TO: ADAM PIRRIE, CITY MANAGER
FROM: JEREMY STARKEY, FINANCE DIRECTOR
DATE: JANUARY 28, 2025
Reviewed by:
City Manager: AP
SUBJECT:
Title
ADOPTION OF A RESOLUTION AUTHORIZING THE CITY MANAGER TO EXECUTE AGREEMENTS TO TRANSFER ADMINISTRATION OF THE CITY’S PENSION SECTION 115 TRUST TO SHUSTER ADVISORY GROUP, LLC, TRANSFER THE TRUST’S ASSETS TO CHARLES SCHWAB TRUST BANK, AND TO NAME ALTA TRUST COMPANY AS DIRECTED TRUSTEE (FUNDING SOURCE: GENERAL FUND)
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SUMMARY
Assets in a Section 115 Trust are irrevocably committed for the government function specified in the applicable trust agreement. In the City’s case, the funds being set aside in the Section 115 Trust are to pre-fund the City’s future pension obligations. Additionally, monies held in such trusts can be invested in accordance with the rules governing those trusts, which are different than the investment rules for the City’s investment portfolio. Investment restrictions that apply to the investment portfolio of a City do not apply to the assets held in an irrevocable Section 115 Trust, thus allowing for more flexibility in the investment strategy. Setting aside funds in a Section 115 Trust can potentially earn a higher rate of return than funds invested within a city’s investment policy guidelines.
The City has one Section 115 Trust for the purpose of funding pension obligations. Those funds are currently administered by the Public Agency Retirement Services (“PARS”), where assets are held by U.S. Bank and managed by PFM Asset Management LLC (“PFMAM”), a subsidiary of U.S. Bancorp Asset Management, Inc., which is a subsidiary of U.S. Bank. After a review of the current fee structure and fund line up, it was determined that savings could be achieved by transferring our plan administration and portfolio management to another provider. The recommended provider, Shuster Advisory Group, LLC, is the same firm that took over fiduciary responsibilities of the employee’s 457(b) deferred compensation plan in 2019.
RECOMMENDATION
Recommended Action
Staff recommends the City Council adopt A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CLAREMONT, CALIFORNIA, AUTHORIZING THE CITY MANAGER TO EXECUTE AGREEMENTS TO TRANSFER ADMINISTRATION OF THE CITY’S PENSION SECTION 115 TRUST TO SHUSTER ADVISORY GROUP, LLC, AND TO TRANSFER THE TRUST’S ASSETS TO CHARLES SCHWAB TRUST BANK AND TO NAME ALTA TRUST COMPANY AS DIRECTED TRUSTEE.
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ALTERNATIVE TO RECOMMENDATION
In addition to the recommendation, there is the following alternative:
• Request additional information from staff.
FINANCIAL REVIEW
Staff has analyzed Shuster's pricing model and the services to be provided in comparison to the current PARS program. The current fee schedule from the PARS program results in a 0.55 percent annualized fee, or $22,242 (based on current balances), whereas the Shuster program would result in a 0.28 percent annualized fee, or $11,323, which provides a 49 percent reduction in the expenses of the program. Assuming both programs earned an average 6 percent gross annual rate of return, the reduction of fees alone will result in an estimated savings of approximately $174,500 over ten years, $563,000 over twenty years, and $1.4 million over thirty years. These results assume there are no fee changes and $4.0 million of assets as of September 30, 2024. Future contributions by the City will only increase the comparative savings. With Shuster’s ongoing oversight and personalized service model, staff expects comparable results for the Section 115 Trust to what were achieved for the 457(b) plan.
Lastly, Shuster will provide ten investment strategies that combine both active and passive (index) investment solutions to take advantage of the optimal mix of investments from both an investment return and cost perspective. If desired by the City, Shuster will also provide a custom portfolio at no additional cost.
The staff cost to prepare this report and administer this program is estimated at $1,664 and is included in the operating budget of the Financial Services Department.
ANALYSIS
Background
On July 27, 2021, the City Council approved Resolution No. 2021-44 authorizing the establishment of an Internal Revenue Code Section 115 Irrevocable Trust with PARS to set aside funds for future payment of our unfunded actuarial liability (UAL). At that time, PARS partnered with U.S. Bank to serve as Trustee/Custodian and its subsidiary HighMark Capital Management to provide investment management services for the program. PFM Asset Management LLC (“PFMAM”), a subsidiary of U.S. Bank, took over investment management services effective January 1, 2024.
It has been three years since the initial creation of the Section 115 Trust in 2021, with PARS serving as the administrator. The City is not obligated to stay in the current trust arrangement with PARS, or any provider for that matter. To the extent that cost savings for administering the trust can be achieved, that is additional money that will stay in the trust and earn interest over time. Based on available options, significant savings in administration costs are available by transferring the administration of the trust to the Shuster Advisory Group, LLC (“Shuster”). This transfer will also provide the City greater control of our funds through the customization Shuster’s program provides, more timely reporting, and potentially higher portfolio returns. As previously stated, Shuster is the same firm that took over fiduciary responsibilities of the employees’ 457(b) deferred compensation plan in 2019. The impact of their changes resulted in significant savings on the fees of employees, participants, and retirees’ accounts.
More specifically, in 2019, the City engaged Shuster as the retirement plan consultant and investment fiduciary for our 457(b) plan. Shuster issued a Request for Information (RFI) to our current recordkeeper and completed a comprehensive review of our plans, identifying that the fees for recordkeeping and administration were high and not transparent and that the quality of the investment menu needed improvement. Based on the information obtained through the RFI, Shuster subsequently issued a Request for Proposals (RFP) for administration and recordkeeping services for the Plans. The results of the RFP proved that the City’s administration and recordkeeping fees could significantly be reduced and the City could implement an open architecture investment menu and fee transparent platform benefiting participants. The City chose to remain with the current recordkeeper at a 93 percent reduction in recordkeeping costs, a higher crediting rate for the safety of the principal stable value solution, and an improved investment menu for plan participants.
Since the transition in August of 2019, participants in the Plans, as a whole, have saved approximately $303,000 from the reduction in recordkeeping fees alone. An additional estimated $42,000 has also been gained via the higher crediting rates on the guaranteed stable value solutions, contributing additional retirement savings for employees. The projected fee savings due to the fee reduction alone are estimated to be $2.6 million over ten years, $6.6 million over twenty years, and $12.3 million over thirty years. These projected savings do not take into account any financial gains from improved investment options.
As of September 30, 2024, the City has $4,044,057 in the pension trust account. A switch from the current administration of our Pension 115 trust account by PARS and U.S. Bank could result in a reduction in fees of approximately $174,500 over ten years, $563,000 over twenty years, and $1.4 million over thirty years, assuming both programs earned an average 6 percent gross rate of return, a beginning value of $4,044,057, no contributions or distributions, and no change in fee structures. Future contributions by the City will only increase the comparative savings.
Discussion
Public Agency Retirement Services (PARS)
The PARS option for OPEB and Pension Stabilization is the Public Agencies Post-Employment Benefits Trust, a multiple employer trust arrangement to which cities adopt the Trust to hold assets. It is important to note that although PARS provides services to public agencies, PARS is not a public agency or a public retirement system. PARS provides trust administration for the PARS Post-Retirement Healthcare Plan and the PARS Pension Rate Stabilization Program, both held in the same Public Agencies Post-Employment Benefits Trust. The advisor to the PARS investment portfolios is U.S. Bank, and PFM Asset Management LLC (“PFMAM”), a subsidiary of U.S. Bancorp Asset Management, Inc., which is a subsidiary of U.S. Bank, manages the portfolios. U.S. Bank also serves as Trustee for the multiple employer trust. The fees for PARS administrative services and U.S. Bank/PFMAM trust and investment advisory services are separate fees, both a tiered structure based on assets. Based on our current trust balance, annualized PARS fees are $22,242 per year. The PARS program provides five active investment strategies and another five portfolios of the same strategies, but as passive (index) strategies.
Shuster Advisory Group, LLC
Shuster Advisory Group, LLC (Shuster) is an independent investment advisory firm and fiduciary. They provide governmental and institutional retirement plan consulting services as well as private wealth management. Shuster is a SEC-Registered Investment Advisor with over $7 billion in assets under management focusing on serving the unique needs of governmental agencies and special districts serving over 95 cities, agencies and public entities. Shuster serves as a fiduciary to plan investments and provides investment selection, monitoring, and management.
Shuster currently serves as the fiduciary investment advisor and plan consultant for our 457(b) Deferred Compensation Plan. The services provided by Shuster are unique with a low-cost, transparent structure and comprehensive and responsive services. Shuster entered the public retirement plan sector after analyzing the sector and realizing that cities and agencies were being over-charged and underserved for their retirement plans, directly impacting the supplemental retirement savings of the public employees. Hiring Shuster for these services resulted in a 93 percent reduction in the recordkeeping and administration fees and a 49 percent reduction in total plan costs, including recordkeeping and administration fees, fund expenses, and consultant fees, in addition to a significant improvement in the quality of the investments available in the retirement plan. Shuster has proven to be a responsive, analytical partner to the City.
Based on our current trust balance as of September 30, 2024, annualized Shuster fees will be $11,323 per year. By transferring the City’s Section 115 Trust to the Shuster Advisory Group, LLC, the City will save approximately $11,000 per year, which when reinvested each year, will result in an estimated $1.4 million in savings over thirty years. Additionally, Shuster will provide the City with daily online access to our trust account, timely customized reports, investment monitoring and advice, greater control over our funds, projected higher yields, and a significantly more interactive dialogue regarding our trust account investments.
RELATIONSHIP TO CITY PLANNING DOCUMENTS
Staff has evaluated the agenda item in relationship to the City’s strategic and visioning documents and finds that it applies to the following City Planning Documents: Council Priorities, General Plan, and the 2024-26 Budget.
CEQA REVIEW
This item is not subject to environmental review under the California Environmental Quality Act (CEQA).
PUBLIC NOTICE PROCESS
The agenda and staff report for this item have been posted on the City website and distributed to interested parties. If you desire a copy, please contact the City Clerk’s Office.
Submitted by:
Jeremy Starkey
Finance Director
Attachment:
Resolution to Execute Agreements to Transfer City’s Pension Section 115 Trust