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HomeMy WebLinkAbout2017-02-07 NEERB MINUTES·- • • NONEMERGENCY EMPLOYEES RETIREMENT SPECIAL BOARD MEETING February 7, 2017 Chairperson Woodward called the special meeting of the Englewood NonEmergency Employees Retirement Plan Board to order at 3 :30 p .m . in the Public Works Conference Room of the Civic Center, 1000 Englewood Parkway, Englewood, Colorado. Members Present: Members Absent: Others Present: A quorum was present. David Henderson, Employee Representative John Moore, Council Appointee Steven Yates, Council Member (Arrived 3:52 p.m.) James Phelps , Council Appointee Kathleen Rinkel, Director of Finance and Administrative Services (Left at 4: 12 p.m.) Jim Woodward , Chairperson, Council Appointee Carol Wescoat, Recording Secretary Mahendra Patel, Employee Representative (Notice) John Jordan , Expense Reduction Analysts Mark Mensack, Expense Reduction Analysts (by phone) * * * * * Expense Reduction Analysts Presentation The Expense Reduction Analysts (ERA) has contracted with the City of Englewood . Mr. Jordan introduced his company, and the processes they use to evaluate areas of potential savings . He explained how ERA is compensated . The savings are split with ERA for the first two years and after that, the savings are the City's. Mr. Henderson clarified that the City has hired ERA, but the NERP Board had not hired ERA . Mr. Moore asked about how ERA recoups the savings from the City. Ms. Rinkel said ERA issues a bill and she anticipates that since the costs are paid by the Plan, the Plan would pay the bill. Mr. Moore suggested that the NERP Board should formally discuss payment at some point. Chairperson Woodward questioned the possibility of the alternative funds under performing the current fund selections. If the savings are in the reduced expense ratio and the returns of the new funds under perform the current fund, then would there be an offset? Mr. Jordan said that Mr. Mensack would answer that question during his presentation . Chairperson Woodward also asked ifERA provides advisory type services . The market fluctuations can create the need to alter the percentages invested in a fund, how would ERA provide the service? Mr. Jordan said that was not their role. He continued explaining their successful project does not reduce the quality of funds and intends to meet a minimum threshold of cash recovery or savings of five percent. The City has in the agreement a five percent savings threshold. Mark Mensack, Fiduciary Expense Analyst with ERA, was on the phone. Mr. Mensack reviewed his career path and reiterated they are not acting as investment advisors nor are they evaluating the investment advisor's work. Mr. Mensack said that Innovest has an excellent reputation and they are not evaluating Innovest. ERA's focus is on optimizing the investments by finding like funds that are the least expensive investment options, comparable to what has been selected by Innovest. Mr. Moore asked ifERA was in a fiduciary role when they provide this service to the NERP . Mr. Jordan said they are not. Mr. Mensack said the fees charged by Innovest, Schwab and Gabriel Roeder Smith and Company are comparable or more competitive than what ERA could identify. They are not making any alternate recommendations for those services. •• • • Mr. Yates arrive d at 3:52 p .m . Mr. Mensack proceeded with reviewing the Baseline and Options report. He explained how revenue sh aring is used within the plans assets and reviewed the Appendix B-Revenue Sharing and Appendix C-Options Report. Mr. Moore asked if the $21,630 ofrevenue sharing was being returned to the plan . Mr. Mensack confirmed that it was being returned to the plan with a very small fraction of the revenue sharing, two basis points , being retained by Schwab that is used to reduce the Schwab fee . The Appendix C-Options Report lists alternative investments with a lower expense ratio than the current fund selections . He further outlined the criteria used to select the alternate investments with similar underlying holding and performance . He e xplained that there is no guarantee that an alternate fund will outperform the current selection . He referred to the RiXtrema report on page five and six of twelve that indicates the similarity of the alternate fund and past performance. The ERA recommendation is generally based on 90% and above composition. 4 :13 p.m . Ms. Rinkel left Mr. Mensack continued reviewing the Proposal Report (fi360). He said that much of the report was duplication of the RiXtrema report and explained the fund comparisons in the Proposal Report fi360 . He reviewed the fi360 Fiduciary Score Criteria Breakdown, page 11 of23. Mr. Mensack pointed out the scores of the Thornburg International Value Fund. Since the fund underperformed the peers, Mr. Jordan suggested that the City needs to be sensitive that the Plan may be outside of their fiduciary responsibility. Mr. Mensack said there needs to be a pretty strong argument why a fund should be kept if it underperformed for the one, three and five year periods . If there is not a strong argument to keep the fund in the Plan , the red X's on the report are a fiduciary red flag . Mr. Moore noted , for the record, that Thornburg has been on the watch list, closely monitored and discussed at the Board meetings. Mr. Moore respects ERA 's information, but he wants the record to show that the Board had been evaluating and monitoring the fund. He said there are factors are not being considered in the report from ERA . Mr. Mensack said they are not making value judgment, they are strictly looking at the numbers . If the Board has been monitoring the funds and that it is recorded in the minutes , then that it is what the fiduciary should be doing. Mr. Moore agreed . Mr. Mensack said, in the Baseline report, is an evaluation of the current investment portfolio expenses , revenue sharing and in the last Appendix C , they identified less expensive alternative funds that have performed just as well if not better and continued to outline the report information . The ERA report on page 12 shows a potential of approximately $82,000 expense re duction of the$ I 98 ,000 expense which appears is approximately a 41 % cost reduction . Mr. Moore commented that Innovest is a co-fiduciary with the Board and that the fee structure evaluated by ERA indic ates that Innovest does not benefit from the selection of the funds . There should be no bias with lnnovest's advice to the Board . Mr. Mensack said that was correct. Mr. Moore said that is a key point as the report is discussed . He also complimented the report presented because it is a tool for the Board. ERA has identified the potential for savings and he looks forward to a discussion with Innovest about these selections . He said that ERA has the advantage of looking back at the historical returns rather than what Board considers at the point of selecting, monitoring or evaluating a fund. Mr. Moore commented about the choices being aimed only at passive management funds rather than active management. Mr. Mensack commented that the active versus passive management tends to be a style choice . He further commented that a general consensus among registered investment advisors is that where markets are efficient, large cap, small cap, or American stocks, trying to outperform index funds with active management succeeds a minority of the time . In inefficient markets, for example, emerging markets , indexing is less efficient. They do not typically see indexing for the emerging market portions of the portfolio as a majority of those index funds do not outperform the actively managed funds. In less efficient markets, the active managers frequently have outperformed. However, it is a style choice . He suggested many advisors use nothing but passive management because their philosophy is that they make decision based upon what they know . They know what the expenses are going to be , but they do not NonEme rge ncy Employees Retirement Board M eetin g 2 o f 5 ·- • • know what the performance will be. He told the Board that their responsibility as a fiduciary is to provide a market- like return and an index fund, minus minimal expenses, in order to achieve that goal. Active management generally has a higher expense ratio for the chance to outperform the market. To recoup the savings, Mr. Mensack explained, that generally the Board reviews the portfolio on a quarterly basis . The last day of each quarter, ERA will value the alternative funds and ifthe alternative fund was 25 basis points cheaper than the existing fund, the savings on that quarter would be 25 percent of25 basis points , 6.25 basis point would be the savings for that quarter. Mr. Phelps added that during the first year because the cost savings would be shared , it would be one-half of the savings and Mr. Moore added, the savings after the first two years would go to the Plan. Mr . Moore used the example of using Dodge and Cox and the recommended alternate fund of a Vanguard fund that ERA does not adjust for investment performance between the two highly correlated funds. Mr. Mensack said that was correct. Mr. Moore said that regarding Chairperson Woodward's question , this is purely an expense ratio game and it could lockdown the investment choices for two years . Mr. Moore said lnnovest reviews each of the funds carefully each time a change is made . It would be interesting to know if any of the alternatives were considered previously and not picked . Mr. Mensack said generally the registered advisor is going to select a lesser expensive fund , but they usually do not search the entire universe of funds for the least expensive fund. That is typically something that registered advisors have never focused on. It is relatively new to give the focus to excess fees in retirement plans . He said that most advisors do not have access to the same database they use . He is not aware of any other way to search the entire universe of funds other than with the database they use . Mr. Moore suggested that what ERA is doing is a service that ideally might be done on the front end by the investment advisors when selecting funds. He questioned ifthe investment firms could subscribe to the RiXtrema? Mr. Mensack said yes. Without lnnovest utilizing the same search, Mr. Moore said they could be back to the same costs issues in a year or two . Mr. Jordan said when they are engaged, they optimize the alternatives over the engagement period and set up a plan to be replicated for years beyond the engagement. He said that ERA can be retained to utilize certain tools to monitor, however, that would have a different fee structure . There are things that can be discussed down the road, but for the next two years, the Board would be getting these tools. Mr. Moore clarified that for the next two years , the Board has two years of decisions that ERA will not be analyzing the decisions that are yet to make. He sees value of the product and ifthe Board does not have a solution for staying on track, it would be a constant correction process. Chairperson Woodward asked ifthere were any of the funds currently being used that were not included. Ms . Wescoat said there had been changes to the funds since the end of the second quarter of 20 I 6. ERA chose not to include the changes in their report. They provided the information based on June 30. Chairperson Woodward asked if the one, three, five and ten year returns in the ERA reports are based on the 2015 calendar year and going back from there . Mr. Mensack said no, that was not what was in the reports. He said the RiXtrema report is as of January 29, 2017 . The Proposal Report was prepared as of January 29, 2017 , with the investment returns as of September 30 , 2016 . Mr. Moore confirmed that the Board had no action items and at some point ifthe Board agreed to pay the expense reduction , approval by the Board will be necessary. Mr. Jordan said that Innovest would probably have potential pushback from making the changes. He said the important thing is that Innovest understand what the ERA role is. Mr. Moore said that Innovest is not biased in the decision process and they are co-fiduciaries. It would hard for Innovest to take a defensive position if it is not in the best interest of the Plan. He said he values that in the relationship with lnnovest and believes that they will provide their honest opinion about this. Mr. Mensack said that Innovest has a very good reputation and are fiduciaries of the Plan . He said no one likes to have it pointed out that you could have done this better and essentially, they did a very good job, but ERA is really diving deep on this aspect of a fiduciary. He would expect them to say, great if it will save the Plan this much money by utilizing the funds. NonEm er ge nc y E m ploye es Retirement Board M eetin g 3 o f 5 •• • Mr. Jordan said that he sees the next step is the Board , Innovest and ERA discussing the findings. Mr. Moore suggested that lnnovest may need an educational session with ERA to discuss their role and give lnnovest an advance walk through the report before they all meet again. Ms. Wescoat will send lnnovest the ERA reports so that it can be discussed the February 14 Board meeting . ERA will schedule a discussion with Innovest to review the reports so Innovest can be prepared for the next Board meeting. Chairperson Woodward asked ifthe numbers represented in the revenue sharing are based on Schwab or Wells Fargo. Ms . Wescoat said Schwab because the custodial change occurred mid-year 2016 and Wells Fargo did not provide the same the revenue sharing. It was less. Chairperson Woodward confirmed that the prior revenue sharing was not a base for the savings , it is based on the expense ratio . Mr. Men sack said it based on a percentage of savings of the current funds and the alternative fund eve ry quarter. Chairperson Woodward suggested that lnnovest be provided the same opportunity to present to the Board as provided ERA . ERA will not attend the February 14 Board meetin g. The Board agreed that if Innovest is versed on the ERA report, ERA 's attendance would not be necessary. Mr. Jordan left at 4 :46 p .m . and Mr. Mensack's phone call ended . Mr. Moore thinks the information is great and is very interested in lnnovest's honest reaction . He said what is not included in the report is the Board discussions related to a fund 's staff turnover, etc . At the end of the day, there ma y be half of these recommendations that turn into savings opportunities and half turn into the Board having made good fund choices. The Board will not change their analysis of the funds based upon the ERA report. It may boil down to s hifting between active and passive management and that is a conversation to have with Innovest. He values the reports, but the Board is only receiving half of the picture without having Innovest being able to talk freely about the report. The question arises, what ifthe Board doesn 't utilize any of the alternative funds? Mr. Moore is fundamentally struggling with the expenditure of funds without the Board's advance approval. He also said that ifthere is no cost savings because the alternative funds are not used, then ERA could not claim there were any savings . Mr. Moore believes the Board was not committed to Thornburg for the next two years . He does not want to pay ERA for making a move that the Board would have done on their own. The Board must carefull y determine how the selections are handled going forward . If ERA is truly saving the plan money , they should be compensated for that and that the Board needs to be really thoughtful as to how that determination is made. Mr. Yates commented the ERA is doing other projects for the City and ERA is only paid on things that the y save money on and not all of the purchases are going through ERA. Chairperson Woodward said investments are different than purchases . Mr. Yates said his comment is that ifthe Board elects not use ERA, then there is no obligation. Mr. Moore said fundamentally the problem is that it sounds like the Board has been bound to a decision that the Board has not consented to , so that should be worked out. Mr. Yates suggested that Mr. Moore speak with the City Manager and he should be able to answer a lot of how this works. The Board agreed to wait until lnnovest shares with the Board . The Board discussed ifthe February 14 meeting would still be information or ifthere would be decisions that would be made. Ms. Wescoat said that Innovest is aware that there is the expectation of a response to the ERA report for th e Board meeting. Chairperson Woodward suggested the regular asset allocation evaluation of the funds may be necessary because there may be additional areas that Innovest wants the Board to consider. Ms. Wescoat reminded the Board that Innovest is preparing a fund expense analysis for the next meeting. It was not prepared during 2016 because of the transfer from Wells Fargo to Schwab . Schwab has different fund choices available and Innovest was waiting until there was a full quarter under Schwab to prepare the report . Mr. Moore questioned if it is a regular service that is included in the lnnovest fee. Ms . Wescoat said it is done typically every two years as part of the services provided by Innovest. Mr. Moore asked how it would be handled if Innovest already provides the service and it was included in their fee . Ms. Wescoat explained that what lnnovest does for the NERP expense analysis is not the same as ERA . The Innovest analysis has been done with the Board 's direction to utilize revenue sharing to pay Schwab fees or that those funds are returned to the Plan . • Further discussion continued regarding if any of the alternate fund recommendations were considered by the Board at the time of current fund selection. If the alternative fund had been previously rejected , then the Board is only looking at hindsight. The Board agreed that it is good information and needs more analysis . NonEme rge ncy Employees Retirement Boa rd Meetin g 4 of 5 •• • • Mr. Phelps express concern of stepping on the toes oflnnovest. Mr. Yates said he was certain that Innovest has addressed similar issues previously. Mr. Moore added that Innovest also understands that it is the Board and their responsibility, as fiduciaries, that when presented with the information, it should be considered. Mr. Moore said that Innovest's analysis and the Board's fund selections had factors far broader than the analysis factors of the ERA report. Board discussion followed regarding the availability of the software database and what lnnovest uses for their universe search. The discussion also illustrated that even ifthe analysis was done with each asset allocation study and changes are made , there is the potential that since nothing goes as expected. There is always the possibility that after the fact that things will look differently . The Board reviews the comprehensive data that is presented w hen Innovest does a fund search including fund composition, expense ratios , revenue sharing potential, performance and personnel longevity or changes. Other discussion included obtaining a comfort level with the process of evaluating lower expense ratios and the Board 's direction to Innovest to use revenue sharing to pay fees. The Board agreed it is important the Board hear lnnovest's opinion so the Board has heard from both parties. Members' Choice No items were discussed. The Board adjourned at 5:02 p .m . !Jhr£W~~ Carol Wescoat Recording Secretary NonEmergency Emp loyees Retirement Board Meeting 5 of 5