Simplifying Your Investment and Fiduciary DecisionsTo: Sharon Donoghue, Deputy County AdministratorOrange CountyMark Fosti...
August 28, 2008Page 2 of 9THE BOGDAHN GROUP’S DUE DILIGENCE FINDINGS1. Advertisement and DistributionWe have verified the ...
August 28, 2008Page 3 of 9reporting certain services, conversion and implementation services, investments, andindependent ...
August 28, 2008Page 4 of 9o Holland & Knight letter confirming the OCSO deferred compensation planstatus as a governmental...
August 28, 2008Page 5 of 9Transition ApproachEmployee CommunicationOCSO, with the dedicated support and direction from Van...
August 28, 2008Page 6 of 9together an efficient portfolio. Portfolio investing is the core of modern portfolio theory,and ...
August 28, 2008Page 7 of 9ING Financial AdvisorsThere are currently over 100 investment options available to plan particip...
August 28, 2008Page 8 of 9several vendors, but by a formal fiduciary process with professional assistance is a criticalcom...
August 28, 2008Page 9 of 9It is our opinion that it is imperative that Orange County immediately move away from thecurrent...
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The Bogdahn Group Report to Orange County Commissioners laying out a "fiduciary imperative"

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Acceptance of this recommendation by Orange County Commissioners resulted in approximately a $1 million savings per year for Orange County employees.

I provided this document to Orange County Commissioners in 2008; therefore, the document is public information despite any license that the Slideshare form may indicate.

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The Bogdahn Group Report to Orange County Commissioners laying out a "fiduciary imperative"

  1. 1. Simplifying Your Investment and Fiduciary DecisionsTo: Sharon Donoghue, Deputy County AdministratorOrange CountyMark Fostier, Assistant ComptrollerOrange County Comptroller’s OfficeFrom: Darlene Malaney, Senior ConsultantHerb Whitehouse, Chief Fiduciary OfficerTim Nash, Senior ConsultantDate: August 28, 2008Re: Review of the Orange County Sheriff’s Office RFP for457(b) Deferred Compensation Services ProvidersOVERVIEW:As an initial step in conducting a thorough review of the Orange County (the County) 457Deferred Compensation Plan, The Bogdahn Group (TBG) was asked to perform a duediligence review of the Orange County Sheriffs Office (OCSO) competitive procurementprocess. The purpose of this assignment is to determine the adequacy thereof, and whetherthe procurement was conducted in a fair, open and impartial manner. Depending on theresults of this review, we hoped to test the viability of a path for the County to accelerate itsown positive change for County employees; viz., “piggy-backing” on the OCSO RFP andOCSO’s positive experience with Vanguard during the transition and after.Our written report describing the scope of our due diligence review and related findings ispresented below. The due diligence review is organized into four sections as listed below.1. OCSO Advertisement and Distribution of a Request for Proposal (RFP)2. OCSO Vendor List3. Contents of the OCSO RFP4. OCSO Evaluation of the Responses ReceivedOur conclusions and recommendations are presented at the end of this report.
  2. 2. August 28, 2008Page 2 of 9THE BOGDAHN GROUP’S DUE DILIGENCE FINDINGS1. Advertisement and DistributionWe have verified the legal advertisement of OCSO’s RFP #132-08 (The RFP) in theOrlando Sentinel on 4/30/06 and 5/4/06. The advertisement provided all necessaryinformation, including the submission deadline, delivery address, date the sealed bidswould be opened, and OCSO Procurement Department contact information. In addition,the RFP was mailed to eighteen potential service providers on 5/1/06. The Advertisementand RFP advised potential applicants of the Tuesday, May 16, 2006, submission deadline.2 . Vendor listThe OCSO mailed the RFP to a diverse group of eighteen professional deferredcompensation service providers, which are listed below. We believe this was an adequatedistribution and that the OCSO obtained a satisfactory number of responses.Potential Providers:Mass Mutual Retirement ServicesCPI Qualified Plan Consultants, Inc.,Moreno, Peelen and CompanyMetLife Resources,Merrill LynchSmith BarneyHummel, Voight InsuranceDimensional Fund AdvisorsRaymond James & Associates, Inc.VanguardT. Rowe Price Retirement Plan Services,Fidelity InvestmentsNationwide Retirement SolutionsMorgan StanleyJohn HancockThe HartfordING Financial ServicesCoAdvantage3. Contents of the RFPThe RFP asked respondents to answer a wide variety of questions and to provide certaindetailed information and documentation to determine their qualifications and ability todeliver the scope of services requested.The RFP was organized into four main sections: Service, Cost, Investments, and SpanishAddendum. A summary of each section is presented below.Service - The RFP asked respondents to answer questions pertaining to their ability andqualifications in performing administrative, operations, technology, documentation and
  3. 3. August 28, 2008Page 3 of 9reporting certain services, conversion and implementation services, investments, andindependent investment advice.Cost - The RFP requested information about the following: plan costs, investmentexpenses, employee costs, investment advisory services, fiduciary review and process, selfdirected brokerage account, compensation to broker/agent or advisory.Investments – The RFP provided a worksheet entitled “Mutual Fund Proposal”. Theworksheet allowed respondants to list recommended funds in the following categories:Large Growth, Large Blend, Large Value, Mid Cap, Small Cap, Growth & Value, SpecialtyFunds (REIT, etc.), International (Foreign) Stock, International Small, Emerging Markets,Intermediate Bond, Intermediate Government, TIPS Short Bond, Money Market, ShortGovernment Bond, Stable Value, Life Cycle Funds. The worksheet requested that therespondents provide the Morningstar asset class, ticker symbol, expense ratio, revenuesharing(12b-1 fees), finders fee/sub-TA fees, and whether it was a propriety fund.Spanish Addendum – The RFP requested information regarding the respondents Spanishcommunication abilities.The information requested was very comprehensive and provided OCSO with all thenecessary tools to make an informed decision.4. Evaluation of the responses received and selection of Vanguard -Based on reviewing OCSO evaluation documentation and confirming discussions with thelead staff person for the OCSO evaluation process, TBG finds that the OCSO evaluationprocess was thorough, fair, and produced not only a reasonable, but an excellent result forthe OCSO and the participants in the OCSO 457 Deferred Compensation Plan through theselection of Vanguard and Dimensional Fund Advisors (a small cap fund subcontractor toVanguard)More specifically, our review of the OCSO documentation included analysis of thefollowing:o OCSO’s Comparison Chart of Proposals in Response to RFP#132-6o OCSO’s Investment Advisory Summaryo OCSO’s Fiscal Chart of Basic Expenseso RFP responses from the 13 service providers that submitted proposalso Meetings, phone conversations and correspondence with Bernie Rice,General Counsel, Orange County Sheriff’s Officeo Trust Agreement between OCSO and Vanguard Fiduciary Trust Companyo Declaration of Trust Establishing Vanguard Trust Company RetirementSavings Trusto Employer’s selection of Vanguard and DFA fundso Employer’s fund mapping strategy
  4. 4. August 28, 2008Page 4 of 9o Holland & Knight letter confirming the OCSO deferred compensation planstatus as a governmental plan within the meaning of Section 818(a)(6) of theInternal Revnue Codeo Vanguard Plan Provisions and Services Summaryo Vanguard Retirement Savings Trust Investment Authorization FormAdditional Advantages to Using VanguardThe price that OCSO secured from Vanguard for its services was appropriate andcompetitive for the OCSO Deferred Compensation Plan. However, using the sameVanguard approach for the rest of Orange County also permits Vanguard to offer reducedrelationship pricing for very similar services in the same geographic location and amortizedover several thousand more participants.The cost of the Vanguard program at OCSO is provided in four basic parts:1. Investment fees for Vanguard funds ranging from 15 basis points (Vanguard 500 IndexFund Investor Shares and Vanguard Total Stock Market Index Fund Investor Shares) to56 basis points (Vanguard Mid-Cap Growth Fund).2. Investment fees for DFA funds ranging from 27 basis points (DFA U.S. Large ValueIndex) to 60 basis points (DFA Emerging Markets Value I).3. A 25 basis point wrap fee payable to Vanguard on all assets invested in DFA funds.4. An annual $60 per participant fee.Vanguard has proposed providing OCSO and Orange County with the same level ofservices and cost. However, at the initiation of the program the annual per participant feewill be $50 instead of $60. In addition, as assets subject to the current vendors’ marketvalue adjustments and deferred surrender charges are transferred into the new program, theannual per participant fee will be reduced to $27 according to the following schedule:Assets Moved to Vanguard$90,000,000 -- $119,999,999 $50 per participant$120,000,000 -- $150,000,000 $42 per participantOver $150,000,000 $27 per participantWe estimate that total cost per participant (excluding termination fees), even in the firstyear of the new program, will be reduced by more than half of the current program costs.11Attachment A compares the expenses of the current Nationwide, ING, and ICMA-RC programs to the expense thatwould be available from piggy backing onto the OCSO RFP.It is important to note that while The Bogdahn Group obtained detailed fee and expense disclosures from the currentvendors, that there is no expense disclosure for the Nationwide and ING fixed income accounts. These accountsrepresent approximately 28% of the combined Nationwide and ING assets. Accordingly, The Bogdahn Group, inconsultation with Nationwide and ING, has estimated the cost of these investments at 100 basis points.Vanguard costs are estimated on the assumption that participants allocate their investments consistent with theallocations in the OCSO program.
  5. 5. August 28, 2008Page 5 of 9Transition ApproachEmployee CommunicationOCSO, with the dedicated support and direction from Vanguard, did a very good job incommunicating the deferred compensation plan changes to its employees. OCSOcommunicated these changes to employees through hard copy correspondence, on-sitemeetings, and a dedicated website. Examples of the various forms of communicationincluded:o Frequently Asked Questions (and Answers) Handout – Created by OCSOo “Your Retirement Plan is On the Move” handout provided by Vanguard –this document outlined information about who Vanguard is, key dates, newfund line-up and mapping, target retirement funds, Vanguard brokerageoption, Vanguard account services contact information, On-site groupmeeting dates and locations, Individual meeting dates and locations, anddedicated OCSO transition website portal.o “Simplifying your Investment Decision” handout provided by Vanguard.This document explains the various investment strategies, options andservices available to employees and provides a questionnaire to assist inmaking this determination.o “Vanguard Target Date Retirement Funds” brochure – this documentprovided an overview of what target date funds are and how they can benefitcertain investors.Vanguard will provide similar communications support for the County 457 DeferredCompensation Plan.Termination Fees and ExpensesAt the time the OCSO RFP was issued, the contracts in place with ING and Nationwideimposed transfer restrictions on certain funds. OCSO made prudent decisions with respectto these issues, and acted with appropriate fiduciary care when it provided clear andconcise information outlining the charges that applied to each participant. OCSO gaveemployees the choice of paying termination fees and moving to Vanguard immediately, orparticipants could choose to leave the assets with ING or Nationwide until conditions weremet for transferring without penalty. OCSO had all unrestricted monies transferred toVanguard immediately, where participants benefited from significantly lower fees, asimplified and improved fund line-up and no surrender charges, termination fees or marketvalue adjustments like the previous providers imposed.Fund MappingWhile the same fund mapping process that Vanguard and OCSO implemented for theSheriff’s plan is a viable approach for the overall Orange County Plan, The Bogdahn Groupsuggests a different approach; namely, mapping to portfolios.The success of every defined contribution plan depends not only on the quality and cost ofthe investment options made available to participants, but on whether participants put
  6. 6. August 28, 2008Page 6 of 9together an efficient portfolio. Portfolio investing is the core of modern portfolio theory,and it allows participants to do more than simply trade risk for return. Efficient portfoliosreduce risk by way of the combination of funds used in order to obtain the greatestexpected return for a given level of risk.Ordinary participants find this task of creating efficient portfolios impossible to execute,and often hard to even comprehend as a concept. Accordingly, we would like to send aneffective message to participants about the value of portfolios by automatically mappingevery participant to an age appropriate Vanguard Target Fund, subject to the participant’sright to direct the mapping of their investments to any fund or funds of their choice.The Overall Evaluation of the Change to VanguardThe Bogdahn Group collected extensive fee, expense, and conflict of interest informationfrom the current vendors serving the Orange County 457 Deferred Compensation Plan. Wehave also met with each vendor. If we were to evaluate the current program on a scaleranging from negative ten (-10) to positive ten (+10), we would place it at a negative seven(-7) or negative eight (-8). Moving to the approach adopted by OCSO, at the morefavorable relationship pricing available, would move the program somewhere from apositive six (+6) to a positive eight (+8).A compelling case can be made for the urgency of making an immediate decision to adopt thesame program as OCSO – even at the same annual $60 per participant cost. We believe that itwould be a serious failure of fiduciary responsibility for the County to delay, even if that delaywould be in connection with doing a new RFP on the model that OCSO conducted. Participantsrequire the immediate cost reductions that “piggy backing” on the OCSO RFP will provide. ButThe Bogdahn Group’s negotiation with Vanguard has resulted in annual fees that will besignficantly less per participant. The Bogdahn Group is of the opinion that these fees arereasonable for the assets and number of participants in the Orange County Plan.CURRENT PROVIDER REVIEWIn addition to evaluating the OCSO procurement process, The Bogdahn Group conducted areview of the current vendors providing services for Orange County. The review processinvolved meeting with each provider, numerous telephone calls, emails, comprehensivedata requests, fee and conflict of interest disclosure. A summary of our findings ispresented below:ICMA-RCThere are approximately 47 investment options available to plan participants under theICMA platform. The ICMA platform also provides mulitple offerings in most fundcategories. For example, there are sixteen funds in the large-cap space alone (6 largeblend, 4 large growth and 6 large value). This line-up also contains some funds ofquestionable quality. For example, the Legg Mason Value fund, with a Morningstar Ratingof one star, and an expense ratio over 1%, has been in the bottom one percent vs. its peersover the trailing year-to-date, one year, three year and five year time periods.
  7. 7. August 28, 2008Page 7 of 9ING Financial AdvisorsThere are currently over 100 investment options available to plan participants on the INGplatform. Having this many options is overwhelming for typical employees. ING providesmultiple choices in most every fund category. A strong case can be made regarding thelack of oversight provided by ING in monitoring the quantity and quality of the investmentoptions it has in place under the current Orange County 457 Plan fund line-up. Forexample, the ING OpCap Balanced Value fund, has a Morningstar Rating of one star andhas ranked in the bottom five percent vs. its peers over the trailing one, three and five yearperiods. This OpCap fund also carries a very high expense ratio of 1.2 %.Nationwide Retirement SolutionsThere are approximately 45 investment options available to plan participants on theNationwide platform. The platform provides mulitple offerings in most fund categories.For example, there are fifteen funds in the large-cap space alone (5 large blend, 5 largegrowth and 5 large value). As explained later in this report, this is counterproductive toparticipants. In addition, the quality of some funds offered is of concern. For example, theMorgan Stanley Institutional Fund Trust has ranked in the lowest quartile vs. its peers overthe trailing one, three, five and ten year average time periods and has a Morningstar Rating2of two stars.Nationwide also appears to provide $600,000 to the Florida Association of Counties.3TheBogdahn Group is of the opinion that the financial support that Nationwide provides to theFlorida Association of Counties is a matter of fiduciary concern for a Florida county that isa member of this Association. The financial support and the apparent conflict of interestthat may exist for Orange County decision makers should be addressed by legal counsel ifOrange County continues to use Nationwide as a vendor.Adopting the core conclusions of the diligent RFP process conducted by OCSO wouldimmediately provide Orange County with a clear arms length vendor relationship, andwould remove even the appearance of a conflict of interest.OVERVIEW OF CURRENT MULTI-PROVIDER STRUCTUREHigh administration and investment fees reduce the ultimate level of retirement savingsavailable to participants. Multiple vendor structures are invariably more expensive thansingle recordkeeper administrative platforms. While investment choices may utilize morethan one fund company, there should be only one point of contact for employees for allaspects of the plan. Moreover, having a menu of investment choices that is selected not by2This is a proprietary Morningstar data point. Morningstar rates mutual funds from 1 to 5 stars based on how welltheyve performed (after adjusting for risk and accounting for sales charges) in comparison to similar funds. Withineach Morningstar Category, the top 10% of funds receive 5 stars, and the bottom 10% receive 1 star. Funds are ratedfor up to three time periods-three-, five-, and 10-years and these ratings are combined to produce an overall rating.Funds with less than three years of history are not rated. Ratings are objective, based entirely on a mathematicalevaluation of past performance.3Florida Association of Counties Budget Proposal FY 2007/08.
  8. 8. August 28, 2008Page 8 of 9several vendors, but by a formal fiduciary process with professional assistance is a criticalcomponent of an effective and well managed defined contribution plan.Offering too many investment choices, as each of the current provider platforms do,increases the complexity and confusion for participants. The result is that poor investmentdecision are made. Academic studies definitively confirm that too many choices results inpoor outcomes for participants in general. A smaller, well-constructed and rationalinvestment menu is necessary when participants are permitted to direct their ownretirement investments..4CONCLUSIONThere are two important factors involved in making the decision to move to a singleprovider. The first is timing. Orange County participants deserve an immediate changethat will move the program from a negative seven/eight (-7/-8) to a positive six to eight (+6to+8). Making the decision to use the vendor and the approach already vetted by the OCSORFP gives Orange County decision makers the unique opportunity to make this decisionquickly and without undue delay. A second factor is confidence that the decision to changeto a single vendor will have a sucessful outcome. Again, Orange County can confidentlymake a decision to use a vendor that has sucessfully managed a very similar transition righthere in Orange County. Not only is Vanguard’s experience with the OCSO transition verytransferable, but Orange County also has access to the advice and counsel of the verycompetent team at OCSO that had oversight over the transition to Vanguard.The key to the approach adopted by OCSO is the administrative, cost, and employeecommunications advantages of a single vendor. Single vendor managed plans createeconomies of scale that can deliver higher quality retirement plans at lower cost. Planstructures that have multiple vendors offering independent administration and investmentservices are more expensive than single vendor approaches. These higher costs will have adirect and negative impact on participants’ accumulations, particularly over the long-run.Multiple vendor approaches are also more difficult to manage and almost always result inparticipants investing in less efficient investment portfolios; namely, portfolios that willhave lower expected returns for any given level of risk, or greater risk for the expectedreturns.4 C.f., April 2008, DEFINED CONTRIBUTION PENSION PLANS IN THE PUBLIC SECTOR: A BESTPRACTICE BENCHMARK ANALYSIS, Roderick B. Crane, J.D., Director, Institutional Client Relations, PublicSector Market TIAA-CREF, Michael Heller FSA, MAAA, EA, Vice President, Actuarial Consulting ServicesTIAA-CREF, Paul Yakoboski, Ph.D., Principal Research Fellow TIAA-CREF Institute.
  9. 9. August 28, 2008Page 9 of 9It is our opinion that it is imperative that Orange County immediately move away from thecurrent multiple vendor approach. By adopting the same approach and using the samevendor selected by the OCSO, Orange County can make this move immediately, withoutthe delay of beginning a new and largely duplicative RFP process.For The Bogdahn Group:____________________________Herbert A. WhitehouseChief Fiduciary Officer

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