Retirement Board

APPROVED MINUTES OF REGULAR RETIREMENT BOARD MEETING Thursday, September 26, 2023 5:15 p.m. In-person Meeting for Trustees: City Hall, Laurel Conference Room Virtual Attendance Option for Consultants/ Staff/ Public Public comments were invited to be submitted to cmester@fallschurchva.gov until 6:30 PM on Thursday September 26, 2023. None received. 1. Call to Order The meeting was called to order by Chair Connie Rydberg at 5:21 PM 2. Roll Call Present: Connie Rydberg, Marshall Jarrett, Kevin Knudsen, Matt Parker, Mathann Jackson, Charles Collier and Nate Dupree Absent: None Staff Present: Cindy Mester, Shari Davidson, Steve Mason, Gregory Brown (NVCJA), and Eric Cembrook (NVCJA) Also Present: Mary Nye, AndCo Consulting Robert Burrell, Segal Lauren Albanese – Financial Investment News Karen Devera 3. Virtual Trustee Approval: Connie Rydberg moved and Kevin Knudsen 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 (Charles Collier abstained). 4. Introductions and Welcome 5. Receipt of Petitions: Request from Police Chief Mary Gavin to consider adding the Police Emergency Dispatchers and Fire Marshalls to the Police Pension Plan (versus the Basic Plan) for fairness, attraction and retention. These employees must work 365 days of the year, including holidays. It was raised that the Federal Government makes the distinction for eligibility in the Public Safety Pension by whether the employee carries a fire arm. In the past, there was a dispatcher, who was at the time a sworn special officer to the City, that won a law suit to become a participant in the Police Pension. The City made dispatchers civilians after that time. There are broad HR and cost implications of this request, such as whether the salary and staffing are at optimal levels for retention. Also, would salary or other benefits be a better vehicle for retention than pension? Marshall Jarrett moved and Kevin Knudsen seconded that the Retirement Board acknowledge receipt of the Police Chief’s petition and refer that petition to the City Manager to request the City Manager study and consider the request in all its dimensions and then make a recommendation back to the Retirement Board. The motion passed 6-1. 6. Review and approval of draft Minutes from February 9, 2023 meetings: Marshall Jarrett moved and Kevin Knudsen seconded to re-adopt approval of the May 14, 2020, September 10, 2020, October 29, 2020, November 19, 2020, February 11, 2021, May 13, 2021, September 9, 2021, November 18, 2021, February 10, 2022, May 12, 2022, September 8, 2022 and October 20, 2022 and May minutes (as previously approved during the City emergency COVID-19 virtual status) as well as the minutes of May 11, 2023 and July 17, 2023 as presented. The motion passed 5-0-2 (Nate Dupree and Mathann Jackson abstained). 7. Second Quarter of 2023 Investment Performance Review a. Performance for the Basic and Police Pension Plans and OPEB–Mary Nye of AndCo Consulting Market Performance: US Equity markets moved broadly higher during the quarter led by growth-oriented stocks. The S&P 500 Benchmark had its best performing quarter since Q4-2021. International stocks experienced modest returns. Global GDP growth continues to face challenges despite falling energy prices. European growth remained under pressure amid hawkish central bank policies. While China has fully reopened after almost three years of COVID-19 restrictions, there have been challenges associated with the region re- integrating with the global economy. Within US markets, Large Cap growth was the best performing domestic segment while small cap value performed the worst. US Government securities were the worst-performing sector during the quarter. US Treasuries lagged the corporate and securitized sectors as yields at longer maturities rose slightly and credit conditions were considered more favorable than the previous quarter. Corporate bonds with lower credit ratings held up better than higher quality issues, aided by narrowing credit spreads as well as their higher coupons. High-yield bonds were the best-performing segment of the domestic bond market, echoing the equity market’s positive sentiment during the quarter. Global bonds underperformed US issues during the quarter and the trailing one- year period. For the period, the S&P 500 large cap benchmark returned 8.7%, compared to 4.8% for mid-cap and 5.2% for small cap benchmarks For the quarter, the MSCI EAFE Index returned 3% while the MSCI Emerging Markets Index rose by 0.9%. For the quarter, performance of the bond market ebbed due to higher rates from the Federal Reserve’s decision to hike policy rates an additional .25%. The Bloomberg (BB) US Aggregate Index returned -0.8%, for the period while investment grade corporate bonds were down less with a return of -0.3%. During the one-year trailing period, US equity markets were positive as the weak performance from the first half of 2022 rolled off. The S&P 500 Index returned 19.6% for the year. The weakest relative performance for the year was the Russell 2000 Index, which still climbed 12.3% over the last 12- months. International markets also rolled off their poor performance in 2022. Over the trailing one-year period, the MSCI EAFE Index returned 18.8% while the MSCI Emerging Markets Index added a much more modest 1.7%. Concerns relating to the conflict in Ukraine continued to emanate throughout the region and globally. Elevated inflation and slowing global economic growth continue to be an additional headwind for global markets. Bond markets softened further, posting negative returns over the previous 1- year period for most indices. The primary driver of results during the first half of 2023 continues to be higher interest rates, which directly impact bond prices and index performance. Investment-grade corporate bonds were the only sector to post positive performance over the previous 12-months, adding 1.5%. The US Government sector suffered the most for the period, posting a return of -2.1%. Basic and Police Plan and OPEB Market Values, Net Flows and Returns on Investment were presented in a consolidated chart. Defined Contribution Plans were included on the consolidated chart. Market Value for the Basic Plan at the start of the quarter was $122.14 Million with net flows of $1.19 Million out of the plan, market increase of $4.36 Million and an ending market value of $124.31 Million. Thus, the gross return for the Basic Plan was 3.60% for the quarter. The Police Plan at the start of the quarter was $40.15 Million, net flows totaled $202 thousand out of the plan, market increase of $1.45 Million and the ending market value of $41.40 Million. Thus, the gross return for the Police Pension was 3.62% for the quarter. Gross returns for the 12-month period were 8.29% for the Basic Plan and 8.57% 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 32nd 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 quartile for the 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 Infrastructure in the Basic Plan at the high end of the range. All individual funds are within investment policy range, except Northern Core in Both Plans just slightly below range and Lazard in the Basic Plan slightly above range (7.1% vs 7%) due to outperformance. Should be remedied with next rebalancing. OPEB funds started at $17.89 Million at the beginning of the quarter. With negligible net cash flow out and a market increase of $902k, the ending market value is $18.79 Million. Thus, the gross return for the OPEB Plan for the quarter was 5.04%. The OPEB plan results for the last 12 months showed a gross return of 13.14%. OPEB broad asset allocations show all funds within policy. OPEB’s return was better than Basic and Police Plans and was at the 5th percentile. All returns were in the top quartile. July was a positive month (Equities 3-6%, Fixed Income flat to slightly positive) and August was negative across the board (Equities -1.5 to -6%, Fixed Income -.5%). September so far is negative. Overall, there were no concerns about current Managers. There was an inquiry about Summit Creek, but their underperformance is due to style (they are higher quality and low quality did better in the quarter). Long term results are competitive. Employees can request an updated Pension Calculation via Human Resources. General Government and School HR work together with the new Segal calculator. US Bank does not have an online calculator for active employees. 2024 Pension Statements will be generated by Segal. b. Basic/Police/OPEB Investment Commission/Fee Review: Vendor administrative fees decreased due to Custodian change, but overall increased 1 basis point, due to higher total investment dollars. Investment manager fees are competitive. Certain legal work was a settlor function and were paid by the City and not charged to the Pension. Fees are charged pro rata 75% to Basic and 25% to Police. Marshall Jarrett moved and Kevin Knudsen seconded to approve the September 26, 2023 annual fee review as presented. The motion passed 7-0. c. Defined Contribution Retirement Savings Plans (457b/401a) Report: The 457 Plan has $27.6M in assets up from $26.3M in the last Quarter. Employee investments are well diversified, with 15.1% of assets in cash and the stable value fund (MissionSquare Plus Fund). 85.6% of assets are in active investment funds. The 401a Plan has slightly under $556,000 in assets up from $505,000 in the last Quarter. 61.4% of assets are in Balanced/Target Date Funds, and 26.1% in Domestic Equity. 82.3% of assets are in active investment funds (non-Index Funds). The investments are participant driven. Balanced Funds/Target Date Funds are the default investment and some employee leave the money there. 401a funds are more likely to remain in default as it is only a City match of up to $20 per paycheck. Employees can view their Plan balance real-time using the MissionSquare App. AndCo will try to correct the estimated Gross Return calculation for Defined Contribution Plans shown in their reports going forward (employees’ investing results). Report shows performance of each Investment Fund including a color coded chart with more than results (quick view) – which ties to meeting the criteria of the Investment Policy Statement. There will likely never be all green due to the nature of the economy. Long term, yellow and red codes will generate discussion and review of any issues or concerns. Heightened scrutiny information (turnover, ownership changes, style shift, etc.) will come from AndCo investment team if situations arise. AndCo will continue to monitor the items in red beyond the rolling 4 quarters. AndCo’s fiduciary responsibility is the same for DB and DC Plans. It was noted that the vast majority of target date funds (except the Income, 2015 and 2060 funds), where the majority of money is invested, are all green. Because the Board is currently considering an almost completely new line up of funds for the Plan – i.e. potentially almost all funds are being replaced – the Board only engaged in a short discussion of funds with long term red or yellow status, and decided to instead focus on the selection of new funds in the next section of the meeting. MissionSquare Income Advantage Plan (being considered for continuation in the Plans) is all green (vehicle that allows participants to mirror a defined benefit payment). MissionSquare is responsible for communicating the level of fees and other complex features when meeting with participants. MissionSquare has offered a deeper dive on this product which they feel is unique and competitive in the market. Retirement Board is responsible for determining reasonableness on an objective basis. Annuity type products have been evolving in DC Plans with little participation because they are expensive and restrictive. It is difficult to compare products because each one is unique. We need more information to evaluate whether we should keep this Fund in the Plan. Specifics about the relationship between MissionSquare and the company that provides the insurance, the factors for conversion to annuity payments and the investment returns are all considerations. They are expensive, in part, because they are guaranteeing a payment for the life of the participant even if they underlying funds are depleted. Participants are also paying a larger recordkeeper fee in this Fund. We can decide whether to keep this Fund in the line-up, but if we remove it then the participants currently enrolled lose the lifetime income guarantee that they have been paying for. We can consider a soft close – i.e., no new participants, but current participants can continue. AndCo recommends this product vs. competitors to it in the market. MissionSquare representatives should be able to educate employees on the new fund line-up when it is rolled out. They should be able to meet with large group on employees, in addition to one-on-ones, on an ongoing basis. d. Defined Contribution (457b/401a) Asset Allocation Recommendation The Retirement Board are fiduciaries of the Defined Contribution Plans for selecting and approving the included Funds. Trustees need to review the options to the best of each Trustee’s abilities and skills. There is an important distinction between DB and DC Plans. In the Pension Plans, the investment risk is born by the City. In the DC Plans, the investments are employees’ money and their ability to retire is impacted directly by the performance of the investments. There is a high moral and ethical obligation, as well as a legal standard to meet. There has been a lot of research since the meeting in July, including several iterations of questions and answers from City staff and the Chair with AndCo and MissionSquare. A summary chart of the AndCo recommended funds and their research team’s rationale was reviewed. Additionally, a summary chart with the Retirement Boards discussions and deliberations to date was constructed to show funds in green with few/no issues identified, funds in yellow that required additional debate and funds in white that required additional research/education. Funds in yellow with the follow-up summary: Vanguard Equity Income and MFS Growth had push back about their recent performance. AndCo Research Group recommends these 2 funds for reasons outlined in their meeting materials. In addition, both of these funds are currently in the Pension Plans, indicating that the Board determined that these funds were the best options in their style category in a prior deep dive review, and these funds continue to meet the Board’s fiduciary standards. They are performing as expected based on their style. They have reviewed the fees for competitiveness. Vanguard Equity Income - Returns look good except for the most recent 1 year – performance due to financial sector performance as a whole. Performed very well against the benchmark. Underweight in financials. Overweight energy and consumer staples. Defends well on the down-side, and the years with returns lower than the index were years with strong returns. Currently in the Pension Plan investments. MFS Growth - US Large Cap Growth space has been difficult with 90% of managers underperforming the benchmark. Index results are usually median but currently in top decile. Apple, Microsoft and a few other stocks are dominating and managers do not want to hold overweight positions – too much in one stock. This situation is an anomaly over the last few years. AndCo looks at the handful of managers that have done well historically. MFS is not as aggressive as others. Will do better when the returns are from a more diversified group of stocks. Recommended due to long term track record and more conservative volatility. Currently in the Pension Plan investments. Additional Fund in yellow – Western Core Plus Fixed Income Fund – provides diversity in sectors held versus the Dodge and Cox Fund. This Fund has struggled recently but is expected to reposition quickly. Question raised as to whether we need 2 active Fixed Income managers. There are differences in that Western Plus has high yield and exposure to small amount of emerging market. Funds in white: MissionSquare Plus Fund and MissionSquare Income Advantage Fund (currently in the Plans fund line-up). Both are considered good funds by AndCo. They do have some complexity if they are removed from the Plan, including revenue sharing on these funds. Questions addressed during the discussion: • Are there any gaps in major categories, like emerging markets? The American Funds European Growth Fund includes about 30% in emerging markets. • Are any of these Funds lower than 3 stars on MorningStar ratings? Will double check, but believe all are 3 stars or above. • Why is the REIT alternative Fund passive? The Vanguard REIT Fund is publicly traded securities of real estate funds, e.g. shopping malls (not shares of actual real estate purchases). Acts more like equity but provides exposure to real estate. It is hard to find an actively managed Real Estate Fund for DC Plans. Can consider in the future when those products are available. The Retirement Board reached consensus to approve the Funds in green that had been discussed in length at the July meeting with no issues. Additionally, the Trustees were comfortable, after discussion, to move Vanguard Equity Income and MFS Growth to green. There was additional debate about including the Western Core Plus Income Fund. 10-15% of the assets are in the “plus category”. It has a higher average duration so it is more sensitive to interest rate changes. With interest rates plateauing, should be more competitive. Western has a higher amount of bonds in the below investment grade sector than Dodge and Cox Fixed Income. Need to be able to explain the “plus” to participants as this fund is riskier. We also have a passive Fixed Income Fund in the recommended line-up. The starting point for decision-making should be “what is the best structure going forward”. However, a point to consider is there are two Fixed Income Funds in the current line-up that would be better mapped to Western Core Plus Income Fund. The “Plus” should provide a little more return for the additional risk. There has been volatility in its rankings in the 3 and 5-year time period, but results are better over the long term. Other Plus Bond Funds in the market are more aggressive and are less likely to be recommended for DC Plans. The Retirement Board reached consensus to include both the Western Core Plus Income Fund and Dodge and Cox Fixed Income Fund. Communication of the difference to participants will be very important. All of the yellow coding is now green. There were outstanding questions on the MissionSquare Core Plus and MissionSquare IncomeAdvantage Funds. AndCo provided information and answers to previously posed questions to MissionSquare. In order to make a completely informed decision, the Retirement Board still requires a deeper dive of the IncomeAdvantage Fund, including conversion factors, insurance wrappers, investment return index (60 Equity/40 Fixed Income mix vs. a Similar Product index which may not be apples to apples) and flexibility. The MissionSquare Core Plus Fund – Crediting rate is in the 90th percentile, fees are higher but the returns are better. We are changing to the lowest cost share class so current fee will go down. There is an  insurance wrapper to protect the assets, but employees can still lose value. Right now the market to book value is 93% (close to the median). This is not an FDIC protected fund. The Retirement Board wants additional information on the protections and restrictions on moving to another vendor. The Retirement Board agreed we need to continue to review the MissionSquare Funds at the October 12th meeting (if MissionSquare is available) or November 9th. Marshall Jarrett moved and Kevin Knudsen seconded to approve the Defined Contribution (457b/401a) Asset Allocation Recommendation and Fund Options, except we withhold approval for the MissionSquare Core Plus and MissionSquare IncomeAdvantage Funds. The motion passed 7-0. 8. OPEB IPS Asset Allocation/Investment Review- deferred to November meeting. 9. Basic/Police/OPEB & DC IPS annual compliance review – certain identified dates were updated. Marshall Jarrett moved and Kevin Knudsen seconded approval of the Basic/Police/OPEB IPS as amended at the September 26, 2023 meeting. The motion passed 7-0. 10. Benefit Administration/ Calculation and Custodian Contract a. USB Custody Contract Component Update- all Managers have been converted to USB except Principal due to a renaming requirement. Overall good transparency but additional internal administrative work. b. Securian Contract Termination Status- still have not terminated, working to get additional data and ability to contact them in the future if needed. Have not paid final invoice (~$24,000) or received remaining assets ($50,000 Basic and $450,000 Police). Balance is still invested and earning money. c. Benefit Calculations and Projection Update- have benefited from fresh eyes on the plan design and calculations. d. Active Employees data tracking options- still considering options for the future. 11. 2023-2024 Training Plan a. October 12, 2023 training on Secure 2.0 and Fiduciary 101- Bolton, Head of Retirement Group will present. b. Reasonable Virtual Training request for Shari Davidson to attend IFEBP Conference remotely due to health concern. Marshall Jarrett moved and Kevin Knudsen seconded approval of medical accommodation for Shari Davidson to attend the IFEBP Conference remotely. The motion passed 7-0. 12. Water Sales Proceeds May 2020 Administrative Manual Review - reviewed by Chair, Segal, City staff Marshall Jarrett moved and Kevin Knudsen seconded approval of the Water Sales Proceeds May 2020 Administrative Manual with no changes as reviewed on September 26, 2023. The motion passed 7-0. 13. Legal Services RFP – scope and evaluation committee Marshall Jarrett moved and Kevin Knudsen seconded approval of the appointment of Trustees Marshall Jarrett and Connie Rydberg to the RFP scope development and evaluation committee. 14. 2023 Revised Work Plan Adoption – IPS and OPEB allocation deferred  Marshall Jarrett moved and Kevin Knudsen seconded approval of the revised 2023 Work Plan. 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, fiduciary activities and deferred action on Plan amendments. Have been very active with hiring and replacements being added to Pension. Current through September for advanced payment true-up. Marshall Jarrett moved and Kevin Knudsen seconded approval of the consent agenda as presented. The motion passed 7-0. 16. Other business not on the agenda: Question about DOL Regulations on ESG will be addressed at October Training meeting. Trustee Onboarding manual has been deferred on the work plan. 17. Adjournment: Marshall Jarrett moved and Kevin Knudsen seconded to adjourn the meeting at 9:18 PM. The motion passed 7-0. Next Meeting scheduled for Thursday, November 9, 2023 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.