04/17/2006 CONF MTG - 6097�
�
CRY OF
HUDLEY
CITY COUNCIL
CONFERENCE MEETING
April i7, �006 - 7:00 p.m.
Fridley Municipal Center
Meeting Room �
Deferred Compensation Plan.
2. Other Business.
Adjourn.
Memo to: The Mayor and Council ��
From: William W. Burns, City Manager �
Subject: Deferred Compensation Plan
Date: 4-11-06
During the fa11 of 2005, a group of concemed employees began evaluating the performance and
other aspects of the ICMA Deferred Compensation Plan. As part of this process, the employee
group has been working with Financial Concepts, Inc. (FCI}, the City's benefits consultasrt, to
evaluate the investments that are offered by ICMA in comparison with other deferred
compensation plans. The employee group also compared the performance of tbe ICMA
investments with the investments of other plans. The general consensvs is that ICMA offers
fewer investmem options than other plans. Although some of their investment ogtions have done
well in 2005, the majority has not done well when compazed with other category specific
investme�s.
In addition to examining the investment perfarmance af the ICMA, the group r�viewed the
investment performance, fees and services of five other plan providers. These include those
offered by Fidelity, M&I Bank, Met Life, Nationwide and Wells Fargo. Aft� discussing the
products and performance of these plans, the group invited three companies, Wells Fargo, MBtI
Bank and Met Life, for interviews with their representatives. Although all three companies have
very competitive products and services, we unanimously concluded that Wells Fargo offered the
best fit for our employees. The d�ision was based largely upon the diversity and number of
investmem options, competitive pricing and the benefit of local se�vice.
Since our irnerviews with the representatives with the three companies, we've also heard a
presentation from three ICMA represematives. They obviously are concemed about losing our
business. Although ICMA now seems to offer a broader array of investmem products than they
did when we first began our investigation, they still offer many fewer funds than does Wells
Fargo, or for that matter, any of the ather 457 providers that we interviewed. While ICMA offers
two money market funds, three bond funds, fifteen balanced funds (bonds and stocks), and
twerny-four stock funds, Wells Fargo offers more than 6,000 fund options and would be willing
to add other funds of our choosing.
Our reason for switching 457 providers is also related to our desire to play a more proactive role
in selecting quality investmeirt opportunities for Fridley's plan participants. Under the current
arrangement, participants play a very passive role. Umil recently there was no employee
committee which meets regularly to evaluate the performance of investmern op�ions. Even if
there had been such a committee, it would not be possible to add or subtract investment options
through ICMA. With them, our participants get what ICMA offers and have no opportunity to
dump poorly performing funds or add new funds. For example, if our participa.nts want to invest
in the emergin� markets sector, tliere is cun-ernly no ICMA fund that repre.�ents tlris sector and
no way for aur participams to choose an emerging markets fund.
In switching to Wells Fargo, we are also suggesting that there be an employee committee made
up of retirees and employees who represent the various City departments. The committce would
initially select twenty-five to thirty-five investment vehicles represeirting a11 of the various levels
Deferred Compensation Plan
April 11, 2006
Page 2
of investment risk. For the more conservative investors, there would money market funds and
bond funds. For more adventurous investors there would be pure small cap funds and emerging
market funds along with a wide variety of choices in between. The committee would also
establish terms and conditions for self-directed accounts and would offer this option to
participants who wanted to choose their own stocks or mutual funds.
After choosing the initial investment options, the committee would meet quarterly with an
investment advisor to evaluate the performance of these investment vehicles. Poorly performing
funds would be discarded; alternative funds that met the investment desires of our participants
would be added.
While the committee and the advisor would function to select investment options, individual plan
members would have the option of ineeting quarterly with an investment advisor who would
review the performance of the participant's portfolio, coach them in balancing their portfolio,
and assist them in making choices within the various investment categories. The employee
would also have the opportunity, as they do with ICMA, to conduct online review of their
portfolio performance.
The fees for both Wells Fargo and the financial advisor who would be provided by the City's
employee benefits consultant, Financial Concepts, would be about the same as plan participants
are currently paying under ICMA. Currently, each ICMA plan participant pays 1.01 % of
portfolio value annually to ICMA. Under the Wells Fargo option, fees would be 1.02% of
portfolio value. There are some additional fees associated with self-directed accounts.
In addition to looking at other alternatives to the City's current 457 provider, our group
conducted two surveys. In the first survey we attempted to measure overall satisfaction with
ICMA. Of the forty-eight employees who responded to the survey, thirty-eight participate in the
ICMA plan. While 60% of these employees said they were happy with ICMA service, only 28%
of them felt that the performance of the funds had been good; 58% said they would be interested
in moving the plan if we could find a new company that would offer better investment options,
increased education and investment information.
We attached a second survey to our February 6letter to ICMA plan participants. Of the 155
surveys sent out, there were 82 responses. Among these respondents, 39 or 47% favored a
change from ICMA to Wells Fargo. Another 31 participants or 38% of these respondents
opposed a change. Of these 31 participants who opposed the change, 17, or 54.8% were retirees.
The remainder were either undecided or said they could go either way.
In addition to surveying current plan participants, we also held a meeting that was open to all
plan participants. Attendees heard a presentation on the work of the committee as well as on
proposed 457 plan changes. They also had an opportunity to raise questions and to make
comments. While some participants raised questions about the changes, the general mood of
those attending seemed positive and no one voiced opposition to the changes.
. , i i
Deferred Compensation Plan
April 11, 2006
Page 3
On Apri14, I mailed a second letter to plan participants. The letter provided an update, and
announced that the issue would be presented to Council at your April 17 conference session.
Since then, I have had one letter from a Police Department employee (see attached letter and my
response) objecting to the change. Other employees that I have talked with about the change
seem very positive. Whatever the mood, I expect that a number of participants will be present
Monday night to voice their opinions.
By now you may be asking yourselves about Council's role in all of this. According to Rick
Pribyl and Fritz Knaak, you have fiduciary responsibility for the funds that plan participants
submit. The dictionary defines a fiduciary as one who holds funds in trust for another. According
to Fritz, in this case, it means that you are responsible for ensuring that the funds received from
employees are spent for the purposes for which they are received. It does not mean that you have
any responsibility whatsoever for the success or failure of any participant's portfolio.
My recommendation to you is that you approve the transfer of funds from the ICMA deferred
compensation plan to a Wells Fargo administered plan and that you agree with the employment
of Financial Concepts to act as the fmancial advisor for participants in this plan. I am also
recommending that the transfer of accounts be mandatory for current employees and optional for
retirees. My logic for this second recommendation is that the retirees have the legal right under
federallaw to transfer their accounts to another plan administrator or IRA anyway. Rather than
force them to transfer and then opt out, it makes sense to allow them to stay where they are if
they choose. We have checked with Wells Fargo and have learned that the absence of the retiree
accounts will not adversely affect our Wells Fargo administrative fees. If, however, we allow the
choice to both retirees and current employees, it is almost certain that the Wells Fargo fees will
increase as the pool of money in the transferred accounts is reduced.
Assuming that the tenor of Council's response to the transfer from ICMA to Wells Fargo is
generally positive on Monday night, staff will have legislation approving the transfer available at
Council's May 8 meeting. The actual transfer, if approved, would occur over several months.
/VVWB
Attachments
William Burns, Fridley City Manager
Dear Ms. Burns:
April I1, 200G
Thank you foi youc xecent lettei iegarding deferred compensation. After careful thought and much
consideration, I am respectfully requesting that we give this matter more time and attention before bringing the
uansfez xecommendation to the City Council.
I believe that the employee committee that was convened to look in to this mattei has surely done an
excellent job at comparing stock perfoimance and options, but I haven't seen any mention that emplopees
affected by this decision may have a difference of opinion regarding the use of a corporate entiry (Wells Fargo)
compared to a not-foi-profit entity (ICMA). ICMr'1-RC is not owned by a bank, insuiance company or financial
institution, and answers only to us, not to the shareholdexs of Wells Faxgo. I'or many of us, this is reason
enough to stay with the steady, dependable performance of the defeired comp plan ICMA-RC offers.
I hope the council will agree with me that we deserve to heat a modetated forum, uath both ICMA and
Wells Fargo representatives present, to respond to our quesrions and for each of them to be held accountable
by the other organization. More important to me, please distribute the infoimation to involved employees
noting the very important distincrion between ha��ing a not-fox-profit vs. a corporate entiry overseeing the plan
(and their assets); only after making this exact point very cleat, I request that you take another survey. The
min;.,,a1 response to the formei survey is evidence that this issue hasn't been given its proper due. At the very
least, emails and postings on this matter should be given the same importance and frequenry as other employee
relations functions. (I haven't spoken with anyone who has had a single conversation with an3�one on the ad hoc
committee regaxding these very important financial matters.) ,
Another way to look at the statistics associated with this issue: you are proposing a dxamatic and substantial
change that could affect the financial securiry of all City employees based on the recommendation of fewer
than 25 %(39 people out of 155 surveped). If you feel compelled to make a change for administrative reasons
(which maq not necessarily be in the emplopees' best intexests) you should consider giving all employees, not
just ie�ees, a choice of plans. I am quite positive this would be amenable to Wells Fargo. You should also ask
those on the committee (i.e. Ahlexs, Guest, Morrissey, and Morse for the Police) to make contact with and
solicit information and opuuons from their co-workers to get a better response to this very important issue I
suggest that their task should be seen as an oppoztunity to educate as well as to investigate. I would expect the
above listed concerns to be included in that pxocess.
Although some people may feel compelled to take on additional short-term risks in the hope of profiting
from corporate dealings, I believe that most employees favor the stable and conscientious approach of ICMA.
Their nonprofit status, by definirion, means dtat profits are rolled back into the accounts of shareholders, not
used to pay corporate salaries, mazketing costs, and stockholder dividends. And with ICMA's iecent
commitment to expanding the flexibility of our plan, we have an opportunity to have the best of both worlds—
the security of a reputable nonprofit, with the self-directed investment control of a brokezage. No one is
currendq iestricted from investing with Wells Fargo or any other vehicle—they need only call a broker, however
the Ciry of Fridley employees can only maintain their current, proven, and secure ICMA –RC investment
opportunity with your help.
Sincerely,
i
.. ��� 1 J 1! t /�
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�
Michelle Zwicky �
Police Technician
�;,
_
_
CITYOF
FRIDLEY
FRIDLEY MiJNICIPAL CENTER • 6431 UNIVERSITY AVE. N.E. FRIDLEY, MN 55432
(763) 571-3450 • FAX (763) 571-1287 • TTD/TTY (763) 572-3534
April 13, 2006
Ms. Michelle Zwicky
71 b Sixth Street N.E.
Minneapolis, MN 55414
Dear Michelle:
Thank you for your letter of April 1 I, 2006. Here is my response to each of the points tha.t you
have made.
1. First, you say that you haven't seen any mention in my letter of Apri14 that
employees affected by our recommendations may have a difference of opinion
regarding the transfer of our deferred compensation plan from ICMA to Wells
Fargo.
In both of my letters (February 6 and Apri14), I mentioned the results of employee
surveys. This included telling you that 38% of the respondents to the latest survey
opposed the change. Although I did not mention it in my letter, we held an open meeting
for plan participants, including retirees, on February 22. All 155 participants were invited
to the meering and had a chance to hear a presentation about the proposed change in plans
as well as to raise questions or concerns. I don't recall anyone voicing concerns at the
meeting.
2. You ask that we hold up Council consideration of the proposed change in deferred
compensation plans until after we have scheduled a moderated debate between the
two providers.
First, let me point out that Wells Fazgo did not come to us seeking to replace ICMA. We
invited them along with two other providers to present their product to a group of about
ten employees who were members of an ad hoc committee. Our invita.tions to these
groups were based on our belief that the performance of the ICMA funds, in general, was
poor. My personal experience with ICMA in 2005 would bear this out. Our consultant
has also provided considerable documentation of their poor performance.
Ms. Michelle Zwicky
April 13, 2006
Page 2
I would also point out that our ad hoc employee committee has listened to a rebuttal by
three ICMA representatives. In general, we felt that although ICMA had broadened their
investment options, they were still woefully short of offering the diversity and number of
options that were available from Wells Fargo.
Although we theoretically could schedule the debate you requested, I believe that the
opportunities provided thus far have been adequate. In addition to half a dozen or so
meetings with an employee comxnittee, we've conducted two surveys and held a general
meeting with plan participants. On Monday evening, a11 employees will have an
opportunity to share their points of view with Council.
3. You asked that we distribute information noting the difference between a plan
offered by a not-for-profit organization and a for-profit organization.
I'm really doubtful that this distinction means much. What is important is performance
and opportunity. The ICMA plan has not performed well and it offers a much more
restricted variety of investment opportunities. ICMA also does not allow for employee
involvement in shaping opportunities. If we make the transfer to Wells Fargo we will
esta.blish an employee committee comprised of representatives from every department.
They will meet at least quarterly with a financial advisor to evaluate the performance of
the funds they have selected for our plan. While there are no guarantees, I believe that
this additionallevel of vigilance will serve a11 of our plan participants well.
4. You ask that we complete another survey in vi�w of the "minimal" response to our
February 6 survey.
Actually, 82 out of 155 plan participants responded. A 53% response rate is usually
considered a good response rate.
5. You want us to give all employees, including retirees, a choice of plans.
We aze making it possible for retirees to stay with ICMA. This is based on our
knowledge that federal law allows them to move their accounts anyway. We also know
from talking to Wells Fargo that we can allow retirees to sta.y in ICMA without impacting
the fees that they charge. If, however, we give the same option to others, our fees will
undoubtedly increase as the dollaz value of our account shrinks. While it would be great
to allow everyone a choice, we know that the choice will be accompanied by higher
costs.
6. You requested that the current committee members make contact and soGcit
information from their co-workers.
There is nothing keeping this from happening. The conversations that I have had seem to
bear out that there has been discussion within departments. You should realize, however,
.�
Ms. lVlichelle Zwicky
April 13, 2006
Page 2
I would also point out that our ad hoc employee committee has listened to a rebuttal by
three ICMA representatives. In general, we felt that although ICMA had broadened their
investment options, they were still woefully short of offering the diversity and number of
options that were available from Wells Fargo.
Although we theoretically could schedule the debate you requested, I believe tha.t the
opporiunities provided thus faz have been adequa.te. In addition to half a dozen or so
meetings with an employee committee, we've conducted two surveys and held a general
meeting with plan participants. On Monday evening, all employees will ha.ve an
opportunity to shaze their points of view with Council.
3. You asked that we distribute information noting the difference between a plan
offered by a not-for-profit organization and a for-profit organization.
I'm really doubtful that this distinction means much. What is important is performance
and opportunity. The ICMA plan has not performed well and it offers a much more
restricted variety of investment opportunities. ICMA also does not allow for employee
involvement in shaping opportunities. If we make the transfer to Wells Fazgo we will
esta.blish an employee committee comprised of representatives from every department.
They will meet at least quarterly with a financial advisor to evaluate the performance of
the funds they have selected for our plan. While there are no guarantees, I believe that
this additionallevel of vigilance will serve all of our plan participants well.
4. You ask that we complete another survey in view of the "minimal" response to our
February 6 survey.
Actually, 82 out of 155 plan participants responded. A 53% response ra.te is usually
considered a good response rate.
5. You want us to give all employees, including retirees, a choice of plans.
We are making it possible for retirees to stay with ICMA. This is based on our
knowledge that federal law allows them to move their accounts anyway. We also know
from talking to Wells Fargo that we can allow retirees to stay in ICMA without impacting
the fees that they charge. If, however, we give the same option to others, our fees will
undoubtedly increase as the dollaz value of our account shrinks. While it would be great
to a11ow everyone a choice, we know that the choice will be accompanied by higher
costs.
6. You requested that the current committee members make contact and solicit
informafion from their co-workers.
There is nothing keeping this from happening. The conversations that I have ha.d seem to
bear out that there has been discussion within departments. You should realize, however,
Ms. Michelle Zwicky
April 13, 2006
Page 3
that this is a specialized subject matter about which not everyone is fluent (or even
interested). That's why we had the open meeting with the Financial Concepts consultant.
7. You believe that most employees favor the stable and conscientious approach of
ICMA over the Wells Fargo option.
If they do, the surveys have not borne that out. Among the respondents to the first survey,
only 28% felt that the performance of the ICMA funds has been good. Another 58% said
that they would be interested in moving the plan if we could fmd a new company that
would offer better investment options, increased information and investment information.
My personal conversations with employees indicate a general dissatisfaction with the
level and quality of attention offered by our current ICMA representative.
Michelle, I will admit that we could extend the process and conduct more meetings and do more
surveys. That being said, I think the current process has been a thorough one that has involved
some very interested and insightful employees, as well as a very qualified financial consultant
that we recruited.
Thank you again for sharing your concems. I will send them along to Council members for their
consideration on Monday evening. I also invite you, along with other interested employees, to
participate in the meeting.
Sincerely,
��
William W. Burns
City Manager