Article Features by Michael More

Money-Saving Tips for Your City’s Supplemental Defined Benefit Plan

Michael More is human resources manager and risk manager for the City of Oxnard; he can be reached at

Many public agencies have separate defined benefit retirement plans that supplement their primary retirement plan (such as the California Public Employees’ Retirement System, CalPERS). These agencies often overlook the costs, investment vehicles, and management of the supplementary plans, but switching providers can be a significant source of potential savings and improved performance. Supplemental plans may consist of an enhancement to an existing retirement plan, which may take the form of an early retirement incentive for a defined period of time or an enhancement to the main retirement plan for the life of the retiree. These plans may be formed as qualified defined benefits plans under Section 401(a) of the Internal Revenue Code. During the early 2000s, many cities and counties used 401(a) plans to provide employees with retirement enhancements and/or early retirement incentives. Other popular supplemental plans include Section 115 trust plans sold by numerous firms that allow for prefunding pension or other post-employment benefits (OPEBs) such as medical benefits.

Though not generally on the minds of decisionmakers as a priority issue, this is an area ripe for achieving substantial savings for an agency — and it’s a worthwhile endeavor with a positive impact. Fees on these legacy plans are generally high and can be easily reduced, creating savings to the tune of hundreds of thousands of dollars annually. Most agencies do not realize that the management of these plans can be performed by numerous market participants. Even more importantly, by utilizing lower-cost index funds, mutual funds, and exchange traded funds (ETFs) instead of a traditional managed account with individual securities, investment performance can be substantially enhanced. For example, in the case of the City of Oxnard’s $90 million plan, a mere improvement of 0.7 percent in a combination of fee savings and improved performance over a 20-year period can have a massive compounding effect — creating improved performance of nearly $63 million. Because these are defined benefit plans, all of the savings accrue to the agency’s benefit (think General Fund savings) and have the potential to lower its unfunded pension liability.

What most public agencies fail to realize is that, once established, the management of these plans is entirely portable. Agencies can move the administration of these plans to other platforms and are not tied to the original firm that assisted with establishing the plan. The 401(a) plan document is a living, breathing document whose terms can be amended and administered by any qualified firm (referred to in the industry as a “recordkeeper”).

Agencies thinking about converting plan administrators for defined benefit plans should be aware of the potential pitfalls and bear in mind these 10 tips.

1. Review your plan documents and conduct an audit. It’s not unusual to find that most agency staff responsible for oversight of a defined benefit plan have not reviewed the supplemental defined benefit plan document — especially if it has been in place for several years — which increases compliance risk. This can lead to errors in administration by the recordkeeper. Consider that the current recordkeeper may not necessarily be following all of the terms of the plan as originally intended. For example, the recordkeeper may not be applying a cost-of-living adjustment (COLA) exactly as written in the agreement, which can have a costly, compounding effect in the long run. It is the plan fiduciary’s responsibility to ensure compliance with the terms of the plan document. Agencies shouldn’t rely solely on the recordkeeper to correctly follow the terms of the plan document; internal staff must oversee and evaluate the process. An experienced independent plan consultant and attorney can also assist the agency in conducting its audit.

Secondly, when reviewing the administrative agreement for the plan (a document separate from the plan document), most likely the fees will be listed and will not have changed over the years. As assets in the plan will presumably have grown over time, the fees in the administrative agreement should be reduced to reflect this larger asset size. Likewise, if the administrative agreement is several years old and the fees haven’t changed, it’s time for a fee renegotiation. Fees in the defined benefit space have changed drastically in the past five years alone due to greater competition in the industry, and it is almost certain that the agency is being overcharged.

2. Before transitioning, clearly define your objectives. Are you satisfied with your current recordkeeper? Ultimately, this is the question that will determine whether you continue the relationship. You should consider the following questions when deciding whether to remain with the current recordkeeper:

  • What are the current fees? Do you believe adequate savings can be gained from renegotiating or would your agency benefit from issuing a request for proposal (RFP) to qualified vendors? Are all fees disclosed in the current arrangement? Issuing an RFP will typically generate the best results due to the perceived competition.
  • Is the service satisfactory? Are you receiving regular reports, including investment reviews, from your administrator? Or do you hear from the recordkeeper only once a year requesting an annual review? Are your active participants and retirees satisfied with the level of service?
  • Is the technology up to date? Does the recordkeeper have satisfactory systems to allow self-service options for retirees and active participants, including online access to account information, retirement estimates, and value-added educational tools? Does the recordkeeper allow the agency to submit retirement applications electronically? Does the agency have online access to reports on participants and retirees? An RFP will generally reveal the technology that each recordkeeper uses.
  • Are your investment options efficient? Is your agency paying high fees for a traditional managed portfolio, when exchange-traded funds and low-cost mutual funds are needed instead? Is your recordkeeper receiving additional revenue from the mutual funds within your portfolio? The answers are not always apparent to a public agency, but a good independent plan consultant will be able to identify all of the fees and revenue-sharing arrangements.

3. Plan ahead to ensure a clean transition. It will likely take nine to 12 months to transition to a new recordkeeper if the present contractor is using outdated technology. Be mindful that most contracts with existing providers contain an evergreen clause that automatically extends the terms for an additional year unless notice is given, usually 90 days before the end of each annual period. As a best practice, agencies should not allow for evergreen contract provisions and should require a term not to exceed five years at the most.

4. Quantify and improve your fees. Often, agencies are unaware of the fees that are being charged, as such fees are deducted from plan assets and are not paid directly through the agency’s budget to the recordkeeper. Fees that have not been reviewed for several years can be substantially above market, as is often the case when contracts are not regularly reviewed and subjected to competitive bidding. Ultimately, savings from lower fees directly benefit the agency, reducing the actuarially accrued pension liability over time.

5. Hire an independent plan consultant to administer the RFP process, negotiate with recordkeepers, and manage investments. An independent plan consultant who has previously conducted a plan conversion can assist with finding fee and investment expense savings, conduct the RFP process, negotiate further reduction in fees, and identify suitable replacement investment options. Find an independent plan consultant that:

  • Demonstrates the ability to identify opportunities and deficiencies in the current plan administration process.
  • Has experience in negotiating fees with recordkeepers.
  • Acts in the best interest of its clients as a fiduciary.
  • Understands the political landscape of public pension plans.
  • Possesses experience and knowledge in managing plan investments.
  • Demonstrates proven results of successful fee negotiations.

6. Hold meetings with stakeholders (unions, management, governing board) before conversion. Though changing administrators is a purely ministerial function that can likely be accomplished with administrative authority (depending on the public agency), it is advisable to inform stakeholders about the reasons for the change. Assure employees that there is no change to the plan benefits, merely that another recordkeeper will administer the plan. Most importantly, advise existing retirees of a change in the payor of the benefits prior to a change in recordkeepers.

7. Plan for your existing recordkeeper to become nonresponsive after a notice of termination is issued. To ensure a smooth transition, plan ahead. Obtain all necessary data while still under contract with the incumbent recordkeeper before issuing a notice of termination.

8. Automate and provide self-service options. The most common and significant complaints about some regional recordkeepers include the lack of online self-service options for active participants and retirees and outdated processes for generating hard-copy retirement estimates. Larger national recordkeepers can provide online account services so that participants can access:

  • Bank account changes.
  • Beneficiary change options.
  • Address and contact information change options.
  • Benefit statements.
  • Tax documents.
  • Retirement estimates.
  • Education and retirement tools.

The availability of multiple self-service options reduces the administrative tasks for staff in an agency’s Human Resources and/or Finance Department. Recordkeepers that offer these features typically also provide online support for active participants and retirees.

9. Provide regular updates and current information to retirees. Retirees commonly complain about the lack of timely updates on the actuarial funding level of their supplemental retirement plan. Often, information is available in the agency’s annual financial statements, but it is not presented in a format that is easy for retirees to find or understand. A competent recordkeeper will be able to prepare and distribute to retirees an annual newsletter with such information as plan investment performance, actuarial funding levels, specific investment types, and any changes to the investment strategy.

10. Ensure proper oversight of investment strategy and performance. Government Finance Officers Association (GFOA) best practices specify that agencies should “review the portfolio performance at least annually (preferably quarterly) to ensure compliance with the strategic and annual investment targets.” Typically, the agency should have a board of trustees that oversees the investment strategy and performance and compares these against actuarial funding requirements.


With proper planning and analysis, competent advisory services, and an experienced successor recordkeeper, public agencies can achieve an improved level of service and substantial savings in the cost of operating their supplemental defined benefit plans.

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