Administrative Policy #3.20 - Defined Contribution Plans Policy

Purpose

The City of Corvallis may offer a voluntary employee retirement savings benefit program, which includes defined contribution program types, such as a 457(b)[1] deferred compensation plan and/or 401(a)¹ money purchase plan in order to provide employees with retirement savings alternatives.

Definition

Defined Contribution Retirement Plan (DCRP):  A DCRP is a retirement plan where fixed or variable contributions are paid into an individual account by employers and/or employees.  The contributions are then invested, and the returns on the investment (which may be positive or negative) are credited to the individual's account.  Upon retirement, the member may use their account in compliance with Federal and State laws governing such plans, as well as the City's plan documents.  This form of plan is distinguished from a Defined Benefit Retirement Plan (DBRP), where a specific pre-determined formula that includes several variables (such as the employee's terminal earnings) is used to calculate the amount of an employee's future benefit.  The City of Corvallis participates in the Oregon Public Employee Retirement System, which provides a DBRP.  A DCRP can also be distinguished from a DBRP in that the employee has considerably more leeway in determining how their DCRP monies are invested and how they are withdrawn.

• 401(a) Plan:  A money-purchase retirement savings plan that is set up by an employer.  A 401(a) plan allows for contributions by the employee, the employer, or both.  Contribution amounts, whether dollar-based or percentage-based; eligibility; and vesting schedule are all determined by the sponsoring employer. Funds are withdrawn from a 401(a) plan through lump-sum payment(s), roll-overs to another qualified plan, or a variety of systematic time-payment methods.
• 457(b) Plan:  A non-qualified, deferred compensation plan established by State and local government employers and other tax-exempt employers.  Eligible employees are allowed to make salary-deferral contributions to the 457(b) plan.  These contributions may be either pre-tax or post-tax ("Roth") salary deferrals.  Pre-tax assets grow on a tax-deferred basis, and contributions are not taxed until the assets are distributed from the plan.  Post-tax "Roth" earnings and qualified distributions are tax-exempt.

Employee Retirement Income Security Act (ERISA): This legislation, enacted in 1974, serves as both a guide to best practices and an accepted method for retirement plan design and operation.  It is generally expected that the courts will hold public plans to this standard, due to its comprehensive nature.

Fund Manager: The person(s) or firm responsible for implementing a fund's investing strategy and managing its portfolio trading activities.  A fund can be managed by one person, by two people as co-managers, or by a team of three or more people.  Fund management firms are paid a fee for their work, which is usually a percentage of the fund's average assets under management.

Plan Fiduciary: Person(s) who, by either function or appointment, have discretionary authority over plan assets and/or administration.  The Fiduciary of a DCRP has duties of loyalty, prudence, provision of diversification of plan assets, acting in accordance with the Plan Document, and an implied duty to monitor plan operations with regard to "events of the world" that may impact the plan.  The Fiduciary is also referred to as Plan Sponsor.

Retirement Plan Investment Consultant/Advisor: Often retained as a co-fiduciary, to provide for the necessary expertise under a fiduciary committee's responsibility for prudence and diligence.

Risk/Return Profile: This is a balance the employee seeks to achieve based upon personal factors, such as an employee's age, financial circumstances, willingness/ability to devote time to following the market and their portfolio, etc.  Diversification of holdings plays into balancing risk/return.

Third Party Administrator (TPA): The TPA is also referred to as the Retirement Plan Service Provider or Plan Vendor of the defined contribution plan and related services.  The City may have one or more TPAs provide these services to employees.

• Plan Fees: Should be optimized at lowest possible cost for requested service benefits
• Services: Provide sufficient and balanced fund offerings to employees to optimize the investment possibilities in a given market/economy and provide agreed-upon participant education and counseling.

Policy

This Policy addresses the City's fiduciary responsibility to oversee any Defined Contribution Retirement Plan(s) (DCRP) offered to City employees.  This Policy should be read in conjunction with the DCRP Statement of Investment Policies and Guidelines, as well as the Defined Contribution Plan Fiduciary Committee (DCPFC) Operating Guidelines.

Defined Contribution Plan Fiduciary Committee (DCPFC):  The City has established a committee to oversee the fiduciary responsibilities associated with defined contribution plan(s).  That committee will operate according to the Operating Guidelines, as referenced above, including meeting regularly and reviewing reports/information provided by the TPA(s) and the Retirement Plan Investment Consultant and other sources to ensure commitments to employee benefits in this regard are maintained according to the above-referenced Statement of Investment Policies and Guidelines.  Membership of the DCPFC is outlined in the Operating Guidelines but generally will include two co-chairs, a senior staff representative, plus three to five other City employees relatively balanced in interests and knowledge, all of whom are selected by the City Manager to serve terms of three years, subject to possible extension.  The Risk Manager and City Attorney will also be ad hoc members.

Request for proposal (RFP) processes:

• The DCPFC will conduct a RFP and negotiate the agreement(s) for a defined contribution retirement plan consultant/advisor every five years to provide expert guidance and advice, as necessary, on the City's fiduciary responsibility; and
• The DCPFC will conduct a RFP process and negotiate the agreement(s) for a defined contribution plan vendor(s) every seven years at a minimum, to ensure optimized cost and service to employees on an ongoing basis.

Guidelines

Department Directors may choose to participate in the City's 401(a) plan and contribute two percent of their income to the plan, with an employer match of two percent of salary. This choice must be made at the time of hire and is irrevocable.

Any City Employee may opt for monthly payroll deductions to the City's 457(b) deferred compensation plan in an amount(s) up to the annual IRS limit; the annual limits for each tax year are posted in the Benefits area on the City's Cityshare Intranet site (http://cityshare).  Such contributions may be changed by the employee at anytime.

Private sector companies are being held to the standards of the Federal Government's Employee Retirement Income Security Act (ERISA), which address fiduciary responsibilities of the employer when offering similar deferred compensation plans.  The public sector is not strictly bound by ERISA, but there are expectations that this guidance be followed as a best practice.

In early 2010, the City started along the path of hiring a retirement plan consultant to assist with reviewing and evaluating its defined contribution plan vendors to obtain the best possible service/cost outcome for employees in keeping with the City's fiduciary responsibility.

Review/Update

The DCPFC will prepare this Administrative Policy as needed and submit to City Manager for review and approval.

Last reviewed: 12-2018

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