Agenda Item 7
November 30,2010
Action
MEMORANDUM
TO:
County Council
FROM:
SUBJECT:
Robert H. Drummer, Senior Legislative Attorney
~
Action:
Expedited Bill 54-10, Retirement - Investments
Management and Fiscal Policy Committee recommendation (2-0, Councilmember
Trachtenberg absent): approve the Bill with amendments.
------------------------~
Expedited Bill 54-10, Retirement - Investments, sponsored by the Council President at
the request of the County Executive, was introduced on October 26,2010. A Management and
Fiscal Policy Committee worksession was held on November 22 and a public hearing was held
on November 23.
Background
Bill 54-10 would:
(a)
allow investments other than mutual and commingled funds in the Retirement
Savings Plan (RSP);
update investment provisions in the RSP and Deferred Compensation Plan (DCP)
(b)
to comply with current procedures;
require automatic distribution of terminated RSP and Guaranteed Retirement
(c)
Income Plan (GRIP) participant account balances of$I,OOO or less; and
allow participants to rollover any eligible retirement plan account into the RSP.
(d)
Public Hearing
Linda Herman, Executive Director of the Board of Investment Trustees testified in
support of the Bill. See ©30.
MFP Worksession
The Management and Fiscal Policy Committee The Committee reviewed the Bill on
November 22 and recommended (2-0, Councilmember Trachtenberg absent) approval with an
amendment.
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Issues
1. What is the fiscal and economic impact of the Bill?
OMB estimated that the automatic distribution of RSP and GRIP accounts for
participants who have left County service will save approximately $22 per account each year for
a total of $8800 in FYII. See ©I6. The Bill would have no other significant fiscal or economic
impact.
2. Should RSP participants be permitted to purchase investments other than mutual or
commingled funds?
RSP participants are required to direct their own investments. Current law restricts these
investments to mutual funds or other commingled funds. The Board of Investment Trustees
(BIT) selects mutual funds and other commingled funds that participants can choose from. The
BIT has also created a self-directed window where a participant can invest in a mutual fund that
is not selected by the BIT. The Bill would permit the BIT to expand the investment options for
participants who use the self-directed window. The BIT would permit participants to invest in
individual equities, bonds, or ETFs if the Bill is enacted. The BIT also provides free financial
counseling to participants to help them make investment decisions. The BIT's explanation of
how this new authority would be exercised is at ©18-19. The BIT's DCP investment policy is at
©20-23 and the BIT RSP investment policy is at ©24-27.
Committee recommendation (2-0,
Councilmember Trachtenberg absent):
approve this expanded authority for the BIT.
3. Should the BIT be permitted to automatically distribute a terminated participant's
GRIP or RSP account with a balance $1000 or less?
OMB estimated that it costs the BIT approximately $22 each year to maintain a GRIP or
RSP account. Account maintenance costs are spread out to all participants. Current law requires
a participant who leaves County service to ask for a distribution before the BIT can close the
account. The Internal Revenue Code permits an automatic distribution of these accounts if the
balance is $1000 or less. The Bill would amend current law to permit the automatic distribution
of these small accounts held for participants who have left County service. The BIT's
explanation for this change is at © 19.
The Bill, as drafted, would permit the automatic distribution of an account balance less
than $1000 at the time of separation from County service. However, a participant's account
balance could grow to greater than $1000 due to investment performance after separation but
before the BIT closes the account. IRS rules restrict the automatic distribution to account
balances of $1000 or less. Therefore, the Bill needs a technical amendment to make sure that
only account balances of $1000 or less are automatically distributed. Staff amendment 1 at ©29
would accomplish this.
Committee recommendation (2-0, Councilmember Trachtenberg
absent):
approve the Bill with Staff amendment 1. See lines 20-24 at ©2 and lines 77-82 at ©4­
5.
2
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This packet contains:
Expedited Bill 54-10
Legislative Request Report
County Executive Memorandum
Fiscal Impact Statement
BIT November 17 Memo
BIT DCP Investment Policy
BIT RSP Investment Policy
Staff Amendment 1
Testimony of Linda Herman
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Expedited Bill No. _:::::..54.!...-.:..:10"--_ __
Concerning:
Retirement
Investments
Revised: November 22,2010
Draft No.
_2=--~
_ __
Introduced:
October 26.2010
Expires:
April 26, 2012
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date: . . . :.N. :. : o:.:. ;n=e_ _ _ _ __
Ch. _ _, Laws of Mont. Co. _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Council President at the Request of the County Executive
AN EXPEDITED ACT
to:
(1)
require an automatic distribution for account balances of $1,000 or less in the
Guaranteed Retirement Income Plan and the Retirement Savings Plan;
(2)
permit rollover contributions into the Retirement Savings Plan from any eligible
retirement plan;
(3)
permit additional investment choices in the Retirement Savings Plan;
(4)
permit additional investments in the Deferred Compensation Plan; and
(5)
generally amend the law regarding the retirement and deferred compensation
plans.
By amending
Montgomery County Code
Chapter 33, Personnel and Human Resources
Sections 33-44, 33-113, 33-116, 33-120, 33-121, 33-125 and 33-145
Boldface
Underlining
[Single boldface brackets]
Dguble underlining
[[Double boldface brackets]]
* * *
Heading or defined term.
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act:
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Expedited Bill No.54-10
1
Sec. 1. Sections 33-44, 33-113,33-116,33-120,33-121,33-125 and 33­
145 are amended as follows:
33-44. Pension Payment Options and cost of living adjustments
2
3
4
*
(n) Required distribution
participants.
*
for guaranteed retirement Income plan
5
6
7
8
ill
The distribution of a participant's guaranteed retirement income
plan account balance must be made no later than April 1 of the
calendar year after the later of the calendar year in which the
participant attains age 70 Y2 or the calendar year in which the
participant terminates employment.
Distributions must be
9
10
11
12
made in accordance with subsection (g). If the participant does
not elect a form of distribution, the distribution must be made in
a lump sum. If the participant dies before beginning to receive
benefits, the participant's designated beneficiary under 33-46(h)
must receive a lump sum distribution as soon as practicable
after the participant's death, but not later than the December
31 st of the year containing the fifth anniversary of the
participant's death.
13
14
15
16
17
18
19
20
21
ill
[[If
£!
participant terminates
employment with an]]
participant's account balance of $1,000 or less[[.1 the account
balance]] must be automatically distributed in
£!
lump sum as
soon
as
administratively
feasible
after termination
of
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25
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27
employment without
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request from the participant.
*
33-113. Definitions
*
*
*
*
*
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Expedited Bill No.54-10
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(r)
Rollover contributions
means that portion of a participant's account
balances in the retirement savings plan that is attributable to any
assets transferred or rolled over to the retirement savings plan from
another [qualified pension or profit sharing plan] eligible retirement
plan as defined in [under] the Internal Revenue Code Section 402(c).
No after-tax contributions may be transferred or rolled over into the
retirement savings plan.
29
30
31
32
33
34
35
*
33-116. Participant Contributions
*
*
*
*
36
37
*
(c)
38
39
40
Participant rollover contributions.
With the Chief Administrative
Officer's written consent, a participant may transfer or rollover to the
retirement savings plan any interest in any other [qualified] eligible
retirement plan [under] as defined in [the] Internal Revenue Code
Section 402(c).
41
42
43
44
45
46
*
Section 33-120.
*
*
*
Distribution
of
Benefit
*
(h)
*
Benefit distribution date.
(1)
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The Chief Administrative Officer must pay a participant who
retires by reason of normal, deferred, or disability retirement
the participant's account balances in the retirement savings plan.
The distribution must begin as soon as administratively feasible
after the participant's retirement and after the date elected by
the participant, but no later than April 1 following the later of
the calendar year in which the participant attains age
70Yz,
or
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Expedited Bill No.54-10
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the calendar year in which the participant's County employment
ends.
(2)
A participant who has a 100% vested interest in the County
contributions account, and whose County employment ends
before the participant's death, disability retirement, or normal
retirement date, may receive the account balances in the County
contribution accounts and the participant contribution accounts
before reaching the normal retirement date only upon filing
written
consent
for
the
distribution
with
the
Chief
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Administrative Officer. The distribution must be made as soon
as administratively feasible after the Chief Administrative
Officer receives the written consent for the distribution.
(3)
(A)
If a participant's County employment ends before the
participant has a vested interest in the County
contributions and the participant properly completes and
submits an application for distribution of the participant's
contribution account, the County must distribute the
participant's
contribution
account
as
soon
as
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administratively feasible.
(B)
If a participant does not properly complete and submit an
application for a distribution, the County must distribute
the participant's contribution account under the time
limits described in this Section.
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75
76
77
ill
Notwithstanding any other provision of this subsection, [[if
f!
participant terminates employment with an]] a participant's
account balance of $1000 or less [[,. the account balance]] must
be automatically distributed in
f!
lump sum as soon as
/"""'''''
.........
\ ,
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80
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Expedited Bill No.54-1 0
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administratively feasible after termination of employment
without
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request from the participant.
*
(a)
Investment [funds] options.
*
*
33-121. Investment of contributions to the retirement savings plan.
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(I)
A participant must direct that contributions allocated to the
participant's retirement accounts be invested in one or more of
the investment [funds] options selected by the Board.
The
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investment [fund] options selected by the Board must conform
to all applicable requirements of the Internal Revenue Code.
(2)
A participant must allocate contributions among the investment
[funds] options only
in
percentages of the value of the account
balances of the participant, as determined by the Board.
(3)
A participant's direction of investment must remain in effect
until the participant changes the direction. If a participant does
not provide a valid direction of investment, the account
balances of the participant, to the extent they are not governed
by a valid direction of investment, must be invested
appropriate investment option selected by the Board.
(b)
Change ofallocation.
III
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an
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(1)
A participant or former participant may change the allocation of
the participant's account balances among the investment [funds]
options [by giving written notice of the requested change at a
time] in accordance with procedures set by the Board. The
changes [will] must take effect on the date or dates set by the
Board.
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(2)
A participant or fonner participant may designate that the
change of the allocation among investment [funds] options is
effective as to one or both of:
(A)
the participant's or fonner participant's account balances
on the effective date of the change; and
(B)
the participant's contributions and County contributions
made after the effective date of the change.
114
115
(c)
Gains and losses.
The Board must maintain [pro rata accounts of a
commingled fund or] separate and distinct accounts for each
participant.
[If
the Board establishes pro rata accounts, the Board may
allocate realized and unrealized gains and losses, using the ratio that
the portion of the account balance of a participant allocated to an
investment fund bears to the portion of the account balances of all
participants allocated to the investment fund as of the previous
valuation date.
If
the Board establishes separate and distinct accounts,
the] The Board must detennine the value of an individual account
solely with respect to the activity within each participant's account and
unrealized gains to a participant's account. [The Chief Administrative
Officer may deduct operating expenses from the realized and
unrealized gains before allocation.]
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125
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127
*
*
(
a)
*
*
*
*
*
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33-125. Powers and duties under the retirement savings plan.
General
*
(2)
*
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133
The Board must invest and reinvest, or cause to be invested or
reinvested, the principal and income of the retirement savings
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Expedited Bill No.54-1 0
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plan and keep the same invested without distinction between
principal and income. The Board has the exclusive authority to
manage the assets of the retirement savings plan, but must, to
the extent directed by participants, invest each participant's
accounts in the manner directed by the participant. [The Board
may make or permit an investment manager to make individual
investment selections with respect to any investments described
in this section.]
The Board may select mutual funds,
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commingled funds, or any combination of [funds] other
investments [to provide] as investment options for the
retirement savings plan.
*
(c)
Authorized investments.
*
*
147
148
(1)
The Board may select or remove any investment option for the
retirement savings plan that the Board finds prudent under the
policies set
Qy
the Board. [The Board may invest or permit an
investment manager to invest the assets of the retirement
savings plan in any investment it considers prudent within the
policies set by the Board. The Board must use an investment
manager except when making an investment in any pooled
investment vehicle, including any combined, common or
commingled trust fund, retirement or annuity contract, mutual
fund, investment company, association, or business trust. The
Board also may authorize the Executive Director to make
investments in pooled investment vehicles and transition assets
from one investment manager to another investment manager as
the Board specifies.]
//-.-~~,
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(2)
If an
investment through any combined, common, or
commingled trust fund exists, the declaration of trust of that
fund is a part of the retirement savings plan trust.
[(3)
The board or any investment manager must not invest any
retirement savings plan asset in any bond, note, or debt
instrument issued by:
(A)
(B)
(C)
Montgomery County;
any political subdivision within Montgomery County;
any agency supported or financed wholly or partly by
taxes levied by the County Council; or
(D)
any agency supported by bond issues underwritten by
Montgomery County.
However, the Board and any investment manager may invest plan
assets in such bonds, notes, and debt instruments if held indirectly
through a mutual fund, subject to any limit in the Internal Revenue
Code.]
*
(f)
(1)
*
*
[Investment management agreements.
The Board may appoint investment managers to manage,
acquire, or dispose of all or some of the assets of the retirement
savings plan. The Board may dismiss any manager the Board
appoints. The fees charged by any manager are expenses of the
retirement savings plan.
(2)
In any contract with an investment manager, the Board must
identify the assets that are subject to the contract. The Board
may give an investment manager the right to invest the assets of
the retirement savings plan specified in the contract without
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Expedited Bill No.54-10
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prior notice to or approval by the Board. The Board may limit
the investment of a specified portion of the retirement savings
plan to a certain type of property. If a contract with an
investment manager only applies to a portion of the assets of
the retirement savings plan and specifies the type of property to
be invested in, the manager must achieve diversification within
the specified category of property, but is not responsible for
diversification of investments of the entire retirement savings
plan. The Board may delegate to the investment manager any
power or discretion conferred on the Board under this Division
and may provide that the investment manager must have
custody and control of certain assets of the retirement savings
plan.
(3)
The Board must monitor the performance of any investment
manager. Monitoring may include any tests or analyses that the
Board considers prudent in the circumstances.]
The Board must monitor the performance of investment options.
Monitoring may include any tests or analyses that the Board finds
prudent.
33-145. Powers and duties of the board.
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192
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*
(d)
Authorized investments.
*
*
(1)
The Board must invest each participant's account in one or
more of the Board-designated investment options in the manner
directed by the participant.
(2)
The Board may select or remove any investment options for the
deferred compensation plan that the Board [considers] finds
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prudent [within] under the policies set by the Board [, except
real property investments described in this subsection].
(3)
[The Board must not invest in real property unless the
investment is a pooled investment in which the Board has no
power or right to manage the real estate property. The pooled
investment must not invest more than 10 percent of its assets in
real property located in Montgomery County. The 10-percent
limitation applies to the market value of the total assets on the
preceding June 30. If the market value of investments in real
property in the County exceeds the 10-percent limitation as a
result of market forces, the Board, or the investment manager
without direction from the Board, is not required to sell an
existing equity investment. The Board may obtain valuations
and take appropriate steps to comply with the 10-percent
limitation.]
[(4)] If an investment through any combined, common, or
commingled trust fund exists, the declaration of trust of that
fund is a part of the deferred compensation plan trust.
[(5)
The Board and any investment manager must not invest the
deferred compensation plan assets in any bonds, notes, or debt
instruments issued by:
(A)
(B)
(C)
Montgomery County;
a political subdivision in Montgomery County;
an agency that receives support or funds from taxes
levied by the County Council; or
(D)
an agency supported by bond issues underwritten by
Montgomery County.
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Expedited Bill No.54-10
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The Board and any investment manager may invest plan assets
in
bonds, notes, and debt instruments of these entities if the investment is
held indirectly through a mutual fund and complies with any limit in
the Internal Revenue Code.]
*
(g)
*
*
[Investment management agreements. Section 33-60(g) (Investment
management agreements) applies to the Board with respect to its
responsibilities under the deferred compensation plan.] The Board
must monitor the performance of each investment option. Monitoring
may include any tests or analyses that the Board finds prudent.
*
Sec. 2. Effective Date.
*
*
The Council declares that this legislation is necessary for the immediate
protection of the public interest. This Act takes effect on the date on which it
becomes law.
Approved:
257
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259
Nancy Floreen, President, County Council
Date
260
261
Approved:
Isiah Leggett, County Executive
Date
262
This is a correct copy ofCouncil action.
263
Linda M. Lauer, Clerk of the Council
Date
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LEGISLATIVE REQUEST REPORT
Expedited Bill 54-10
Retirement
-
Investments
DESCRIPTION:
The bill amends the County's retirement law to: (a) allow investments other
than mutual and commingled funds in the Retirement Savings Plan (RSP),
(b) update investment provisions in the RSP and Deferred Compensation
Plan (DCP) to comply with current procedures, (c) require automatic
distribution of terminated RSP and Guaranteed Retirement Income Plan
(GRIP) participant account balances of $1,000 or less, and (d) allow
participants to rollover any eligible retirement plan account into the RSP.
(1)
RSP participants may only invest in mutual and commingled funds.
PROBLEM:
(2) Several of the investment provisions in the RSP and DCP are not
applicable.
(3) There is a significant cost associated with maintaining small account
balances for terminated participants of the RSP and GRIP. Plan costs will
be reduced if these participant accounts are involuntarily distributed.
(4). RSP participants may not currently rollover accounts from certain
types of retirement plans (e.g., 403(b), 457, lRAs).
GOALS AND
OBJECTIVES:
To: (a) allow investments other than mutual and commingled funds in the
Retirement Savings Plan (RSP), (b) update investment provisions in the
RSP and Deferred Compensation Plan (DCP), (c) permit automatic
distributions to terminated RSP and Guaranteed Retirement Income Plan
(GRIP) participants who have accounts of $1,000 or less, and (d) allow
participants to rollover any eligible retirement plan account into the RSP.
COORDINATION: Board of Investment Trustees
FISCAL IMPACT: Office of Management and Budget
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
Office of Management and Budget
N/A
N/A
Board of Investment Trustees
Office of the County Attorney
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APPLICATION
WITHIN
MUNICIPALITIES:
N/A
PENALTIES:
NI
A
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OFFICE OF THE COUNTI EXECUTIVE
Isiah Leggett
County Executive
ROCKVILLE. MARYLAND 20850
MEMORANDUM
October 21, 2010
TO:
FROM:
SUBJECT:
Nancy Floreen, President, County Council
Isiah Leggett, County Executive
~
L._hH.r--­
Legislation
to
amend the County's Retirement Law
I am attaching for the Council's consideration a bill requested by the Board of
Investment Trustees
(BTI)
which would amend the County's retirement law to: (a) allow
investments other than mutual and commingled funds in the Retirement Savings Plan (RSP);
(b)
update investment provisions in the RSP and the County's Deferred Compensation Plan (OCP);
(c) permit automatic distributions to teI11linated participants the RSP and Guaranteed Retirement
Income Plan (GRIP) who have account balances less than $1,000; and (d) allow participants to
rollover any eligIble retirement plan account into the RSP.
The County Code allows RSP participants to invest
in
mutual and commingled
funds. The bill replaces the terms "mutual fund" and "fund" with "investment option" to allow
the BIT to expand the investment options available to RSP participants.
In many respects, the County Code provisions relating to RSP and DCP
investments mirror the County Code provisions relating to the Employees' Retirement System
(ERP). However, because the RSP and DCP are participant directed retirement plans, some
aspects ofthose County Code provisions are not applicable to the RSP and DCP (e.g., investment
manager agreements). The bill amends current law to
clarify
current administrative and
investment procedures for the RSP and DCP.
Under current law, the BIT cannot distribute RSP or DCP account balances to
terminated participants unless the participant
first
submits a request for the distnbution to the
BIT. The Internal Revenue Code
(IRC)
allows a plan sponsor to distnbute account balances of
less than $1,000 even without a request
from
the participant. In light of the administrative costs
associated with maintaining small accounts, the BIT has recommended that current law
be
modified to conform to the IRC provision (i.e., to allow the BIT to distn'bute terminated
participant account balances of less than $1,000 even when the participate has not requested the
distribution).
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Nancy Floreen, President
October 21,2010
Page 2
Federa1law allows participants to roll over accounts from most types of
retirement plans (e.g., 403(b), 457, 401 (k), IRA) into the RSP. However, under County law, the
only qualified plans (e.g., 401(k)) can be rolled over into the RSP. The bill amends current law
to allow participants to roll over retirement accounts from most types ofretirement plans.
Thank you for your prompt consideration ofthis bill. Please contact BIT
Executive Director Linda Herman 240-777-8224 if you have any questions about this bill.
Attachments
cc:
Linda Herman, Executive Director, Board of Investment Trustees
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OFFICE OF MANAGEMENT AND BUDGET
Isiah Leggett
County Executive
Joseph F. Beach
Director
MEMORANDUM
October 20, 2010
TO:
FROM:
SUBJECT:
Nancy Floreen, President, County Council
Joseph F. Beach,
Expedited Bill
~
~dments
to the County's Retirement Law
The purpose of this memorandum is to transmit a fiscal and economic impact statement
to the Council on the subject legislation.
LEGISLATION SUMMARY
This bill amends the County's retirement law to:
• allow investments other than mutual and commingled funds in the Retirement Savings Plan (RSP);
• update investment provisions in the RSP and County's Deferred Compensation Plan (DCP) to comply
with current procedures;
• permit automatic distribution of terminated RSP
and
Guaranteed Retirement Income Plan (GRIP)
participant account balances ofless
than
$1,000; and
• allow participants to rollover any eligible retirement plan account into the RSP.
FISCAL AND ECONOMIC SUMMARY
The Board of Investment Trustees estimates that the annual cost of administering RSP
and GRIP participant accounts for terminated employees whose balances are below $1,000 is about $22
per account. There are currently about 400 terminated participants with balances at
this
level, so the
proposed legislation would result in administrative savings of about $8,800 in FY11. There is no fiscal
impact to the County since the savings would be used
to
lower the investment management fees charged
to participants for investment options and/or to provide additional services to participants. Plan
participants would continue to benefit
in
future years, but savings are indeterminate as they are dependent
on the number of employees who terminate with balances lower than $1,000.
The legislation has no significant economic impact; it affects very few people and any
savings would be small relative to the Montgomery County economy as a whole.
Office of the Director
101 Monroe Street, 14th Floor • Rockville, Maryland 20850 • 240-777-2800
www.montgomeryCQuntymd.goY
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Nancy Floreen
October 20, 2010
Page
2
The
following contributed to and
ConCWTed
with this analysis: Linda Hennan and
Patrick O'Brien, Board oflnvestment Trustees, Lori O'Brien, Office of Management and Budget, and
Michael Coveyou, Department of Finance.
lFB:lob
c: Kathleen Boucher, Assistant ChiefAdministrative Officer
Dee
Gonzalez, Offices ofthe County Executive
Jennifer Barrett, Director, Department of Finance
Linda Herman, Board ofInvestment Trustees
Patrick O'Brien, Board of Investment Trustees
Michael Coveyou, Department of Finance
Lori
O'Brien, Office of Management and Budget
John Cu:ff, Office ofManagement and Budget
@
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BOARD OF INVESTMENT TRUSTEES
November 17,2010
To:
From:
Subject:
Robert
H.
Drummer, Senior Legislative Attorney
Linda A. Herman, Executive Director
Expedited Bill #54-10 - Amendments to the County's Retirement Law
Expedited Bill #54-10 would amend the County's retirement law to replace the terms "mutual
fund" or "fund" with "investment option" to expand the investments available to participants.
The Montgomery County Code ("Code") permits Retirement Savings Plan (RSP) and County
Deferred Compensation Plan (DCP) participants to invest in mutual and commingled funds.
Background:
The Code grants the Board of Investment Trustees ("the Board") the exclusive
authority to manage the assets of the RSP and the County's DCP and to select investment options
through funds that the Board considers prudent subject to the Standard of Care set forth in
County Code.
The Plans' participants have different investment objectives, time horizons and risk tolerances.
To meet these varying investment needs, the Board provides a diversified slate of investment
options through mutual and commingled funds, each of which has a different set of risk and
return characteristics as disclosed in their fund prospectus. In addition, the Board recognizes that
some participants consider themselves experienced investors who want more variety,
independence, and greater control in managing their retirement plan portfolios. To meet this
need, the Board permits a participant to purchase/sell any
mutual fund,
unless otherwise
prohibited, through a Self Directed Brokerage Account (SDBA).
A SDBA is an option available in most defined contribution plans (the SDBA option was added
to each Plan in 2005) allowing participants to select investment options other than the slate of
funds offered by the Board. There are currently 43 participants with SDBAs across both Plans
with assets totaling $3.2 million.
In
2005, when the Board began offering the SDBA they
limited participation to only mutual funds. However, as new investment options have developed
over the past few years, including Exchange Traded Funds (ETFs), and with requests from
participants to purchase other types of securities, the Board is recommending that the County
Code be amended to allow the Board to offer participants the option of trading any fund,
exchange traded product (e.g. ETFs), equity, or fixed income product, unless otherwise
prohibited (options will be prohibited), through the SDBA.
@
Montgomery County Employee Retirement Plans
101 Monroe Street, 15
th
Floor' Rockville, Maryland 20850
240.717.8220 Fax 301.279.1424
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Prior to opening an SDBA, participants are required to sign an agreement acknowledging their
understanding that they exercise exclusive control over their SDBA and that the Board does not
select or monitor the funds/securities traded in the SDBA. The agreement also provides a
reminder to participants that Section 33-125 (a)(5) requires the Board to make investment
counseling services available to all Plan participants to assist them with their investment
selections.
In addition, each Plan recordkeeper provides investment education including:
newsletters, onsite seminars, one-on-one counseling sessions, representative visits, and internet
access services.
The Board recently amended its Statement of Policies and Objectives for the RSP and the
County's DCP to become effective upon the enactment of the legislation reflecting the
following: Recognizing that some participants may want more variety, independence, and
greater control in managing their RSP or DCP retirement plan portfolio, the Board will permit a
participant to select any mutual fund, exchange traded product (e.g. ETFs), equity, or fixed
income product, unless otherwise prohibited, through the SDBA. If the legislation is approved,
the Board will prepare a communication piece to all RSP and DCP participants advising them of
the changes and encouraging them to meet with the investment counselors to obtain additional
information on the Self Directed Brokerage Account option and the feasibility of its use in their
portfolio.
Expedited Bill #54-10 would also amend the County's retirement law to permit the RSP and
Guaranteed Retirement Income Plan (GRIP) to distribute terminated employee account balances
of less than $1,000. Although a participant may close his or her RSP or GRIP account when
leaving County service, the County Code requires that the participant request a distribution
regardless of the size of the account balance.
Background:
Annually, the Board evaluates the services provided by each Plan's recordkeeper
to determine if processes can be altered to lower expenses which will result in lower fees for
participants. The Internal Revenue Code (IRC) allows a plan sponsor to distribute account
balances of less than $1,000. Due to the administrative costs associated with maintaining these
small accounts, and the costs being borne by all participants, the Board of Investment Trustees is
recommending adoption of the IRC provision to distribute terminated RSP and GRIP participant
account balances of less than $1,000 without requiring a request from the participant.
In addition, Expedited Bill #54-10 also amends the County's retirement law to allow participants
to rollover retirement accounts from most types of retirement plans and clarifies current
administrative and investment procedures for the RSP and DCP.
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Montgomery County Employees Deferred Compensation Plan
Statement of Policies
&
Objectives
Montgomery County sponsors the Montgomery County Employees Deferred Compensation Plan
("Plan") to provide eligible employees a voluntary method of retirement savings through pre-tax
employee contributions to individual participant accouuts.
The Montgomery County Code ("Code") grants the Board of Investment Trustees ("the Board") the
exclusive authority to manage the assets of the Plan and to select investment options that the Board
considers prudent subject to the Standard of Care set forth in Code Section 33-61C. The Code also
provides that the Board must invest each participant's account in the Board designated investment
options as directed by the participant. The Board adopts this Statement of Policies and Objectives as a
guide to the exercise of its powers and duties in overseeing the investment program of the Plan.
Selection of Investment Options - Board
The Plan's participants have different investment objectives, time horizons and risk tolerances. To
meet these varying investment needs, the Board will provide a diversified slate of investment options,
each of which has a different set of risk and return characteristics as disclosed in their fund prospectus
or other offering documents. From the options offered, participants can construct a portfolio designed
for their retirement needs and risk tolerance.
The Board will select investment options that:
Cover a risk and return spectrum of appropriate investment classes
Are distinguishable and have distinct risk and return characteristics
Are well diversified and professionally managed
Charge fees that are reasonable for the asset class and investment style
Maximize return within reasonable and prudent levels of risk
Recognizing that Plan participants have different investment styles and degrees of involvement in
managing their retirement savings, the Board developed the following investment tiers to categorize
the investment options offered in the Plan:
Tier
• Tier 1
!
Implementation Style
One decision funds
I
Tier 2
• Tier 3
Tier 4
Passive exposure
Active management
Fully Participant driven
I
Investments Offered
Lifecycle fuuds
Stable Value fund
Index funds across major asset classes
Funds within all major asset classes
Self Directed Brokerage Accouut
I
The Board will offer a variety of options within each tier. Recognizing that some participants may
want more variety, independence, and greater control in managing their Plan account, the Board will
permit a participant to select any mutual fund, exchange traded product (e.g. ETFs), equity, or fixed
income product, unless otherwise prohibited, through the Self-Directed Brokerage Account (SDBA).
!6/;')
The Board will not monitor or evaluate the investment options available within the SDBA.
~
I
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When selecting investment options offered in Tier 1,2, and 3, the Board may consider such factors as:
• The size, company staffing and organization, history, reputation, regulatory and legal
compliance of the investment firm that manages each investment option.
• The experience of the individual portfolio manager.
• The investment objectives and structure, sector and security diversification.
• Adherence to investment strategy/style drift.
• Its historical risk and return measured against appropriate benchmarks and/or peer groups.
• Avoidance of duplication among investment options.
• The cost to participants, including any purchase or exchange fees, as well as its annual
operating expenses.
• The ability to assist participants in meeting their individual investment goals when evaluated
with the other available investment options.
• New product/investment opportunity.
Appendix A (attached) provides the current list of the investment options offered through the Plan and
will be updated when changes are made.
Investment Program Oversight
On a quarterly basis the Board formally reviews and evaluates the investment options offered and the
performance of each investment option. Board staff monitors the options daily and will notify the
Board if circumstances warrant immediate action. The Board will discuss taking action if an
investment option fails to satisfy its performance criteria, the basis for selecting the investment option
has changed, or if some other material change prompts concern. If such an event occurs that causes
concern as to the appropriateness of continuing to offer that investment option, the Board may take one
or more of the following actions:
• Establish a probationary period during which any area of concern will be assessed and, if
necessary, corrected.
• Supplement the investment option with one or more alternative investment options for that
category.
• Replace the investment option with one or more alternative investment options for that
category.
• Eliminate the investment option.
Changes to the investment options available will be made at the sole discretion of the Board, which
shall document its decisions in the Board minutes, and communicate all changes to the participants on
a timely basis. If a fund is eliminated and a replacement fund is added, participants will be notified
that if they fail to make an election to move their balance from the eliminated fund prior to the date of
transfer, any assets in the eliminated fund will be transferred to the replacement fund.
Selection of Investment Options - Participant
Participants may choose one or more investment options depending on individual investment
objectives. Participants may change investment elections at any time (trade restrictions and fees on
redemptions may be initiated by a particular option at any time), A participant's direction of
"f::!)
investment remains in effect until otherwise changed by the participant. If a participant fails to
0
2
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designate an investment option, the participant's account balance and future contributions will be
invested in the default option, which is currently the lifecycle fund (also known as target date fund)
closest to the participant's expected retirement date, based on the participant's date of birth.
Participants are advised that they bear all investment risk and earnings on their participant account
balances are determined solely by their investment elections. No person who is a fiduciary shall be
liable for any loss resulting from the participant's exercise of control over his or her plan account.
Prior to opening an SDBA, participants will be required to sign an agreement acknowledging their
understanding that he or she exercises exclusive control over his/her SDBA and that the Board does
not select or monitor the investment options traded in the SDBA.
Third Party Administrator
The Board, in conjunction with the Chief Administrative Officer, will select a Third Party
Administrator (TP A) to perform functions related to administration of the Plan and recordkeeping of
partIcIpant investment accounts, including: enrollment, exchanges, transfers, distributions,
communication, performance and fee information, and periodic individual statements and benefit
payments.
The Board will conduct a review annually, or as necessary, of the TPA, to evaluate the expenses, the
revenue sharing arrangements in place, and to determine if the TPA is meeting the administrative
requirements as described above.
Investment Education Resources
Participants will have educational resources available to make informed investment decisions based on
their investment goals. The TP A will provide investment education and will include materials such as:
quarterly statements and newsletters, onsite seminars, one-on-one counseling sessions, representative
visits, and internet-based financial planning calculators or other tools.
The Board has administrative procedures in place with the TPA to ensure that participants receive
information on risk factors, fee structures and other issues related to investments. The TPA will
provide these materials upon request.
Amended: September 24, 2010
3
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Appendix A - Current Investment Options
Tier Classification
Investment Category
Fund Options*
Tier 1
Lifecycle Funds
Blackrock LifePath Retirement
Blackrock LifePath 2020
Blackrock LifePath 2030
Blackrock LifePath 2040
Blackrock LifePath 2050
I
Tier 1
Tier 2
Stable Value Fund
Index Funds
SEI Stable Asset
i •
Tier 3
Bondllncome Funds
Hartford Total Return Bond
Goldman
Pimco High Yield
Sachs
Government
Short
SSgA U.S. Bond Index Fund
SSgA S&P 500 Index
SSgA Russell Small/Mid Cap Index
SSgA International Index Fund
Duration
Tier 3
Real Return Funds
Fidelity Inflation-Protected Bond
Fidelity Strategic Real Return
SsgA Tuckerman REIT
American
Funds: Growth Fund of
Tier 3
Stock Funds
Tier 3
Tier 4
International/Global Stock Funds
Self Directed Brokerage Acct.
Fidelity Diversified International
Oppenheimer Global
State Street Global Markets
America
Hartford Dividend & Growth
ClearBridge
Legg
Mason
Appreciation
Hartford Capital Appreciation
Fidelity Low Priced Stock
Fidelity Small Cap Stock
Legg Mason ClearBridge Small Cap ,
Growth
Northern Small Cap Value
*Investment options as of September 24, 2010
4
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Montgomery County Retirement
Savings
Plan
Statement of Policies
&
Objectives
Montgomery County sponsors the Montgomery County Retirement Savings Plan ("Plan") to provide
eligible participants a multiple-employer defined contribution plan.
The Montgomery County Code ("Code") grants the Board of Investment Trustees ("the Board") the
exclusive authority to manage the assets of the Plan and to select investment options that the Board
considers prudent subject to the Standard of Care set forth in Code Section 33-61C. The Code also
provides that the Board must invest each participant's account in the Board designated investment
options as directed by the participant. The Board adopts this Statement of Policies and Objectives as a
guide to the exercise of its powers and duties in overseeing the investment program of the Plan.
Selection of Investment Options - Board
The Plan's participants have different investment objectives, time horizons and risk tolerances. To
meet these varying investment needs, the Board will provide a diversified slate of investment options,
each of which has a different set of risk and return characteristics as disclosed in their fund prospectus
or other offering documents. From the options offered, participants can construct a portfolio designed
for their retirement needs and risk tolerance.
The Board will select investment options that:
Cover a risk and return spectrum of appropriate investment classes
Are distinguishable and have distinct risk and return characteristics
Are well diversified and professionally managed
Charge fees that are reasonable for the asset class and investment style
Maximize return within reasonable and prudent levels of risk
Recognizing that Plan participants have different investment styles and degrees of involvement in
managing their retirement savings, the Board developed the following investment tiers to categorize
the investment options offered in the Plan:
Tier
Tier 1
Tier 2
Implementation Style
One decision funds
Passive exposure
Active management
Fully Participant driven
Investments Offered
Lifecycle funds
Stable Value fund
Index funds across major asset classes
Funds within all major asset classes
Self Directed Brokerage Account
I
I
I
Tier 3
Tier 4
The Board will offer a variety of options within each tier. Recognizing that some participants may
want more variety, independence, and greater control in managing their Plan account, the Board will
permit a participant to select any mutual fund, exchange traded product (e.g. ETFs), equity, or fixed
income product, unless otherwise prohibited, through the Self-Directed Brokerage Account (SDBA).
The Board will not monitor or evaluate the investment options available within the SDBA.
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When selecting investment options offered in Tier 1,2, or 3, the Board may consider such factors as:
• The size, company staffing and organization, history, reputation, regulatory and legal
compliance of the investment firm that manages each investment option.
• The experience of the individual portfolio manager.
• The investment objectives and structure, sector and security diversification.
• Adherence to investment strategy/style drift.
• Its historical risk and return measured against appropriate benchmarks and/or peer groups.
• Avoidance of duplication among investment options.
• The cost to participants, including any purchase or exchange fees, as well as its annual
operating expenses.
• The ability to assist participants in meeting their individual investment goals when evaluated
with the other available investment options.
• New product/investment opportunity.
Appendix A (attached) provides the current list of investment options offered through the Plan and will
be updated when changes are made.
Investment Program Oversight
On a quarterly basis, the Board formally reviews and evaluates the investment options offered and the
performance of each investment option. Board staff monitors the options daily and will notify the
Board if circumstances warrant immediate action. The Board will discuss taking action if an
investment option fails to satisfy its performance criteria, the basis for selecting the investment option
has changed, or if some other material change prompts concern. If such an event occurs that causes
concern as to the appropriateness of continuing to offer that investment option, the Board may take one
or more of the following actions:
• Establish a probationary period during which any area of concern will be assessed and, if
necessary, corrected.
• Supplement the investment option with one or more alternative investment options for that
category.
• Replace the investment option with one or more alternative investment options for that
category.
• Eliminate the investment option.
Changes to the investment options available will be made at the sole discretion of the Board, which
shall document its decisions in the Board minutes, and communicate all changes to the participants on
a timely basis. If an investment option is eliminated and a replacement fund is added, participants will
be notified that if they fail to make an election to move their balance from the eliminated fund prior to
the date of transfer, any assets in the eliminated fund will be transferred to the replacement fund.
Selection of Investment Options - Participant
Participants may choose one or more investment options depending on individual investment
objectives. Participants may change investment elections at any time (trade restrictions and fees on
redemptions may be initiated by a particular option at any time). A participant's direction of
investment remains in effect until otherwise changed by the participant. If a participant fails to
designate an investment option, the participant's account balance and future contributions will be
2
@
r:::?-.
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invested in the default option, which is currently the lifecycle fund (also known as target date fund)
closest to the participant's expected retirement date, based on the participant's date of birth.
Participants are advised that they bear all investment risk and earnings on their participant account
balances are determined solely by their investment elections. No person who is a fiduciary shall be
liable for any loss resulting from the participant's exercise of control over his or her plan account.
Prior to opening an SDBA, participants will be required to sign an agreement acknowledging their
understanding that he or she exercises exclusive control over hislher SDBA and that the Board does
not select or monitor the investment options traded in the SDBA.
Third Party Administrator
The Board, in conjunction with the Chief Administrative Officer, will select a Third Party
Administrator (TPA) to perform functions related to administration of the Plan and recordkeeping of
participant investment accounts, including: enrollment, exchanges, transfers, distributions,
communication, performance and fee information, and periodic individual statements and benefit
payments.
The Board will conduct a review annually, or as necessary, of the TPA, to evaluate the expenses, the
revenue sharing arrangements in place, and to determine if the TPA is meeting the administrative
requirements as described above.
Annuity Option
Section 33-120(f)(2) requires the Board to provide an annuity distribution option to Plan participants.
The Board will provide several vendors, through the Third Party Administrator ("TP A"), from which a
participant may select an annuity option. Annually, the Board will review the TPA's evaluation of the
vendors, with a focus on additions or deletions to the list of approved vendors, as well as vendor credit
ratings. The TPA serves as the Board's expert in performing analytics and due diligence to evaluate
factors impacting each annuity provider's claims paying ability and creditworthiness, including:
Quality and diversification of the annuity provider's investment portfolio
Size of the insurer relative to the proposed contract
Level of insurer's capital and surplus
Lines of business of the annuity provider and other indications of the insurer's exposure to
liability
• Structure of the annuity contract and guarantees supporting the annuities
• State guarantee association protection
Investment Education Resources
Section 33-125 (a)(5) requires the Board to make investment counseling services available each year to
all Plan participants to provide advice on the investment options available. To meet this requirement,
the Board will engage an investment counseling firm to provide counseling to each participant
annually. The Board annually reviews the service provider to ensure that the contract terms are being
met and that participants are satisfied' with the service provided. Each participant is asked to complete
a survey after meeting with the service provider to evaluate the satisfaction level with the counseling
session.
3
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In addition to individual investment counseling, participants will have educational resources available
to make informed investment decisions based on their investment goals. The education will be
provided by the TPA and/or other qualified resources and includes:
quarterly statements and
newsletters, onsite seminars, representative visits, and internet-based financial planning calculators or
other tools.
The Board has administrative procedures in place with the TPA to ensure that participants receive
information on risk factors, fee structures and other issues related to investments. The TPA will
provide these materials upon request.
Amended: September 24, 20lO
4
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Appendix A - Current Investment Options
Tier Classification
Tier 1
Investment Category
Lifecyc1e Funds
Fund Options*
Fidelity Freedom K 2000
Fidelity Freedom K 2005
Fidelity Freedom K 2010
Fidelity Freedom K 2015
Fidelity Freedom K 2020
Fidelity Freedom K 2025
Fidelity Freedom K 2030
Fidelity Freedom K 2035
Fidelity Freedom K 2040
Fidelity Freedom K 2045
Fidelity Freedom K 2050
Fidelity Freedom K Income
Managed Income Portfolio
Fidelity US Bond Index
Spartan Total Market Index
Spartan 500 Index
Spartan Extended Market Index
Spartan International Index
Fidelity Intermediate Bond
Fidelity Capital
&
Income
Fidelity Puritan
Fidelity Strategic Real Return
Fidelity Inflation-Protected Bond
Fidelity Real Estate Investment
Fidelity Contrafund
Fidelity Growth Company
Fidelity Value
Fidelity Equity Income
Davis NY Venture
Fidelity Low Priced Stock
Northern Small Cap Value
Fidelity Small Cap Stock
Artisan Small Cap
Fidelity Diversified International
Templeton World
Fidelity BrokerageLink
Tier 1
Tier 2
Stable Value Fund
Index Funds
Tier 3
Bond/Income Funds
Tier 3
Tier 3
Balanced/Hybrid Fund
Real Return Funds
Tier 3
Stock Funds
Tier 3
International/Global Stock Funds
Tier 4
Self Directed Brokerage Acct.
*Investment options as of September 24, 2010
5
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Staff Amendment 1
Amend lines 20-24 as follows:
ill
[If
~
participant terminates employment with an] A participant's
account balance of $1,000 or less[.,. the account balance] must
be automatically distributed in
~
lump sum as soon as
administratively feasible after termination of employment
without
~
request from the participant.
Amend lines
77-82
as follows:
ill
Notwithstanding
any other provision of this subsection, [if
~
participant terminates employment with an] a participant's
account balance of $1000 or less [.,. the account balance] must be
automatically distributed in
~
lump
sum as soon as
administratively feasible after termination of employment
without
~
request from the participant.
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,0
TESTIMONY FOR EXPEDITED BILL 54-10, COUNTY'S RETIREMENT LAW
Good morning, for the record, I am Linda Herman, Executive Director for the
Board ofInvestment Trustees which oversees the assets ofthe County's three retirement
plans. I am here today on behalf of the County Executive to testify in support of Bill 54­
10, Chapter 33 - Retirement
&
Investments.
The proposed Bill will amend the County's retirement law to: (a) allow
investments other than mutual and commingled funds in the Retirement Savings Plan
(RSP), (b) update investment provisions in the RSP and the County's Deferred
Compensation Plan (DCP), (c) permit automatic distributions to terminated RSP and
Guaranteed Retirement Income Plan (GRIP) participants who have account balances less
than $1,000, and (d) allow participants to rollover any eligible retirement plan account
into the RSP.
The County Code permits participants to invest in mutual and commingled funds.
The bill replaces the terms "mutual fund" or "fund" with "investment option" to expand
the investments available to participants.
The investment provisions defined in the County Code for the RSP and DCP
mirror the investment provisions of the Employees' Retirement System; however,
because the RSP and DCP are participant directed retirement plans, the provisions are not
all applicable to the RSP and DCP (e.g., investment manager agreements). The bill
amends these sections to clarify current administrative and investment procedures.
The County Code requires that a terminated participant request a distribution
regardless of the size of the account balance. The Internal Revenue Code (lRC) allows a
plan sponsor to distribute account balances of less than $1,000. Due to the administrative
costs associated with maintaining these small accounts, and the costs being borne by all
participants, the Board of Investment Trustees is recommending adoption of the IRC
provision to distribute terminated participant account balances of less than $1,000.
Finally, federal law allows participants to rollover accounts from most types of
retirement plans (e.g., 403(b), 457, 40 1(k». The RSP limits rollovers to qualified plans
(e.g., 401 (k». The bill allows participants to rollover retirement accounts from most
types of retirement plans.
We look forward to working with the Council
legislation.
In
its deliberations on this