Retirement Board

APPROVED MINUTES OF REGULAR RETIREMENT BOARD MEETING Thursday, May 11, 2023 6:00 p.m. In-person Meeting for Trustees: City Hall, Dogwood A&B Virtual Attendance Option for Consultants/ Staff/ Public Public comments were invited to be submitted to cmester@fallschurchva.gov until 6:30 PM on Thursday May 11, 2023. None received. 1. Call to Order The meeting was called to order by Chair Connie Rydberg at 6:01 PM 2. Roll Call Present: Connie Rydberg, Charles Collier (joined at 6:17 p.m.), Marshall Jarrett, Kevin Knudsen, Matt Parker, Mathann Jackson and Nate Dupree Absent: None Staff Present: Cindy Mester, Shari Davidson, Kiran Bawa, Steve Mason and Kristen Michaels Also Present: Mary Nye and Jacob Peacock, AndCo Consulting Robert Burrell, Segal 3. Virtual Trustee Approval: Connie Rydberg moved, and Matt Parker seconded to allow Charlie Collier to attend the meeting virtually due to a medical condition that prevented his physical attendance. The motion passed 6-0-1 (Charlie Collier absent). 4. Introductions and Welcome 5. Receipt of Petitions: none 6. Review and approval of draft Minutes from February 9, 2023, meeting: Marshall Jarrett moved, and Matt Parker seconded to approve the minutes of the February 9th meeting as presented. The motion passed 6-0-1 (One absent). 7. First Quarter of 2023 Investment Performance Review a. AndCo presented their 2023 Disclosure (Adv Part 2a) – which provides information about the qualifications and business practices of AndCo Consulting. AndCo updated ownership information with new partners. No comments or questions. b. SVP and Bank Turmoil – AndCo presented information about the recent Banking industry failures. AndCo reached out to investment managers. City of Falls Church Pension and OPEB investment funds had minimal exposure (most had none, highest was .36%) to these events. Additionally, AndCo does not believe the indirect exposure to the bank/credit sub industry will impact the Fund. No concerns. Banks have new ownership and FDIC protected depositors. c. MissionSquare Leadership Change/Lazard Staffing Lay-off Update - MissionSquare announced the departure of Lynn Ford, their CEO and appointment of Board Chair Deanna J. Santana as Acting Chief Executive Officer & President due to significant missteps with the system upgrade, they  recently conducted. They also terminated Chief Revenue Officer possibly due to ties to CEO strategy. Trying to “right the ship”. Increased call center staff by double. In-sourced up front user experience web assistance. Paused 403b work. People/Process/Technology improvement is new mantra. Moving to get issues behind them. City of Falls Church did have some transition issues with payroll file acceptance and long wait times to get Customer Service help, but that has been remedied, and there were no participant facing issues that the City is aware of. Chief Client Experience and Technology Officer is still retained. Should get more information after next Board Meeting. Will continue to monitor situation. Lazard is reducing workforce 10% as part of cost saving initiatives impacting financial advisory, corporate and asset management businesses. Sales, Marketing and Management were mostly affected. Not planning to change personnel on Infrastructure Fund. AndCo stated that they have no concerns with the Plans’ investments in the Lazard related to this change. d. New Consolidated Report – AndCo reviewed the new customized report template to include Defined Contribution Plan investments. e. Performance for the Basic and Police Pension Plans and OPEB–Mary Nye of AndCo Consulting Market Performance: Equity markets moved broadly higher during the quarter despite inflation, slowing global GDP growth and banking system concerns. International stocks also experienced strong returns. China’s reopening from COVID-19 restrictions has been a great tailwind. Large Cap growth was the best performing domestic segment while small cap value performed the worst. Performance across domestic bond market sectors was positive during the quarter, led by corporate investment grade bonds. Global bonds slightly outperformed domestic fixed income. For the period, the S&P 500 large cap benchmark returned 7.5%, compared to 4.1% for mid-cap and 2.7% for small cap benchmarks For the quarter, the MSCI EAFE Index returned 8.5% while the MSCI Emerging Markets Index rose by 4.0% For the quarter, performance of the bond market was broadly positive due to lower inflation and falling yields beyond 1-year maturities. The Bloomberg (BB) US Aggregate Index returned 3.0%, for the period while investment grade corporate bonds posted a return of 3.5% First 2 quarters strongly negative, last 2 quarters positive. No longer seeing double digit negatives for the year – just single digit negatives. Basic and Police Plan and OPEB Market Values, Net Flows and Returns on Investment were presented in a consolidated chart. Defined Contribution Plans were added to the consolidated chart. Market Value for the Basic Plan at the start of the quarter was $119.32 Million with net flows of $1.53 Million out of the plan, market increase of $4.35 Million and an ending market value of $122.14 Million. Thus, the gross return for the Basic Plan was 3.66% for the quarter. The Police Plan at the start of the quarter was $39.26 Million, net flows totaled $486 thousand out of the plan, market increase of $1.38 Million and the ending market value of $40.15 Million. Thus, the gross return for the Police Pension was 3.53% for the quarter. Gross returns for the 12-month period were -5.23% for the Basic Plan and -4.92% for the Police Plan. Comparative performance for the Basic and Police Plans against all retirement plans showed the Total Funds are still ranking in the top decile in overall universe for the five-, seven-, ten-, and fifteen- year time periods. For the quarter, the ranking was third quartile for Basic Plan and Police Plan. In comparison to plans with a similar investment strategy (greater than 70% allocation to equities) the Basic and Police plans are ranked in the top third for the five, seven-, ten- and fifteen- year time periods. For the quarter, both plans rank in the fourth quartile. This result is consistent with the plans’ investment strategy to protect in a downside market, which can mean lower returns in an up market. Pension asset allocations show all strategies within policy and close to target, except Fixed Income at the low end of the range. All individual funds are within investment policy range, except Lazard in the Basic Plan slightly above range (7.1% vs 7%) due to outperformance. Should be remedied with next rebalancing. Domestic equity managers, particularly large cap value, struggled this past quarter. OPEB funds started at $17.22 Million at the beginning of the quarter. With net cash flow out of $308k and a market increase of $971k, the ending market value is $17.89 Million. Thus, the gross return for the OPEB Plan for the quarter was 5.65%. The OPEB plan results for the last 12 months showed a gross return of -6.45%. OPEB broad asset allocations show all funds within policy. OPEB’s return was slightly better than Basic and Police Plans and was at the 18th percentile. The longer returns (beyond 3 years) were in the top quartile. April was generally a positive month, which has improved the numbers from the presented results. Overall, there were no concerns about current Managers. f. Defined Contribution Retirement Savings Plans (457b/401a) Report: `The 457 Plan has $26.3M in assets up from $25.1M in December 2022. Employee investments are well diversified, with 15.3% of assets in cash and the stable value fund (MissionSquare Plus Fund). 86.6% of assets are in active investment funds. The 401a Plan has slightly under $505,000 in assets up from $447,000 in December 2022. 60% in Balanced/Target Date Funds, then 25.5% in Domestic Equity. 82.8% of assets are in active investment funds (non-Index Funds). Report includes performance of each Investment Fund. In the future will show color coded chart of results (quick view) – which ties to Investment Policy Statement. Will try to estimate Gross Return for Defined Contribution Plans going forward (employees’ investing results). Report also includes a fiduciary education section each quarter – particularly important for trustees to review and ask questions. g. Defined Contribution (457b/401a) Asset Allocation Recommendation AndCo provided framework for decision making process to follow and best practice recommendations. Guiding principles include exclusive benefits rule, loyalty, prudence and diversification. Documentation of decisions is imperative. Funds and fees = fiduciaries. The Retirement Board generally should operate as if governed by ERISA (best practice approach). Safe harbor for Qualified Default Investment Alternative is satisfied by the Target Date Funds currently in our Plan. Fiduciary protection for Fund Line-up changes – can do Like to like mapping and QDIA mapping. Safe harbor for number of choices – must have at least 3 fund options with different risk and return profiles. Fees can be paid by participants, the employer or some combination. Falls Church plans are participant paid through revenue sharing (mutual funds pay 4 basis points of the fees to the recordkeeper). Can also be asset based – flat % (benefits those with smaller balances), per participant fee – flat $ (benefits those with larger balances) or some hybrid – asset plus per participant fee. Can consider MissionSquare products Guided Pathways advisory service with Managed Account or self-directed brokerage account in the future (additional fees apply). Investment Lineups can include Basic, Broad or Specialized with core, complimentary and specialized funds. Offering too many funds can cause confusion and lead to election paralysis. Target date funds offered can be helpful for those who don’t want to make an individualized investment choice (“do it for me”). Passive funds are available for those who want to mirror the market at low cost. Complimentary and Specialized funds for those who want to customize and/or prefer active investment management. Currently offer 48 funds in the 457 (34 funds if the target date funds are counted as 1 fund) and 46 funds in the 401a (32 funds if the target date funds are counted as 1 fund), including several overlapping classes. Do offer well diversified set of broad investments. Should reduce the number of options to simplify selection – recommend 10-15 (Target date funds count as 1). Offer best fund in asset class universe, if available – separate from recordkeeper. Suggest moving to target date funds (“TDFs”) and away from risk-based funds (doesn’t change over time) for the QDIA. It was noted that, in the 457 Plan, the Balanced Funds currently have more assets than the Target Date Funds ($5.3m vs $5.1m). MissionSquare staff confirmed that participants are aware of the difference between asset allocation and TDFs, and that the balanced funds are intentionally selected. Nevertheless, AndCo advised TDFs as the Plans’ QDIA option in part, because participants can replicate a balanced fund investment using other investment funds (e.g. put 60% of their funds in a large cap and 40% in a bond fund) if they prefer that approach. TDFs provide the advantage of gradual adjustments to the investment allocation as participants get closer to retirement. AndCo recommends best practice asset allocation – balanced, passive core and complimentary/specialty. h. Defined Contribution (457b/401a) Fund Options Selection Process Fund Option selection – As a Board, either review options for each asset class (Option 1) or review AndCo’s expert recommendations (Option 2) – or some combination. AndCo is a prudent expert, hired by the Board, which satisfies fiduciary requirements. Suggestion that we do deep dive on the Target-date fund features as a Board due to the amount of money invested in them and variance among Fund Families. Each Retirement Board trustee was able to express their opinion. After consensus reached, the following motion was made: Connie Rydberg moved, and Matt Parker seconded approval of the Defined Contribution Retirement Savings Plans (457b/401a) Fund Lineup selection process utilizing Option 1 for the QDIA asset class and Option 2 for the remainder of the asset classes in the Plans’ asset allocation. The motion passed 7-0. The Retirement Board decided to do the selection review as a full Board at a separate meeting. The Retirement Board discussed including an emerging market fund in the line-up. The AndCo proposed International fund includes 25-30% emerging markets. Also, target date funds vs balanced funds for use as the QDIA should be reviewed. i. Defined Contribution (457b/401a) Investment Policy Statement (IPS) - AndCo presented the revised draft Best Practices IPS for review and discussion after first round of edits and questions from last meeting. It was confirmed by AndCo that their quarterly report for the Plans will be consistent with the what the IPS indicates will be reviewed. In consultation with Plans’ outside Counsel and the City Attorney, it was confirmed that “prudent person” is the proper diligence requirement for fiduciaries, similar to ERISA. Code sections are included in the IPS and are consistent with Pension Plans. The IPS needs to be approved by City Council. Marshall Jarrett moved, and Matt Parker seconded approval of the Defined Contribution Retirement Savings Plans (457b/401a) Investment Policy Statement as presented. The motion passed 7-0. j. Defined Contribution (457b/401a) Fees Request for Information (RFI) Recommendation The Retirement Board needs to monitor fees on an ongoing basis. The IPS requires an RFI at least every three years. AndCo reached out to multiple recordkeepers for a current market fee comparison. Vendors were provided statistics of our Plan anonymously on which to quote. MissionSquare @10 basis points for total recordkeeping revenue is competitive (administration, education and communication). Only one vendor provided 1 basis point lower quote. When you add in all other services, MissionSquare is giving a very competitive price for the services they offer. Current fee of 4 basis points is because we are using their funds. AndCo’s recommendation is to stay with MissionSquare. The Staff agrees with this recommendation, unless we have service issues going forward. RFI satisfies fiduciary requirement for 3 years. Given the upcoming fund changes and the recent challenges with the system upgrade, the Board should re-visit this a year from now to determine if services are still satisfactory and participants are happy. If we don’t do a Request for Proposal, then 3 years from now, there would be another RFI. AndCo Research Department will provide an update if any concerns arise about the MissionSquare Management and Board changes and how they are doing.  Marshall Jarrett moved, and Matt Parker seconded approval of the Defined Contribution Retirement Savings Plans (457b/401a) Fees recommendation and next steps as presented: Stay with MissionSquare for now, continued monitoring of MissionSquare, a year from now, a very formal review of MissionSquare and how they are doing and in 3 years do an RFI to monitor if recordkeeper fees are still competitive. The motion passed 7-0. 8. OPEB IPS Asset Allocation/Investment Review – AndCo will conduct an asset allocation study, similar to what is done for the Pension Plans, to determine if we need a separate asset allocation for the OPEB funds or if it can be simplified to the same as Pension. Will look at current mix and a similar mix to Pension and see what the investment return expectation would be. Will present at September meeting. 9. Economic Assumption Evaluation and Recommendations- Robert Burrell, Segal Consulting Every year we ask our actuaries to look at our long term (30 years) key economic factors (inflation, asset return, salary increase, payroll, cost of living increases). Segal is recommending no changes. Chair attended a continued education session of actuaries that discussed assumptions, and consensus was inflation should remain at 2-2.5%, consistent with the Plans’ current assumption. Chair advocated for no change as well for investment return. Some salaries have gone up more than assumption due to comp study review. If salaries increase more for a third year, then would recommend a revision. For now, because the updates were expected to be a one-time event, Segal recommends leaving the salary increase assumption unchanged. Marshall Jarrett moved, and Matt Parker seconded approval of the Economic Assumption Evaluation Recommendation as presented. The motion passed 7-0. 10. Actuarial Equivalence Analysis Cost Proposal- Robert Burrell, Segal Consulting Segal provided a proposal to create new actuarial equivalence factors for the 9 different annuity options (as recommended by Bolton analysis of the Pension Plans). There have been lawsuits about this calculation at other organizations. Chair approved Basic Plan Cost ($5,451-$6,821) and now needs Retirement Board for the Police Plan ($2,726-$3,411) because total is more than $10,000. These factors are needed to finalize June and July retirement calculations. The Board questioned the cost of the work. The Chair validated that the project was a significant amount of work, and therefore she was comfortable with the reasonableness of the fees, especially given the lower cost for preparing the work for the Police Plan (economies of scale). Marshall Jarrett moved, and Matt Parker seconded acknowledgment of Chair Rydberg’s May 4, 2023 expedited approval for Basic Pension Plan Analysis and moved approval of the combined Actuarial Equivalence Basic and Police Pension Plan Analysis Cost proposal total as presented. Furthermore, the Pension Plan Administrator is authorized, in consultation with the Chair, to execute the recommended Actuarial Equivalence Cost proposal as discussed. The motion passed 7-0. 11. Officer Election: Chair and Vice-chair positions – nominations were solicited for Officer positions. Can’t both be City Resident representatives. Current office holders were willing to continue. No new nominations were offered. Marshall Jarrett moved, and Matt Parker seconded approval of the nomination slate of Connie Rydberg as Chair and Nate Dupree as Vice-Chair. The motion passed 7-0. 12. Benefit Administration/ Calculation and Custodian Contract a. USB Custody Contract Component Update – USB is now the Custodian for all investments. Vanguard has recently moved to USBank making accounting and administration much easier. Still working on Principal Funds transition (naming issue on statement that needs to be corrected). b. Securian Contract Termination Status – still trying to get all data transferred and residual funds returned (Basic Plan $55,000, Police Fund ~$400,000). c. USB Retiree Benefits Payment Contract Transition Update – made May 1 payment to retirees. Very collaborative and helpful with data issues. Line by line review of taxes was necessary. d. Benefit Calculations and Projection Update The Retirement Board previously approved Segal retirement calculation fee of $750 per retiree and $500 per terminated vested participant. Segal has asked for a price increase to $600 effective January 1, 2024, for terminated vested due to higher billing rates already effective. Additionally, Segal added a reduced cost of $300 for minor updating of a calculation. Marshall Jarrett moved, and Matt Parker seconded acknowledgment of Chair Rydberg’s March 30, 2023 expedited approval for certain benefit calculation costs, with costs that will exceed the cost previously authorized by the Retirement Board starting in January 2024. Chair Rydberg confirmed that she approved the cost above the authorized amount because (1) the cost increase is in the future and (2) the additional cost over the 1-year term of the contract was below $3,000. Further, Marshall Jarrett further moved, and Matt Parker seconded that the Retirement Board authorize the proposed cost increases as presented and that, the Pension Plan Administrator is authorized, in consultation with the Chair, to execute the Benefit Calculation Services proposal as presented. The motion passed 7-0. e. Active Employee Annual Statements Segal Proposal Segal provided a proposal for Annual Pension Statements of $12,300. Chair recommended approval. Securian had a packaged fee, but this item was estimated at $14,000. Will be efficient to have the actuary create the statements because they already have the census data, and they are expected to be able to provide the statements in a timely manner. Marshall Jarrett moved, and Matt Parker seconded approval of the Active Employee Annual Statement Segal Contract Amendment as proposed. The motion passed 7-0. f. Active Employee data tracking options – The current known data storage options for active and term vested data are not sufficient for the City’s needs. We will have Securian data spreadsheets and may be able to use additional Munis module. This is a work in progress. 13. 2023-2024 Training Plan and Budget a. Preliminary October 12, 2023, training topic discussion – Secure 2.0 and Fiduciary 101 topics New Trustee 3-year cycle training rotation and budget of $16,000 proposed (including fee for mandatory October training). Marshall Jarrett moved, and Matt Parker seconded approval of Retirement Board training plan as presented. The motion passed 7-0. b. Confirm new Trustee onboarding committee to create a manual. Trustee onboarding committee will consist of Charlie and Matt. 14. 2023 Revised Work Plan Adoption Pension Plan amendments deferred. OPEB discussion, if a contribution is required, added to November. Marshall Jarrett moved, and Matt Parker seconded approval of the 2023 Work Plan as amended. The motion passed 7-0. 15. Consent Agenda Items on the consent agenda were made public and provided to the Board in advance of the meeting for review. Items included the Plan Administrator’s Quarterly Report and deferred action on Plan amendments. Police had one military service buy-back and one buy-back for break in service. Have been very active with hiring and replacements being added to Pension. USBank fees have been adjusted from last quarter for newly negotiated rates. The Plans are up-to-date through March for advanced payment true-up. Marshall Jarrett moved, and Matt Parker seconded approval of the consent agenda as presented. The motion passed 7-0. 16. Other business not on the agenda: a. Meeting timing options – may consider earlier or during the day (Charlie – can do earlier, Marshall – flexible, Nate – during day, Kevin – can do 9-2, not 5pm, Matt – day off, not 9 or 5, Mathann flexible with advanced notice) b. May 2023 Training Report – Chair attended virtual actuarial program. Certificates have been created for former Retirement Board members. 17. Adjournment: Marshall Jarrett moved, and Matt Parker seconded to adjourn the meeting at 9:54 PM. The motion passed 7-0. THE CITY OF FALLS CHURCH IS COMMITTED TO THE LETTER AND SPIRIT OF THE AMERICANS WITH DISABILITIES ACT. TO REQUEST A REASONABLE ACCOMMODATION FOR ANY TYPE OF DISABILITY, CALL 703-248-5129, TTY711.