in every category and asset class. This is important because investment management
firms generally do not have a “top-tier” product offering in every category. Given the size of the County’s
plan, multiple vendors offered this flexibility.
Proposers were also asked to provide spreadsheets listing the total number of mutual funds and share
classes available on their recordkeeping platform. Lists provided by the finalists ranged from 3,500 to over
10,000 entries (although some are duplicates due to multiple share classes of the same fund being listed).
In addition, finalists indicated that they add mutual funds to their recordkeeping platform when requested to
do so by clients.
As a result of this RFP process, the County will have substantial flexibility in terms of structuring an
investment menu for participants regardless of which vendor is selected. By achieving open-architecture
flexibility, the selection of an investment menu becomes separate from the County’s selection of a thirdparty administrator.
4
Investments: General Account vs. Stable Value
The County’s plan currently offers a general account product which is very popular among participants.
Over 4,500 participants currently invest at least a portion of their assets in the product, amounting to roughly
half of the total plan assets. Over 1,500 plan participants use the general account as their only investment
option. The general account product has historically provided returns which are greater than money market
funds and traditional stable value funds. However, in spite of the popularity and attractive returns offered by
the product, there are important considerations the County should evaluate. Specifically, there is a
concentration of risk in the general account product associated with Mass Mutual. In a general account
product, your plan’s assets are commingled with Mass Mutual’s other assets. If Mass Mutual were to
experience bankruptcy, investors in the general account product may lose a substantial percentage of their
savings because those assets are not segregated. In Buck’s view, money market funds and traditional
stable value products have a more appropriate risk profile for an investment option that is intended to be
conservative. While the likelihood of a Mass Mutual bankruptcy may be small, the consequences of such
an event could be devastating. Buck does not recommend offering a general account investment option in
your plan even with the higher potential returns offered by those products.
Mass Mutual’s general account offer consists of an initial guaranteed minimum rate of return of 3.75%. The
minimum guarantee would drop by 0.50% per year and would ultimately be 1.00% after five years. The
ultimate 1.00% guarantee is higher than returns currently available on money market funds, but lower than
current returns offered by many traditional stable value funds. Mass Mutual also indicated verbally during
their finalist presentation that the general account product would be available to the County on an
“investment-only” basis. This means that the County could select a different vendor to act as the third-party
administrator of the 457(b) Plan, and still offer Mass Mutual’s general account product within the plan.
While ICMA-RC has offered the County full flexibility to select non-proprietary investment options, they
included information on their Vantage Trust PLUS Fund in their proposal which would be available to the
County. The PLUS fund is a traditional stable value fund currently offering returns in the range of 2.00% to
2.50% depending on the share class selected (The PLUS fund’s one year trailing net-of-fee return as of
2/28/2013 was 2.39%). While the current returns are lower than the initial guaranteed rate of the Mass
Mutual general account, they are very attractive relative to money market funds that currently offer returns
very close to zero percent per year. The PLUS fund is a commingled fund, which means the assets would
be combined with assets of other plans and managed in one vehicle by ICMA-RC (similar in structure to the
equity mutual funds currently offered within the County’s plan). However, the assets in the PLUS fund are
held in a trust and segregated from ICMA’s other assets. In the event of a bankruptcy or other financial
distress experienced by ICMA, the assets in the PLUS fund would be protected from ICMA’s creditors. The
ICMA-RC PLUS fund also has third-party insurance contracts (“wrap contracts”) in place to guarantee the
stability of principal. These guarantees could potentially fail in the same way the Mass Mutual general
account guarantee might fail. However, Buck views the PLUS fund as containing substantially less risk
because assets are segregated. The PLUS fund has also outperformed a universe of peer stable value
funds as documented by the investment research firm Heuler.
Buck views the PLUS fund as an attractive investment option, and we also remind the County that it could
select a non-proprietary stable value, money market, or general account product.
5
Persistency Credit
In recent years the County has offered a $50 per person per year persistency credit to participants that
continue to participate in the 457(b) plan. Approximately 6,000 participants received the credit in the most
recent year and this amounted to a total of approximately $300,000. The credit is funded from fees
received by The Hartford/Mass Mutual associated with investments currently offered within the plan. Briefly,
this credit is paid for by plan participants from fees charged to plan participants in other ways such as
implicit revenue sharing contained in mutual funds or a reduced general account guaranteed rate. All
vendors serving large 457(b) plans have the ability to administer a flat dollar per participant credit. As an
alternative, the County may choose to reduce the fees contained in the investments offered within the plan
and simultaneously eliminate the credit. Buck views the persistency credit as an unusual plan feature. We
do not believe that considerations surrounding the persistency credit should influence the County’s choice
of a vendor in any direction. While all vendors are able to administer the persistency credit, the County may
in the future be discouraged from continuing the practice by whomever it selects as a vendor. In particular,
the persistency credit could be seen as taking money out of participant accounts in the form of higher
investment-related fees, and then subsequently rebating those fees back to participants in proportions
different from how the fees were levied.
6
Participant Communication and Education
The RFP requested a substantial amount of information on the communication and education resources
that would be available to plan participants. Proposers were asked to describe their approach to participant
communications and provide sample communications materials. Proposers were also asked to detail online
tools that would be available. At a high level, all finalists are capable of providing adequate participant
communications for the County’s plan, on-line savings calculators, and general education delivered in print,
on-line, and via on-site representatives.
The County currently has one full-time vendor representative serving plan participants and providing
education, and the RFP requested that proposers incorporate that same level of service into their RFP
responses. As a part of the reference check process, Buck asked other jurisdictions about the perceived
quality of on-site representatives that would deliver education directly to plan participants. As a result of
these reference checks, finalist presentations, and feedback from Committee members, Buck believes that
ICMA-RC would offer excellent on-site representation and participant education services.
Buck is also concerned with the high level of assets currently invested in the general account option in the
plan, and that has led to a more negative assessment of The Hartford/Mass Mutual’s abilities in terms of
education and on-site vendor support. Specifically, we are concerned that participants are not being
educated about the risks inherent in the general account. We are also concerned that many plan
participants may not have an appropriate asset allocation given their age, risk tolerances and other financial
considerations. Buck believes that there are too many participants that are choosing to invest solely in the
general account, and are not diversified among other investment options offered within the plan. We
believe over 25% of plan participants are currently investing 100% of their 457(b) balances in the general
account. Given that The Hartford/Mass Mutual expects to generate an economic benefit from the assets
invested in the general account, and the large asset balances contained in the general account, we
question whether education has been provided with participant’s best interests in mind.
In addition to one full-time on-site representative, ICMA’s proposal also includes 12 days per year of oneon-one meetings with a certified financial planner (CFP) for retirees and participants nearing retirement.
While the CFP may only be able to meet with 40-60 participants per year, we do believe this is a meaningful
benefit to the County and participants that want help with their financial planning.
7
Recordkeeping & Administration
The RFP requested a substantial amount of information on the underlying system used to track participant
accounts, process payroll feeds, test for compliance with IRS contribution limits, and the ability to administer
other plan features such as loans or unforeseen emergency withdrawals. All proposers would be able to do
the actual plan recordkeeping, and currently perform these services for other similar clients. All proposers
received the County’s current plan document with the RFP and would be able to administer the plan
according to the County’s current plan design.
ICMA-RC uses the SunGard OMNI system for recordkeeping which is a standard product used by many
different firms to perform back office third-party administration services to 457(b) plans. Mass Mutual uses
an internally developed system to perform the same functions. Recordkeeping for legacy clients of The
Hartford are performed on a separate system that will eventually be transitioned to Mass Mutual’s systems.
While we don’t view the merging of systems as a major concern, we do expect it to place an increased
burden on some of Mass Mutual’s internal resources in the near term. In terms of data backup and disaster
recovery, both Mass Mutual and ICMA-RC conduct daily backups of recordkeeping data with off-site
storage. If the administration of the Plan were moved to a different vendor, the new loan program would be
supported with a similar fee structure (same $50 initiation fee if ICMA-RC was selected).
Both Mass Mutual and ICMA-RC would be expected by Buck to accurately track participant accounts and
conduct back-office recordkeeping of the Plan according to the current plan design.
Plan Sponsor Service
Buck has a favorable view of the relationship managers proposed by both Mass Mutual (Bob Gleason) and
ICMA-RC (Michelle Martin). Bob and Michelle received very positive reviews from their references. There
are differences with regards to client loads with Michelle currently serving four clients while Bob is serving
forty four. In Buck’s conversations with the Committee we have not gotten an impression that Bob’s client
load has negatively impacted his ability to service the County. Nonetheless, we expect Michelle Martin
would be able to devote a larger proportion of her time to serving the County. Both ICMA-RC and Mass
Mutual indicated in their proposal response that the County could request and receive a different
relationship manager if desired.
8
Organization Capabilities and Stability
Buck views both Mass Mutual and ICMA-RC as financially stable organizations. Mass Mutual receives a
credit rating of AA+ from Standard and Poor’s. ICMA-RC is a non-profit corporation and is not rated by
rating agencies. To assess financial stability Buck has reviewed ICMA-RC’s confidential financial
statements. At a high level, ICMA’s assets substantially exceed liabilities, and revenues also exceed
expenses. The County has also received a copy of ICMA-RC’s financial statements, and we do not cite
those documents in more detail here due to the confidentiality.
ICMA’s status as a non-profit organization dedicated solely to public sector retirement plans is a meaningful
differentiator, in Buck’s view.
Both Mass Mutual and ICMA-RC serve similar public jurisdictions. Mass Mutual currently serves 324 clients
in California, but we are unsure how many of those 324 clients are public sector entities. ICMA-RC
currently serves 629 public sector clients in California. The table below lists a subset of clients served by
each organization:
Mass Mutual
County of San Joaquin
County of San Mateo
Stanislaus County
City of Stockton
City of Oakland
County of Humboldt
County of Napa
City of Santa Clara
ICMA-RC
BART DEFERRED COMPENSATION
CITY OF ANAHEIM
CITY OF BEVERLY HILLS
CITY OF BURBANK
CITY OF CAMPBELL
CITY OF CLOVIS
CITY OF ESCONDIDO
CITY OF GLENDALE
CITY OF LONG BEACH
CITY OF MILPITAS
CITY OF PLEASANTON
CITY OF ROSEVILLE
CITY OF SACRAMENTO
CITY OF SAN RAMON
CITY OF WALNUT CREEK
COUNTY OF ORANGE
COUNTY OF SANTA CLARA
COUNTY OF SOLANO
FRESNO METROPOLITAN FLOOD CONTROL DISTRICT
GOLDEN GATE BRIDGE
LOS ANGELES CNTY METRO TRANSP
LOS ANGELES CO SANITATION DIST
SACRAMENTO COUNTY
9
References
Buck conducted reference checks for the three vendors selected as finalists (Mass Mutual, ICMA-RC, and
Prudential). While reference checks suffer the inherent limitation of self-selection bias we do think they add
some value. In addition, the RFP requested terminated client references and we also ask each reference if
they have previous experience with different vendors. Buck’s experience conducting reference checks
during other RFP processes also informed our view of different vendors.
Overall, finalist references were positive and that is typical in our experience. As mentioned earlier, both
Bob Gleason of Mass Mutual and Michelle Martin of ICMA-RC received positive references. ICMA-RC’s
terminated reference did not provide useful information. Mass Mutual’s terminated reference was a legacy
client of The Hartford and had positive things to say, but ultimately changed vendors over fees. Buck was
not surprised to hear this feedback given the level of fees contained in The Hartford’s extension offers to the
County presented during the fourth quarter of 2012, and the fees contained in Mass Mutual’s original
proposal in response to the RFP.
While all references were positive, Buck felt that ICMA-RC’s references were more enthusiastic in their
support of the organization, and this is consistent with reference checks we have made in conjunction with
RFP processes for different public jurisdictions. No major issues or concerns were uncovered during
reference checks.
10
Fees
To facilitate accurate comparisons of fees among vendors, the RFP requested pricing under an open
architecture scenario, and also under an alternate scenario where some level of proprietary investment
product would be required.
Vendor
Mass Mutual
ICMA-RC
Estimated Mass Mutual
Current Fee*
Fee with Open Architecture
Investment Structure
0.14%
0.116%
Fee if County Uses Vendor’s
Proprietary Stable Value or
General Account Product
(required product)
0.14%
0.0625% (PLUS Fund)
0.25%, or 0.35% on nongeneral account assets
*Current Mass Mutual Fees were estimated by Buck based on Mass Mutual’s proposal response describing
revenue sharing of Plan investment options, and Plan asset balances. In a small number of cases Mass
Mutual did not indicate the level of revenue sharing received by a current plan investment option. In those
cases Buck estimated the revenue sharing for that option based on the fund company, share class, total
expense ratio, and known revenue sharing amounts provided for similar products. The 0.25% estimates
results from crediting 0.15% in revenue sharing for the Plan’s general account option which is consistent
with Mass Mutual’s enhanced pricing offer. However, 0.15% may not be the appropriate revenue sharing
credit to capture the economic benefit generated by the general account. The County has previously been
told by The Hartford that their goal was to earn 1.00% from the general account by investing in assets that
produced a return greater than the rate of return provided to investors in the general account vehicle.
When we excluded the general account assets we calculated a weighted average revenue sharing amount
of 0.35% on the variable assets. However current plan fees are estimated, it is clear the RFP will result in
fee savings for participants.
11
Revenue Sharing
Mutual fund expense ratios (and fees on other products) commonly contain “revenue sharing” amounts
which are paid from the investment manager to a plan’s third-party administrator. These fees are a
component of the expense ratio (not in addition to the expense ratio) and are generally invisible to plan
participants. Many plans use revenue sharing contained in funds to pay for the services of the third-party
administrator. Additionally, some plans structure an investment menu that generates revenue sharing
greater than fees required by the third-party administrator, and the extra fees are then rebated to the plan
sponsor. Rebated revenue sharing amounts are commonly used to pay for plan-related expenses such as
legal, audit, or consulting fees. Some plan sponsors have dedicated deferred compensation staff members
and use rebated revenue sharing to pay for internal administration expenses, including salaries.
The RFP requested proposers to confirm that any revenue sharing amounts generated in excess of fee
quotes would be tracked and reimbursed to the County. ICMA’s proposal confirmed this practice. Mass
Mutual’s proposal indicated that some amount could be available for reimbursement but did not commit to
the process requested by the RFP. Mass Mutual was asked about this in written follow-up questions prior
to finalist interviews, and their response indicated a preference for a different process involving a fixed dollar
reimbursement and a plus or minus 10% buffer around the level of Mass Mutual’s required revenue. This
approach could lead to the Plan paying slightly more or slightly less in total fees than the 0.14% required
revenue quoted by Mass Mutual.
12
Conclusion
Buck views ICMA-RC has having submitted the most attractive proposal for the services covered by the
RFP. Relative to the incumbent provider, Mass Mutual, Buck believes ICMA-RC would provide superior
services at a lower level of fees.
13