STAFF REPORT
City of Lancaster
CC 10
2/13/2024
JC
Date:February 13, 2024
To: Mayor Parris and City Council Members
From:George N. Harris II
Subject:Resolution Approving the Adoption of the Defined Benefit Platform Proposed by Shuster Advisory Group, LLC.
Recommendation:
Staff recommends that the City Council adopt Resolution 24-XX approving the adoption of a new Defined Benefit platform for the City of Lancaster Supplemental Defined Benefit Retirement Plan and related Governmental Excess Benefit Arrangement and the discontinuance of the Public Agency Retirement System’s (PARS) PARS Retirement Enhancement Plan (REP) and PARS City of Lancaster Excess Benefit Plan and the related Trusts. This Resolution was originally presented and approved by the City Council as Resolution No. 23-27 on May 9, 2023. The actual transition will occur on or around March 31, 2024, and the current administrator requires an approved Resolution with the actual date of termination within the resolution. This Resolution 24-XX is a restatement of the already approved Resolution 23-27, with the transition services dates updated.
Fiscal Impact:
Staff has analyzed the fee structure of the program provided by Shuster in comparison to the current PARS program. Assuming an average 6% gross annual rate of return, the fee schedule based on assets as of 7/31/2022 from the PARS program results in a 0.70% annualized two-year average fee, whereas the Shuster program would result in a 0.36% annualized two-year average fee. Over two years, the total PARS fees are estimated to be $112,850, whereas the total Shuster fees are estimated to be $57,685. The program proposed by Shuster results in a 49% reduction in the program's expenses in comparison to the current PARS program. The reduction in fees alone will result in an estimated $433 thousand in savings over 10 years, $1.5 million over 20 years, and $3.7 million over 30 years. These results assume there are no fee changes and assume $7,865,008 million of assets as of July 31, 2022. In addition, the combined impact of lower asset management fees and higher expected investment performance would have an additional positive impact. While past performance does not guarantee future results, higher-rated mutual funds with lower fees should continually produce results superior to the current status quo.
Background:
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The PARS Retirement Enhancement Plan (REP) and related Excess Benefit Plan were approved by the City Council on January 09, 2001. The plan was effective January 1, 2001, and is a defined benefit 401(a) plan (“DB Plan”) that, combined with the existing Public Employees Retirement System (“PERS”) pension benefits, enhances the retirement formula provided by the City to eligible employees. The plan is only available to employees hired before January 1, 2013. The plan has been administered by Phase II Systems (d/b/a PARS) since inception.
After a review of the current fees, investment portfolios, and services, it was determined that significantly reduced fees and improved investment flexibility, customization, transparency, and service could be achieved by transferring our plan administration and portfolio management to a different program provider.
Staff’s valuation process concluded that the program offered by Shuster Advisory Group, LLC (“Shuster”) provides the flexibility of investment options and extremely competitive fees for the comprehensive services the City will receive, including but not limited to Investment Fiduciary services, consolidated full fee transparency, and fully customizable investment options.
On January 09, 2001, the City Council approved a supplemental retirement benefit for employees meeting eligibility requirements. The plan is a defined benefit 401(a) plan (“DB Plan”) that, combined with the existing Public Employees Retirement System (“PERS”) pension benefit, enhances the retirement formula provided by the City to these employees based upon final compensation and years of service. This supplemental product was developed and implemented with Public Agency Retirement Services (“PARS”). However, it is important to note that (1) PARS is a private company and is not a public agency like PERS, and (2) the City administers the DB Plan and several third-party providers in accordance with the adopted plan documents. Although the DB Plan is commonly referred to as “the PARS plan,” it is merely a 401(k) defined benefit plan that can be administered by any capable defined benefit recordkeeper, trustee, and investment advisor.
The DB Plan is only provided to employees hired before January 1, 2013, due to the adoption of the California Public Employees' Pension Reform Act (PEPRA). Current assets in the DB Plan total approximately $8 million. Funds in the DB Plan are invested in accordance with the DB Plan documents in the Moderate HighMark Plus investment strategy (40%-60% Stocks, 40%-60% Bonds, and 0%-20% Cash).
Since inception, the DB Plan has been administered by Phase II Systems Inc. (“Recordkeeper”).
In addition, the funds have continuously been held in trust by US Bank as Trustee (“Trustee”), and investments have always been managed by Highmark Capital (“Investment Advisor”) a subsidiary investment manager of US Bank.
Analysis:
In 2022, staff conducted a due diligence review of the DB Plan. Staff found that administrative fees being charged by the current service providers were high and lacked transparency since the fees were not discernable. In addition, staff concluded that the assets were largely invested in mutual funds with relatively higher management fees. Finally, staff determined that the Recordkeeper did not have the technological resources to provide sufficient retirement educational or account information to participants or process retirement applications electronically.
Based on the analysis and the defined benefit program made available through Shuster, significant savings in administration costs are available in addition to improved active investment 1 5
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management services by Shuster. Shuster is the same firm that took over fiduciary responsibilities of the City’s 457(b), 401(a), RHS, and OBRA plans in July of 2018. Through that change, employees, participants, and retirees have realized significant savings on the fees in those accounts as well as access to an enhanced institutional investment menu.
More specifically, in 2017, the City was introduced to Shuster Advisory Group, LLC, and later on chose to engage Shuster as the retirement plan consultant and investment fiduciary for our 457(b), 401(a), RHS, and OBRA Plans. Shuster issued a Request for Information (RFI) to the current record keeper administering the plans and completed a comprehensive review, identifying the fees for record-keeping and administration were high and not transparent, and the quality of the investment menu needed improvement. Based on the information obtained through the RFI, Shuster subsequently conducted a Request for Proposal (RFP) for administration and recordkeeping services for the Plans. The results of the RFP proved that our administration and record-keeping fees could significantly be reduced, and the city could implement an open architecture investment menu and fee-transparent platform benefiting participants. The incumbent, Mission Square (formerly known as ICMA-RC), was selected by the city at a 55% reduction in plan fees [with a 75% reduction in 457(b) and 401(a) plan record-keeping costs], a higher crediting rate for the safety of principal guaranteed stable value solution and an improved investment menu for plan participants. In addition, Shuster recently negotiated a further reduction of the 457(b) and 401(a) record-keeping fees effective July of 2022, resulting in a total reduction of 91%. At the time of conversion, the positive impact on 457(b) and 401(a) participants due to the combination of the fee reduction and increased interest rate was estimated to be approximately $170,333 over a one-year period. The actual impact was higher than estimated and has averaged $253,456 per year for an overall impact of $1.141m. This enhancement does not consider any financial gains from the enhanced investment menu.
Shuster Advisory Group, LLC
Shuster Advisory Group, LLC is an independent investment advisory firm and fiduciary. They provide governmental and institutional retirement plan consulting services as well as private wealth management. Shuster is an SEC-Registered Investment Advisor with over $5 billion in assets under management, focusing on serving governmental agencies and special districts' unique needs. Shuster serves as an investment fiduciary to over 60 governmental agencies and special districts, providing investment selection, monitoring, and management, and provides plan consulting and participant services.
Shuster is currently the fiduciary investment advisor and plan consultant for our 457(b), 401(a), RHS, and OBRA plans. The services provided by Shuster are unique, with a low-cost, transparent structure and white glove approach. Shuster entered the public retirement plan sector after analyzing the sector and realizing that cities and agencies were being underserved and over- charged for their retirement plans, directly impacting the supplemental retirement savings of the public employees. Hiring Shuster for these services resulted in a 55% reduction in total plan costs for the 457(b) and 401(a) plans, in addition to a significant improvement in the quality of the investments available in the retirement plan. Shuster has proven to be responsive, analytical, and a true partner to the city.
Shuster has conducted the same analysis of the City’s supplemental defined benefit program and again determined that the City was being overcharged and underserved. Shuster found that the program available was over-priced and lacked full-fee transparency and high-level customer service. Shuster provides a defined benefit plan solution that combines Shuster’s investment fiduciary services and plan consulting with Charles Schwab Trust Bank as custodian and Nyhart 1 5
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as plan administrator, cohesively providing enhanced services at a fraction of the cost of the current program. With Shuster’s ongoing oversight and exceptional service model, Staff expects similar results with the defined benefit plan as experienced with the 457(b) and 401(a) plans.
Attachment:
A. Resolution No. 24-XX
B. Investment Advisor Agreement