403b Information Session

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403(b) Information Session

• Presented by
• Michael P. Beczkowski
• Bolton Partners Investment Consulting Group, Inc.
• October 15, 2008

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Before New 403(b) Regulations

• School system acted as a payroll facilitator
• Made deductions only, essentially supplying only
  payroll slot
• Limited or no screening of vendors
• No requirement for school system to take
  ownership of the program
• Schools had little involvement other than
  monitoring contribution levels

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New 403(b) Regulations

• Effective for taxable years after December 31,
  2008
• Reshape the historical perspective of 403(b)
  plans, effectively making them employer-sponsored
  plans
• Regulations are a first step to make these plans
  operate in a manner similar to 401(k) plans

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Background on ACPS 403(b) Plan

• Estimated assets of at least 5 million
• Cash flow is 1.6 million
• Participation is 27
• 29 vendors

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Goal ThreeRecruit, retain and develop a diverse
cadre of the highest quality teaching personnel,
staff and administrators

• Joint Board Adopted Benefits Strategy
• Target Benefits-Slightly above adopted market
• This requires changes in the benefits programs
  periodically.

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The ACPS 403(b) program is plagued by

• Low participation (27)
• Too many vendors and multiple messages
• Too many investment options (average 10-30 per
  vendor)
• Lack of independent investment education
• Potential surrender charges on withdrawals or
  transfers
• Time lags for deposits into participants
  accounts

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Selecting Vendors

• Given that schools now have an increased burden
  of compliance, a prudent process to select and
  monitor vendors should be utilized
• Vendor will need to be named in the Plan document

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Plan Design Options

• Hire a Third Party Administrator (for a multiple
  vendor solution)
• Maintain number of vendors
• Reduce number of vendors
• Utilize a single vendor solution
• Common for 401(k) 457(b) Plans
• 403(b)s moving in this direction

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Fees Paid by Investors

• Investment Management fees
• Contract charges
• Administrative fees
• Mortality and Expense fees
• Can be eliminated in a single vendor scenario

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Single Vendor Solution

• Pros
• Leverages Plan Sponsor buying power as a group
• Can result in lower plan and investment fees
• Can result in better investment options
• More focused participant communications
• Salaried representatives
• Easier compliance with the new 403(b) regulations
• Acts as Third Party Administrator
• Cons
• More participants will need to change vendors

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Single Vendor Solution

• One vendor who provides all record keeping,
  administrative, and communication services
• Will provide salaried representatives who will be
  onsite at every location to meet with
  participants for both group and one-on-one
  meetings
• Provides investment options from multiple fund
  families
• American Funds
• Baron
• Dreyfus
• Janus
• Royce
• We should be able to eliminate all administrative
  fees in this scenario
• Potentially participants would only pay the
  expense ratios

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VERY IMPORTANT

• Participants will not be forced to move their
  existing accounts to the new vendor

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Single Vendor Programs

• Cecil County Public Schools (MD) 2007
• Harford County Public Schools (MD) 2007
• Manassas City Public Schools (VA) 2000
• Prince William Cty. Public Schools (VA) 2003
• Richmond Public Schools (VA) 2005
• Henrico County Public Schools (VA) 2007
• Chesterfield County Public Schools (VA)- 2007
• Loudoun County Public Schools (VA) 2008
• Rockingham Public Schools (VA) 2008
• Roanoke Public Schools (VA) 2008
• Williamsburg James City Public Schools (VA) -
  2008

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Single Vendor Participation Rates

• Harford County Public Schools (3/07)
• Participation increased by 14
• Deferrals increased by 13
• Prince William County PS (1/03)
• Participation increased by 20
• Richmond City Public Schools (8/05)
• Participation increased 1200 participants to 1832
• By 52
• Chesterfield County Public Schools (9/07)
• Participation increased from 1826 participants to
  3409
• By 87

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Other Entities Utilizing a Single Vendor

• Virginia Retirement System (VRS)
• U.S. Government (TSP)
• NEA (Vanguard)
• All vendors who responded to this bid

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Fee Contract Features

• 2002 study
• 64 of participants are not aware that investment
  management fees impact investment performance
• 75 could not define expense ratio
• Fees do matter!!!

2002 Vanguard/Money Investor Literacy Test
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Mutual Funds vs. Annuities Comparison

• Mutual funds ? Investment portfolio
• Annuities ? Investment portfolio
  PLUS insurance

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Growth Fund of America(Same mutual fund in a
single or multi vendor scenario)
Source Morningstar Data as of 6/30/08
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Impact of Internal Fees
Why are fees important? The table below shows
the cumulative impact Of asset based fees. The
following table illustrates the impact on a
single participant Contributing 3,000 each year
(compounded at 8 annually).

• Assumes 3,000 contributed annually at the
  beginning of each year and an 8 annual rate of
  return net of investment management fees.
• This model assumes no additional contributions
  after Year 30.
• The above table is for illustrative purposes only
  and is not intended to be representative of any
  particular vendors program.
• ME fees are usually found in variable annuity
  contracts not mutual fund contracts.
• The decision to use multiple vendors has
  resulted in significantly higher fees paid to
  participants.

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Comparison of Single vs. Multi Vendor SP 500
Index Fund
Observation Mutual fund program provides lower
fees and higher returns.
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Beware! Problems with Annuities

• High cost
• Insurance is rarely utilized
• Surrender charges may apply
• Deposit vs. contract
• Compensation levels may vary (commissions)

Note Nearly all companies that sell these
products dont use them in their own retirement
plans
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Why Not Use a TPA?

• Good solution for multiple vendors
• TPA fee is 2 - 7 per employee
• Does not eliminate each vendors administrative
  fee since ACPS does not have negotiating power
  (participants are still charge higher fees)
• There are still barriers to participation

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Criteria For Selecting Vendors Evaluating RFPs

• Compliance with new regulations
• Communications program
• Record keeping systems
• Administrative outsourcing
• Investment performance
• Professional fee schedule
• Stability and financial strength of firm
  (example credit ratings)
• Lawsuits, conflicts of interest

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Next Steps

• Interview finals
• Four Finalists

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Questions
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Contact Information

• Michael P. Beczkowski
• Bolton Partners Investment Consulting Group
• 403(b) Consultant
• 443-573-3901
• 800-394-0263 x101
• Mbeczkowski_at_boltonpartners.com