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HomeMy WebLinkAbout03.d. Receive the 2023 Annual Deferred Compensation Report Encompassing Central San's 457(B) Deferred Compensation, 401(A) Money Purchase, and Health Reimbursement Arrangement PlansPage 1 of 14 Item 3.d. MEETING DATE: SUBJECT SUBMITTED BY: BOARD OF DIRECTORS POSITION PAPER FEBRUARY27, 2024 REVIEW DRAFT POSITION PAPER TO RECEIVE THE 2023ANNUAL DEFERRED COMPENSATION REPORT ENCOMPASSING CENTRAL SAN'S 457(B) DEFERRED COMPENSATION, 401(A) MONEY PURCHASE, AND HEALTH REIMBURSEMENT ARRANGEMENT PLANS INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION -FINANCE REVIEWED BY: PHILIP LEIBER, DEPUTYGENERAL MANAGER -ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER ISSUE The Deferred Compensation Plan Advisory Committee respectfully submits its 2023 Annual Report. BACKGROUND Deferred Compensation Advisory Committee Background Central San's Board of Directors (Board) approved the establishment of the Deferred Compensation Plan Advisory Committee (DCAC) in January 1982. The scope of activities of the DCAC includes: • Establishing internal administrative procedures • Educating participants regarding the Plan • Fiduciary Oversight of the Plan • Review and approve emergency withdrawal requests (unless delegated to the record keeper) • Reviewing investment performance of the Plan • Submission of an Annual Report to the Board of Directors and Plan participants The DCAC is comprised of seven members. The DCAC is designed to be representative of plan participants and generally be comprised of employees across the various non -management employee negotiating groups and organizational departments. The two non -management employee negotiating groups that are represented are the Management Support/Confidential Group (MSCG) and the Employees' Association Public Employees Union, Local One (Local 1). The Finance Manager serves as the DCAC Chair and Plan Administrator facilitating meetings of the DCAC and serving as Central San's primary contact with the record keeper, currently MissionSquare Retirement (previously known as I CMA- February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 128 of 196 Page 2 of 14 RC), and the Plan's 3(21) Fiduciary Adviser, NFP. Except for the Committee Chair, which serves a permanent term, DCAC members are appointed by the Directors (currently Deputy General Managers) of their respective departments when a position vacancy arises due to term expiration or resignation. Deferred Compensation Advisory Committee 2023 Activities I n accordance with its Administrative Procedures, the DCAC met four times in 2023, meeting in the months of February, May, August, and November to review results and discuss other plan matters. Once approved by the DCAC, minutes from past DCAC meetings are posted on Central San's website under "Financial Information." Some of the most significant accomplishments and developments of the DCAC over the course of 2023 include the following, organized by responsibility area: Plan Administration & Governance • Reviewed plan performance and fund scorecard reports from the DCAC's 3(21) fiduciary advisor regularly throughout the year (quarterly) demonstrating prudent fiduciary responsibility in monitoring the Plan's fiscal health. o Approval of a fiscally responsible DCAC budget for calendar year 2023 sufficient to cover plan administrative expenditures (i.e., fiduciary advisory fees, National Association of Deferred Compensation Administrators (NAGDCA) annual dues, DCAC member education, etc.) while maintaining minimum emergency reserves. Consistent with past practice, the 2023 budget also incorporated the return of approximately $169 thousand back to plan participants on a proportional balance basis as this amount exceeded minimum reserves (i.e., one year's operating budget). o With the support of its 3(21) fiduciary advisory consultant, the DCAC negotiated a new record keeping agreement with Mission Square to be recommended for Board approval. The new 5- year record keeping agreement, approved by the Board April 6, 2023, incorporated performance standards (a recommended best practice for retirement plan record keeping agreements, which was not in place previously) as well as a noteworthy reduction in fees (to 0.03 percent versus 0.0525 percent). o Appointment of a replacement DCAC member to ensure the composition of the DCAC is reflective of Central San's bargaining units and organizational structure (three departments) pursuant to its Administrative Procedures. Quarterly DCAC meetings continue to be well attended by its members, acting as a channel to keep Central San's various bargaining units and departments informed on significant deferred compensation plan matters. Plan Structure & Design o With the guidance of the DCAC's 3(21) fiduciary advisor, the DCAC designed a revamped core investment lineup structure in an "efficient fund menu" design in -line with NAGDCA best practices to help reduce fiduciary risk and improve participant outcomes through the elimination of redundant, higher risk, and higher cost investment fund options. This new lineup was approved by the DCAC in its February 2023 quarterly meeting and went into effect in June 2023 and reflected a noteworthy decrease in total fund expenses from a 0.543 percent to 0.29 percent, projected to generate up to $1.675 million in savings to participants over 5 years. Participant Engagement • Worked with Mission Square to rollout a participant education plan for calendar year 2023 including retirement plan specialist workshops and financial planning webinars. • Publication of a Lateral Connection article in January 2023 communicating upcoming plan lineup changes, the objectives of these changes, and where to learn more. This was distributed to both active employees as well as retirees. • Forming a sub -committee of DCAC members to test a financial planning service offered by NFP (WellCents) to assess its suitability for plan participants. Following product testing and discussions, the DCAC authorized the Plan Administrator to proceed with this service in 2024 February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 129 of 196 Page 3 of 14 for a 1-year trial period. As Mission Square's in-depth certified financial planner reports are only available to participants with balances greater than $100 thousand, the DCAC is hopeful the WellCents tool will provide a planning product for newer plan participants with smaller balances to help educate and prepare Central San employees for retirement. Plan Sponsor Ongoing Education • Ensured DCAC members received training on their fiduciary responsibilities, specifically covering NAGDCA best practice training on "Plan Administration" in August 2023 and "Plan Governance" in November 2023. • Sending a newly appointed DCAC member to the NAG DCA annual conference to learn more about deferred compensation plan design and administration best practices and other relevant topics. Several key conference takeaways were shared with DCAC members which will help steer DCAC objectives in 2024. The DCAC met most recently on February 7, 2024, in a regularly scheduled quarterly meeting to discuss the annual performance of the Plan as well as conduct regular business of the DCAC (i.e., review quarterly Plan results, review participant educational/outreach efforts, review DCAC membership, etc.). At this meeting the DCAC reviewed a draft of the 2023 annual report, provided feedback and direction, and authorized it for presentation to Central San's Board. Annual Report on Plan Performance for Calendar Year 2023 The attached presentation (Attachment 1) shows the current value of assets, segmented between the 457(b), 401(a) and HRA plans. The report also shows the distribution of assets by investment type for each sub -plan, a trend analysis line chart showing the changes in total market value over the previous five years, and the diversification of assets between seven investment type categories in that same five-year period. Central San's new plan menu provides participants with a variety of investment alternatives across various asset classes, with the selection of the asset mix being the choice of individual participants. I n the aggregate across all plans, participants continue to have a relatively large share of assets in the Stable Value/Cash Management plan at 21.5 percent, which is a slight decrease from 27.2 percent one year ago. While much of 2023 was characterized by market turmoil attributable to high inflation and market losses, the year closed with relatively strong performance. This strong finish is correlated with an increased desire and willingness by plan participants to take on equity risk, shifting retirement assets out of more conservative options. Central San Plan participants continue to invest most heavily in U.S. Stocks overall, making up 32.9 percent of the total portfolio, relatively unchanged compared to 33.7 percent one year ago. Central San's Plan reported a sizable increase in market value of 16.7 percent to a total market value of $174.8 million as of December 31, 2023. Despite this growth, it is still short of the aggregate market value of $175.3 million reported two years ago on December 31, 2021, reflective of worldwide market declines reported in 2022. Central San participants continued to make steady contributions to retirement accounts, with contributions to the Plan totaling approximately $7.1 million in 2023, an increase from $6.2 million in 2022. I n conjunction with the transition to the California Public Employees' Retirement System (CaIPERS) Health Benefits Program effective in Fiscal Year (FY) 2019-20, Central San implemented a Health Reimbursement Arrangement (HRA) for Retiree Health Tier I I I employees of Local 1 and MSCG, excluding the Management Group and unrepresented employees. Central San contributes 1.5 percent of base salary for each eligible employee to be used for eligible I RS qualified medical expenses post District employment. Accordingly, Central San entered into an agreement with its record keeper to open and administer an Retirement Health Savings (RHS) account for its newly established HRA. To provide an opportunity for Management and Unrepresented employees to take advantage of this useful retirement tool, during 2022 Central San opened an additional HRA account to be funded solely by mandatory February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 130 of 196 Page 4 of 14 employee contributions. I n total, the HRA plans reported a total market value of $1.6 million as of December 31, 2023. During 2023 there were total employer contributions of $340 thousand (to the MSCG-Local 1 account) and total investment gains (excluding fees) of $213 thousand. Education and Outreach to Plan Participants At the onset of 2023, Central San coordinated with its record keeper to rollout a financial wellness webinar program to educate plan participants on important and trending retirement topics. Twelve seminars (one for each month), facilitated by the record keeper, were held conveniently during the lunch hour and in a virtual format for employees to attend. In addition to the pre -planned educational and outreach program for 2023, Central San's record keeper continued to offer monthly recurring "virtual" face-to-face meetings with a Retirement Planning Specialist (RPS). These one-on-one meetings allow employees the opportunity to learn about the record keeper's online tools, discuss retirement planning strategies and investment options, and make investment strategy and allocation changes. Central San's record keeper also continued to offer one-on-one virtual meetings with a Certified Financial Planner (CFP), allowing participants to design and map out a financial plan and retirement strategy that is unique to their own situation. These meetings continued to be popular with participants in 2023, where there were 91 one-on-one RPS consultations, 11 webinars held by an RPS on retirement planning topics, 34 one-on-one consultations with a CFP, and 46 webinars on financial planning topics hosted by a CFP. ALTERNATIVES/CONSIDERATIONS None. FINANCIAL IMPACTS The Board's acceptance of the Annual Report for 2023 does not have any direct fiscal impact to Central San. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its February 27, 2024 meeting and recommended RECOMMENDED BOARD ACTION Receive the Annual Report of the Deferred Compensation Plan Advisory Committee for 2023. Strategic Plan re -In GOAL THREE: Workforce Diversity and Development Strategy 3 - Retain skilled workers by investing in resources and opportunities for all employees to grow and thrive GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility ATTACHMENTS: 1. Presentation February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 131 of 196 Page 5 of 14 February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 132 of 196 Page 6 of 14 /, Background Deferred Compensation Advisory 7,, Committee (DCAC) established by Board _ dj in 1982 Comprised of seven members appointed by department headsi, J, DCAC membership designed to be 1/!/y representative of workforce, including�� both Local 1 and MSCG Finance Manager serves permanent term as Chair and Plan Administrator 3 Plan Composition 4 4 • All full-time permanent employees • Voluntary employee contributions only • All full-time permanent employees • Employer contribution of 6.2% up to statutory social security income caps • All Tier III full-time permanent employees • Employer contribution of 1.5% of base salary • Management & Unrepresented at -will • Varying mandatory employee contributions, contingent on group, hire date, and income bracket February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 133 of 196 2 Page 7 of 14 DCAC Scope Co -fiduciary to Central San Board over Plan Annual communication to Board Scope of DCAC defined in the Deferred 0ompensation Plan Board Policy (BP Investment Policy Statement (IPS) and Education Policy Statement contained within Administrative Procedures Approval of Unforeseen Emergency Withdrawals can be delegated to recordkeeper 5 DCAC Membership BargainingDepartment I Group � Arellano, Grace** Administrative Services Operations MSCG 12/31 /24** ** Assistant 2 Cruz,Tricia Accountant Administration Local 1 12/31/26 1 3 Lawson, Dana Senior Engineer Engineering MSCG 12/31/25 ** 4 Mercerjustin InstrumentTechnician Operations Local l 12/31/26 2nd 5 Mizuno, Kevin Finance Manager 6 Niswander, Geoff Senior Household Hazardous Engineering Local 1 12/31/25 ** Waste Technician 7 Thomas, Christopher Accounting Supervisor Administration MSCG 12/31/24 2nd *Committee Chair position is title -specific and not employee specific. Finance Manager position serves as Plan Administrator and Committee Chair. Term limits do not apply. **Appointed to complete term of predecessor pursuant to AP 047. l: February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 134 of 196 3 Page 8 of 14 DCAC Activities & Accomplishments • Quarterly plan Designed and Design and Conducted two performance approved efficient rollout of fiduciary training reviews fund menu participant sessions for conducted. investment lineup education plan DCAC members • Adoption of a for Plan which for 2023 on plan 2024 DCAC was rolled out Formation of a administration budget returning successfully in sub -committee and plan excess admin to June 2023 to test a new governance participants financial planning Sending DCAC • Execution of a tool for member to new S-year term participants, annual NAGDCA record keeping expected to conference agreement. rollout in 2024 7 New Core Investment Menu New structure in -line with best practices issued by National Association of Governmental Deferred Compensation Administrators (NAGDCA) Reduces "decision paralysis" by cutting fund option choices in half 26 remaining options still provides for diversity in choice Projected to generate up to $1.675 million in savings to participants through lower expense ratios over 5 years 8 s •Savings to participants Higher benchmarked funds for Alleviates participants fiduciary risk and burden Reduces participant "Decision paralysis" February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 135 of 196 4 Overview of New Core Investment Lineup • New fund lineup inspired by 3(21) fiduciary advisor recommended structure (5-4-3-2-1-0) • Total of 26 options (including self -directed brokerage), compared to 50 offered previously • 22 basis point overall reduction in fund expense ratios • Self -directed brokerage option retained for participants outside of core lineup • Target Date Funds separated into 5-year retirement increment groups spanning 2010 through 2060 0. Specialty (2) I. Active International (1) Large Cap Large Cap Value 11 Growth III 11 (Putnam I (AB Large I LCV) Cap Growth) Small Cap Small Cap Value III 11 Growth II 11 (PIMCO I (AB Small I RAE) Cap Growth) LSD CENTRAL SAN CEO a CT S111-1 o 11RICI Page 10 of 14 Passive /Index Funds Four funds offered in passive/ index fund category Each fund offered scored highest rating possible (10) by 3(21) fiduciary advisor 11 Other Funds Three funds offered in active fixed oncome fund category One fund offered in active international equity fund category Additionally, two specialty funds include: Real Estate Investment (Cohen & Steers Realty Shares Q Retirement Fixed Income Fund (MissionSquare Retirement IncomeAdvantage Fund IRS) 12 Value Blend J� E Growth Int.Value Int. Blend Int. Growth BlackRock J E V1 Core Fixed Income Fixed Income Cash Equivalent = = M Active Fixed Income Core Fixed Income Fixed Income Cash Equivalent Lord Abbeft Core MissionSquare Fixed Income R6 PLUS Fund Class Active International Equity Value Blend Growth International Equity 11 (Fidelity Intl Cap J •• E IA February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 137 of 196 6 Page 11 of 14 Self -Directed Brokerage Option Will continue to be offered outside of core investment lineup Designed for knowledgeable investors who wish to invest outside of the core lineup Central San not fiduciarily responsible for investments held in self -directed brokerage accounts Minimum balances and administration fees apply 13 Annual Report Highlights Assets in 457b plan make up 57% of Plan assets, while 401a Plan is approximately 42% Largest share of plan assets is in U.S. Equities Assets in Balanced/Asset Allocation and Stable Value / Cash Management make up large portion of plan assets 14 SUMMARY DISTIBUTION BY INVESTMENTTYPE International/Global Specialty Stock 9.4% 3 g� !!! Stable Value/Cash _Management 213% U.S. Stock 32.9%, Bonds 7.2% Guaranteed Lifetime Income 3.3 % Balanced/Asset Allocation 21.9% i February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 138 of 196 7 Page 12 of 14 Annual Report Highlights Market value of Plan increased approximately 16.73% from the prior year 2023 Events: New Core Investment Lineup that took into effect June 16, 2023 Federal Reserve interest rate hikes Total contributions into plan were $7.1 million 15 Annual Report Highlights US Equities consistently the largest asset class in Plan Decrease in relative proportion of Stable Value/Cash Management category offset by increase in Balance/Asset Allocation category Little change in Guaranteed Lifetime Income, Bonds, Specialties, or International Equities 16 Total Market Value of Plan Assets as of December 31 st $200,000,000 $175,257,995 $174,820,254 $180,000,000 $152,787,496 $160,000,000 $140,000,000 $149,761,621 $120,000,000 $126,296,802 $100,000,000 $80,000,000 2019 2020 2021 2022 2023 Ratio of Investments by Type: Central San's ICMA 457 and 401(a) Plans 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 5.00% 10.00% ■■n MEN ■ �� I on. I III 0.00% c� cas e o° c c \� �o, 00 `o \O `,�v So l ro Gros \ �P\o JS \o SQ Jm D aP oc \e ee �e ca0 S�0 Q7��C \C`eC (7J�i9C ■ 2019 - 2020 - 2021 2022 r 2023 February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 139 of 196 $ Page 13 of 14 2023 Education & Outreach Efforts A designated Retirement Plan Specialist held 91 one-on-one meetings with participants A designated Retirement Plan Specialist conducted 11 webinars on various financial wellness topics for participants Certified Financial Planners held 34 one- on-one consultations with participants 46 webinars were conducted by Certified Financial Planners on financial planning and wellness topics 17 What's on the horizon? Execute 2024 participant education and outreach program Consider plan amendment for revokable auto enrollments with default contribution percentages (new employees only) Assess impacts of Secure 2.0 legislation and recommend plan changes to board if appropriate Roll out WellCents financial planning tool targeted for new employees IN W_W_SVIZ . , da; \1 OIL �� I CENTRALSAN i_ February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 140 of 196 9 Page 14 of 14 19 February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 141 of 196 10