We Did It A Single Provider Tax Deferred Compensation Program

1
We Did It! A Single Provider Tax Deferred
Compensation Program

• Harford County Public Schools
• John Markowski Jim Jewell
• present

2007 Spring Conference
or How to stress out the Chief Financial Officer
2
Why?

• IRS Regulations (always a good reason)
• Expect to be adopted June 30, 2006 (not)
• Must comply by January 1, 2007 (ok, 2008)
• IRS attempt to stem abuse of 403(b)
• Make regs more like 401(k)
• Places more burden on school systems
• Written plan document naming vendors
• Control responsibility is shifted to employer
  from vendors
• Requires annual notice of eligibility
• Requires criteria for selecting/authorizing
  vendors
• Requires vendors performance monitoring
• Prudent man rule

3
Lower Employee Costs

• New institutional single vendor programs became
  available in late 1990s
• Programs allowed Plan Sponsors to leverage their
  buying power (group contracts vs. individual
  contracts)
• 2002 study
• 64 of participants are not aware that investment
  management fees impact investment performance
• 75 could not define expense ratio
• Fees do matter - 140,000 over 30 years!!!

Source Bolton Partners
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Impact of Fees on Returns
assumes 3,000 contributed annually at the
beginning of each year and an 8 annual rate of
return. this model assumes no additional
contributions after year 30.
HCPS did better than this due to no admin fee.
Source Bolton Partners
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Investment Flexibility

• Open architecture
• New programs utilize vendors from multiple
  families
• Sample proposal included Delaware, Van Kampen,
  American Funds, Goldman Sachs, Dreyfus, Davis,
  Columbia, and Baron
• Closed architecture
• Most providers limit participants to a limited
  number of options including their own

Source Bolton Partners
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Enhance Service

• Salary based representatives
• Provide unbiased education and communication
  instead of a sales pitch
• HCPS can control message and theme
• Reps can be replaced
• All employees receive same service
• Commission based representatives
• Comp differs based on the year of deposit
• Cause of surrender charges
• We do not know what they are selling!!

Source Bolton Partners
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HCPS Starting Point (June 2006)

• 17 - 403(b) 1 - 457 companies
• 65 agents
• all requesting access to employees at offices or
  schools during the year
• all required to provide hold harmless agreement
• all required to provide EO certificate of
  insurance
• Many requests by vendors to be added to list
• Each enrolled employee to provide salary
  reduction agreement for each plan
• 2,087 403(b) 31 457 participants
• about 9 million in annual employee contributions
• 90 million in assets
• Negotiated Agreements silent on TDC
• We offer NO advice, employees on their own

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HCPS Participant Demographics
In summary 49 lt 10 years 70 lt 15 years
Source HCPS Budget Office
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The Plan

• Retain Bolton Partners
• Submit a proposal/price
• develop plan documents and RFP
• bid for a SINGLE PROVIDER with multiple fund
  investment options
• establish selection criteria and recommendations
• Inform BOE (closed session 7/10/06)
• Requirements
• Plan to implement
• Gain approval to proceed
• Inform employees/unions
• Requirements
• Process
• Timeline

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The Plan - continued

• Educate Employees
• Provide a matrix of offerings with all
  fees/charges disclosed
• Assist with transfer to new provider
• Provide analysis of surrender charges vs. fee
  avoidance
• Provide simple investment guidance based on
  employees risk tolerance (high, medium, low) and
  investment period
• Prepare new salary reduction agreement for each
  employee
• On-going communications to encourage retirement
  savings (try to achieve higher participation
  will establish a benchmark)

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Close the Deal with the Board

• This is a plus from the feds for a change!
• Improves administrative efficiency
• 1 point of contact, 1 disbursement/pay
• Dramatically reduce demands on building
  administrators for employee access
• Requires only 1 errors and omissions insurance
  certificate (vs. 65)
• Improve return on investment accounts for
  employees
• Reduce expenses
• Eliminate surrender charges
• Ease roll-over of investments between funds
• Increase employee participation
• Fewer choices make selection easier

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Initial Timeline (hey, it worked until October)

• 6/21 Brief Superintendent
• 6/30 IRS Adopts Regulations
• 7/10 Brief BOE
• Second half of July Brief Unions Employees
• Early August Draft Plan Document
• Mid-August Issue RFP for 403(b) 457
• Mid-September Proposals Due
• Early October Recommendation
• 10/23 BOE Approval
• 10/24 to 12/31 Employee Education
• 1/1 Go Live

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Employee Concerns (to put it kindly)

• Went to everyone (except us)
• Board, Superintendent, Elected County officials
• Letters, e-mails, phone calls, Board meeting
  testimony
• Mostly from teachers probably instigated by the
  unions and providers
• Curious to Nasty (some REALLY NASTY)
• Some (more than you would think) employees didnt
  know which, if any, plan they were in!!!

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Nature of employee concerns

• Im retiring this year and dont want to change
• I love my agent/rep/company and dont want to
  change
• I need choices and this plan removes all
  choices
• Corollary 1 Why not offer 2 or 3 (or pick a
  number) companies (as long as one of them is
  mine)?
• Corollary 2 Its like Enron, you are putting
  all our money in one company and it may fail
• Corollary 3 - Will HCPS make up any money I
  lose?
• The regs arent final and may be changed so
  wait
• Who are these people (referring to Bolton or us)
  and what are their credentials?
• This is HCPS trying to make money on us

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Adapt and Overcome (Semper Fi)

• Employees NOT required to transfer assets
• Letter of Intent to Retire for end of school
  year recd by 3/1 to Superintendent
• Automatically stay in current plan
• Allows leave payout to stay in current plan
• Moved go live to March 1
• Created an Investment Committee
• Employee volunteers
• Must be enrolled in the program
• Local reps received consideration in proposal
  evaluations

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Employee Communications

• Web, and broadcast e-mails (http//www.hcps.org/de
  partments/humanresources/benefits/retirement.aspx)
  
• Before provider selection
• Explanatory memos
• Posted the RFP
• Posted PowerPoint presentations
• After provider selection
• Posted regularly updated FAQ page
• Posted enrollment books forms
• Posted building assignments and consultant
  contact information (after preliminary enrollment
  period)
• Sent notices re current plan contribution

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RFP Results

• Sent to 24 firms - including all incumbents
• Evaluation Criteria
• Funds offered
• open or closed architecture
• investment returns
• Morningstar ratings
• Compensation arrangement (salary vs. commission)
• Fees, including surrender charges
• Local presence by firm
• Other factors were analyzed
• 12 firms responded
• 1 was deemed non-responsive
• 1 withdrew proposal
• 3 firms selected for final interviews
• Lincoln Financial Group
• Diversified Investment Advisors
• AIG VALIC
• Only 7 of the 17 incumbents responded

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Vendor Responses
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Lincoln Selected - Fees

• Administrative expense 0
• Asset-based administrative fees 0
• Installation/implementation expense 0
• Education and communication expense 0
• Mortality and expense fee 0
• Investment transfer expense 0
• Plan compliance expense 0
• Morningstar Guidance Online SM planning tools 0
• Surrender charges 0
• Loan fees 75 application, 75 annual
• Distribution expense 10 lump sum, 1
  periodic
• Expense ratio (fund managers fee) see
  Investments

Q. How do they make their money?
A. A piece of the expense ratio and float!
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Lincoln - Investments
Lincoln waived any load in these funds. The
Lincoln Stable Value Account will also be
offered. This is a guaranteed income account.
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Lincoln - Asset Allocation Models
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Lincoln - Surrender Charge Reimbursement

• 100 of any surrender charges
• Created a 2 pool from the total of previously
  sheltered assets transferred to Lincoln by HCPS
  employees
• Pool will be used to reimburse surrender charges.
• Requests for reimbursement will be honored in the
  order that they were submitted
• This formula has always been adequate to fully
  reimburse all employees requests
• Waived Lincoln transfer surrender charges
• The paperwork to transfer previously sheltered
  assets must be submitted to Lincoln by May 31,
  2007 to be considered for reimbursement.

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Implementation - Enrollment

• Weekly conference calls w/Lincoln
• Lincoln sent all employees PIN letters and
  enrollment books
• On-site meetings
• Scheduled at least 2 site visits per building
  with at least 2 reps over 4 weeks
• Walk-in enrollment meetings
• Weather was a factor (as was procrastination)
• Focused on enrollment only
• Continuity of contribution for March 2 pay date
• Transfers Surrender Charges to May 31
• Consultants assigned to buildings
• On-line and Service Center call options

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Implementation Legal Documents

• Retained Venable, LLP
• Trust Agreement with Wilmington Trust
• Lincoln Account Applications
• Lincoln Group Fixed Annuity Contract
• 403(b) 457(b) Plan Questionnaires
• 403(b) 457(b) Plan Documents
• It would have been better to work these out
  sooner a lesson learned
• Indemnity was biggest issue
• HCPS Drafted an Investment Policy
• HCPS awarded Investment Consultant contract to
  Bolton (competitively bid)

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Unintended Consequences (oh, no!)

• The Good
• Technology is a wonderful thing
• No more Salary Reduction Agreements
• Employee accounts posted in 3 business days
• Earlier notice of retirements (Ive got to keep
  my provider!)
• The Bad
• Notifying Unions ? Notifying Employees
• Should have done more employee outreach when
  unions informed
• ITRs (Intent to Retires) game the system
• Issues with Rollover Transfers between plans
• The Ugly
• People do not read and follow instructions
• People do not work and play well with others
• People are incapable of making decisions

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First Pay (March 2, 2007)

• 1,722 participants with deductions
• 200 enrollees did not get the deduction
• Paper enrollment forms processed too late
• Even if paper enrollment form completed before
  the cut-off date (2/16/07)
• Almost 100 calls and e-mails to HCPS by COB
  3/2/07 - Friday)
• Calls e-mails continued Monday

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Lincoln Remedy to First Pay Problems

• Special Mailing to Affected Employees
• Offered to double up March 30 contribution
• Would restore to normal amount for April 13 pay
• Established a unique 800 number _at_ call center
• Bottom Line They Fixed It

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Other Problems 3rd Pay of Month

• In past did not take TDA contribution for 3rd
  payday of month.
• We started with Lincoln based on employee
  requests.
• Some employees did not want the deduction.
• Advised to go to Lincoln website and zero the
  contribution.
• About 12 employees did zero the 3rd pay.
• Bottom Line It passed.

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Other Problems - SSN

• All active employees census info including SSN
  sent to Lincoln.
• Updated each pay period with hires and
  terminations.
• HCEA objects to our release of SSN.
• Garnered support of Superintendent.
• As requested, employee records are expunged from
  the Lincoln database.
• Only 9 employees requested this.
• Still a pending issue.

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Who is Betty Fith (or was it Benny Fitz)?

• Lesson Learned
• Call the 800 number and listen to the greeting.
• Hello, this is the Betty Fith (actually Benny
  Fitz) help line. May I have your social security
  number?
• Recorded Lincoln 800 number answering message.
• Lincoln will abandon this marketing initiative in
  June 2007.

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Participation Results
2,201
2,026
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Contribution Results
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Average Contribution/Participant Results
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It happened!
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Acknowledgements
A special thank you to Mike Beczkowski of Bolton
Partners for providing a lot of the information
contained in this presentation and to the team
from the Lincoln Financial Group.
Questions?