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APPROVE A MOTION TO JUSTIFY EXCEPTION TO THE COMPETITIVE BID PROCESS AND ENTER INTO SERVICE AGREEMENT WITH EMPOWER RETIREMENT, LLC, FOR INVESTMENT AND RECORD KEEPING ADMINISTRATION SERVICES FOR THE 457(B), 457(B) PART-TIME, TEMPORARY, SEASONAL, AND 401(A) DEFERRED COMPENSATION PLANS
recommended action
RECOMMENDATION
It is recommended that the City Council approve a motion to:
1. Approve entering into the service agreements with Empower Retirement, LLC, for investment and record keeping administration services for the 457(b) Group Account Number 772929-01, 457(b) Part-Time Group Account Number 772932-01, Temporary, Seasonal employees, and 401(a) Group Account Number 772933-01 Deferred Compensation Plans.
2. Authorize the City Manager to execute a three-year service agreement with the option of two (2), one (1) year extensions, for fixed account investment and record-keeping and administration services: and
3. Approve findings pursuant to Stockton Municipal Code 3.68.070 in support of an exception to the competitive bidding process.
It is also recommended that the City Manager be authorized to take necessary and appropriate actions to carry out the purpose and intent of the motion.
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Summary
The City of Stockton offers two Section 457 Plans and one Section 401(a) Plan. One of the 457 Plans is a voluntary plan for full time employees. The second Section 457 Plan is a mandatory plan for part-time, seasonal, and temporary employees and serves as a mandated Social Security replacement plan for employees not eligible for enrollment in the California Public Employees Retirement System (CalPERS) due to the City not participating in Social Security. The 401(a) Plan exists for specifically contracted obligations that have been in place over various periods of time.
The City entered into a service agreement with Empower Retirement, LLC, previously known as MassMutual to provide investment and record keeping administrative services for the City’s 47(b) and 401(a) plans, with the option to renew which is due to expire June 30, 2023.
The dramatic increase in interest rates during these unprecedented times in the stock market could potentially have a negative impact to plan participants if a provider change is made for record-keeping and administrative services. The Fixed Account in the City of Stockton’s 457(b), 401(a), and Part-time plans has a market value adjustment (MVA) that can be par, negative, or positive which only comes into play when a contract is terminated.
We recommend the City extend our service agreement with Empower Retirement, LLC, due to the unprecedented negative financial impact a change in record-keeping and fixed account portfolio services would have on participant balances. Due to the significant increase in interest rates over the past 16 months, the plan’s fixed account currently has a negative market value adjustment of negative -13.616%, an estimated participant impact of negative -$9,874,825. By extending our agreement with Empower, participant administrative fees will not be negatively impacted.
DISCUSSION
Background
The City sponsors a voluntary employee funded retirement savings program through a Section 457 Plan for the full-time employees, a mandatory Section 457 Omnibus Reconciliation Act of 1990 Plan (OBRA) for the part-time, seasonal, and temporary employees, and a Section 401(a) Plan for specified individual(s)/groups. Each plan is held for the exclusive benefit of eligible participants and their beneficiaries.
In October 1972, Council adopted Resolution 30,047 providing for a deferred compensation Section 457 Plan for specific full-time employees of the City. In 1978, the ability to participate in the voluntary plan was opened to all bargaining units with the exception of safety employees. Participation in the Section 457 Plan was extended to the Fire Unit in 1981 and to the Police Unit in 1984. Currently, full-time employees in all bargaining groups have the ability to participate in the voluntary full-time Section 457 Plan.
In July 1991, the City established a Section 457 OBRA Plan for all part-time, seasonal, and temporary employees, who are not eligible for enrollment in the City’s CalPERS plan, to provide a retirement plan alternative to Social Security, since the City does not participate in Social Security. The Omnibus Reconciliation Act of 1990 (OBRA) introduced into law IRC Section 3121(b)(7)(f), which provided for an alternative to the Federal Insurance Contributions Act (F.I.C.A.), a Social Security tax. The City automatically reduces the eligible employees’ wages each pay period by 7.5% and has this amount deferred under this plan. As a result, employees of a government entity may deposit money into a private retirement plan instead of Social Security, as defined in Section 457(h) of the Internal Revenue Code.
Present Situation
By remaining with Empower, the City protects the plan and participants from a negative financial impact. Staff will continue to monitor the interest rate environment and the impact to the fixed account with our fiduciary consultant.
Findings
Stockton Municipal Code section 3.68.070 provides an exception to the competitive bidding process in cases where the City Council has approved findings that support and justify the exception. Below are proposed findings which, if adopted by Council, constitute sufficient grounds for making such an exception:
1. Sole Source - Empower Retirement, LLC has provided investment and retirement administrative services for the City since 2014. As discussed in this report, changing service providers at this time could result in either significant financial losses to employee participants with assets in fixed accounts, and/or cause all employee participants to be negatively impacted with higher fees.
FINANCIAL SUMMARY
There is no administrative cost to the City associated with the Section 457 and Section 401(a) Plans. Each Section 457 Plan is a retirement savings program fully funded by the participants. The Section 401(a) Plan is an employee/employer funded Plan, with City contributions determined by employment contract or, if applicable, labor agreements.
Attachment A - Empower Service Agreement