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21-0504_SHUSTER ADVISORY GROUP, LLC_E8_Agenda ReportCity of San Juan Capistrano Agenda Report TO: Honorable Mayor and Members of the City Council FROM: Benjamin Siegel, City Manager SUBMITTED BY: Sam Penrod, Human Resources and Risk Manager DATE: May 4, 2021 SUBJECT: Professional Services Agreement with Shuster Advisory Group, LLC, for Defined Contribution Plan Consulting and Investment Fiduciary Services RECOMMENDATION: 1.Approve and authorize the City Manager to execute a Professional Services Agreement with Shuster Advisory Group, LLC for defined contribution plan consulting and investment fiduciary services (Attachment 1); 2.Approve the consolidation of the 457(b), 401(a), Retirement Health Savings (RHS), and Part-Time, Temporary and Seasonal (PTS) record-keeping services to a single provider, ICMA-RC; 3.Authorize the City Manager to execute the necessary service provider agreements related to the administration of the defined contribution plans; and, 4.Appoint the Human Resources and Risk Manager as the contract administrator for the City's 457(b), 401(a), Retirement Health Savings (RHS) and Part-Time, Temporary and Seasonal (PTS) defined contribution plans. EXECUTIVE SUMMARY: The City provides its employees with deferred compensation plans to encourage and assist with retirement planning. Three providers - Empower, Lincoln, and ICMA-RC - currently provide 457(b) plan services, and ICMA-RC also administers the City’s 401(a), Part-Time, Temporary and Seasonal (PTS), and Retirement Health Savings (RHS) plans. At no cost to the City, Shuster Advisory Group, LLC issued a Request For Information (RFI) to the plan sponsors and conducted a financial analysis of the three providers. 5/4/2021 E8 City Council Agenda Report May 4, 2021 Page 2 of 4 Because of Shuster’s financial understanding of the defined contribution marketplace, they were able to negotiate a significant reduction (94%) in costs to plan participants (employees). Staff is recommending that the City Council approve a professional services agreement with Shuster for defined contribution plan consulting and investment fiduciary services and consolidating all defined contribution plans into ICMA-RC. DISCUSSION/ANALYSIS: Under Section 457(b) of the Internal Revenue Code (IRC), government entities may sponsor a deferred compensation plan, while meeting fiduciary responsibilities under California law, to allow employees to defer income tax on retirement savings into future years. Currently, the City is providing employer-sponsored deferred compensation plans under Section 457(b) with three providers: Empower (formerly MassMutual), Lincoln Financial Group, and ICMA-RC. Alongside the 457(b) Plan, the City also offers a separate defined contribution plan under 401(a) of the IRC, which is with ICMA-RC. Under Section 457(b) and Section 3121(b) of the Internal Revenue Code, government entities may sponsor a retirement alternative, or in-lieu plan, to Social Security for all part- time, seasonal and temporary employees (also known as an OBRA plan), while meeting fiduciary responsibilities under California law. An employee is required to contribute a stated percentage of his or her compensation on a pre-tax basis to a retirement account providing tax-deferred growth. The City currently provides a Part-Time, Temporary and Seasonal Plan (“PTS Plan”), or OBRA plan, with ICMA-RC, with the part-time employees paying 3.75% toward the plan, and the City also contributing 3.75% toward the plan. Additionally, the City provides a Retirement Heath Savings Program (“RHS Plan”) that is also with ICMA-RC. This plan provides participants the benefit of tax-free reimbursements for qualified medical expenses upon separation from employment. As the plan sponsor, the City has certain fiduciary duties and responsibilities under State law (California State Constitution, Article XVI Section 17). These duties and responsibilities focus on ensuring that the operation and investment of the public retirement plan is for the exclusive purpose of providing benefits to participants and beneficiaries. Fiduciary responsibilities include: • Investing the assets of the plan; • Administering the plan; and, • Engaging in a prudent process for making all decisions related to the operation of the plan, including decisions related to the plan's investments and related services. As the plan sponsor, the City has the right to contract with third-party service providers in fulfilling the City’s responsibilities for the plans. The City currently utilizes ICMA-RC, Empower and Lincoln to provide record keeping and administration services for the City Council Agenda Report May 4, 2021 Page 3 of 4 plans. These record keepers are not fiduciaries to the plans. Due to increased regulatory responsibilities and the complexity of the investment process and associated responsibilities, staff sought to learn more about trends affecting the employer- sponsored retirement plan marketplace and laws governing fiduciary requirements for the operation of the City’s sponsored plans. In addition, in an effort to fulfill the City’s fiduciary responsibility to provide plans in the best interests of participating employees, the City sought to conduct a review of the City’s 457(b), 401(a), PTS and RHS Plans and an RFP for record-keeping services. Staff learned of Shuster Advisory Group, LLC and the significant value Shuster’s consulting and fiduciary services provided to other municipalities. Staff met with Shuster to find out more about their process and the results Shuster obtained for other cities. Shuster provides fiduciary and consulting services to over 50 other Southern California cities and agencies. These agencies utilize Shuster to evaluate their contract terms, plan fees and investments with their current providers. Shuster also conducted RFP processes resulting in client cities greatly reducing their plan fees and enhancing their investment options. At no cost to the City, Shuster conducted a review of City’s existing plans including a Request for Information (“RFI”) to the City’s incumbent providers. The RFI included a review of all contract related data, including but not limited to: administrative fees associated with the plans, investment options, asset values, fixed account interest rates, and additional fees that may be charged by the plans. Utilizing the information obtained through the RFI and with staff authorization, Shuster then conducted an RFP from leading record-keepers, including the three incumbents, to determine whether the incumbent plans were competitive and fees assessed were reasonable. Based on Shuster's analysis, staff determined that economies of scale are not being utilized by having the 457(b) and 401(a) plans with three recordkeepers, and plan participants as a whole would benefit by consolidating the plans with a single record- keeper, ICMA-RC. Shuster provided a proposed comprehensive institutional class investment menu for the 457(b) and 401(a) plans that is lower in cost than the current menus and provides a higher blended fixed interest rate to plan participants. By aggregating plan assets and implementing the new investment menu, the City would: 1) reduce plan and investment fees; 2) enhance the investment options; and, 3) provide participants a competitive fixed interest rate. Shuster’s services will provide an annual financial benefit to plan participants (net of consultant costs) of approximately $47,000. Based on the results of the RFI and RFP processes, staff recommends that the City Council approve the consolidation of the 457(b), 401(a), RHS, and PTS plans to a single record-keeping platform with ICMA-RC and engage Shuster to provide investment advisory and consulting services. By consolidating the plans with ICMA-RC, participants will benefit from a 94% reduction in plan record keeping costs, and a 55% reduction in total plan costs, inclusive of the Shuster consultant fee. Shuster would assist the City City Council Agenda Report May 4, 2021 Page 4 of 4 with consolidating the deferred compensation plans and assist the City in performing its fiduciary responsibilities with respect to applicable IRC and California law. Shuster would also assist the City in educating our employees with the goal of increasing participation and help employees become more retirement ready. Pending City Council approval of the recommended action, staff and Shuster will begin the product conversion process with a targeted completion of August 2021. Shuster would provide conversion support services, including the review and consultation on plan design and provisions. Shuster and ICMA-RC would also provide participant communications and education on-site and via web meetings. FISCAL IMPACT: There is no direct fiscal impact to the City, as the fee for Shuster’s services is $2,083.33 per month, paid by plan assets. ENVIRONMENTAL IMPACT: In accordance with the California Environmental Quality Act (CEQA) the recommended action is exempt from CEQA per Section 15061(b)(3), the general rule that the CEQA applies only to projects which have the potential for causing a significant effect on the environment. Where it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment, the activity is not subject to CEQA. A Professional Services Agreement with Shuster Advisory Group, LLC, to provide defined contribution plan consulting and investment fiduciary services would not be an activity with potential to cause significant effect on the environment and therefore is exempt from CEQA. PRIOR CITY COUNCIL REVIEW: Not Applicable. COMMISSION/COMMITTEE/BOARD REVIEW AND RECOMMENDATIONS: Not applicable. NOTIFICATION: Mark Shuster, Managing Member, Shuster Advisory Group, LLC Laura Stokes, CEA President Sergio Klotz, MPEA President ATTACHMENT: Attachment 1 – Draft Professional Services Agreement ATTACHMENT 1