Regular Board Meeting
January 23, 2007
Minutes
Chair Sandy Matheson called the meeting to order at 9:30 a.m. Board members present: Michael Coleman, Chet Griffith, Robert Lenigan, Sheila Marcy, Gene Otis, Judi Owens, Al Symington, Brian Talbott and Staci Vesneske.
Staff/resource personnel present: Assistant Attorney General Nicole Potebnya, Kris Heurich, Gary Bruebaker, Jeff Wickman, Dave Nelsen, George Pickett and Wilma Eby.
Chair Matheson introduced new board member Brian Talbott and Assistant Attorney General Nicole Potebnya.
Gene Otis made a motion, seconded by Chet Griffith, to approve the October 31, 2006 meeting minutes as submitted. The motion passed unanimously.
No public comment
Matt Smith, Washington State Actuary, provided information about the gain sharing program and the cost of the program. Gain sharing is paid on January 1 of even numbered years when the average rate of investment return over the previous four state fiscal years exceeds 10 percent. The present value of future gain sharing benefits is $744 million in Plan 3 and $900 million in Plan 1. He explained that gain sharing has a cost because the projected long-term investment earnings of 8 percent per year that are assumed to offset the cost of future pension benefits are reduced by the payment of gain sharing benefits. The Governor’s budget proposes to discontinue gain sharing after the 2008 event, provide a one-time increase to the Uniform COLA for Plan 1 retirees, allow Plan 3 members the choice to opt into a “Plan 2 like” benefit for future service and provide Plan 2/3 choice for new hires in the Teachers’ Retirement System and School Employees’ Retirement System. The Legislature will make the final decision on gain sharing and COLA benefits.
Kris Heurich, Senior Vice President at ICMA Retirement Corporation (ICMA-RC), provided a status report of the record keeping services for the Plan 3 programs. She reported an 8 percent increase in Plan 3 membership in 2006 and a 22 percent increase in member contacts to ICMA-RC compared to 2005. Of those contacts, 86 percent were made through the Internet. The most active day on the Internet was Tuesday, the least active was Sunday. Ms Heurich reported that 43,000 fourth quarter statements were mailed to Plan 3 members on January 8 and 9. Compared to 2005, there was a 2.7 percent increase in statements delivered electronically. Almost 4 percent of total Plan 3 members use e-delivery for their statements and approximately 7 percent of Public Employees’ Retirement System (PERS) members use e-delivery.
For fund transfers, Ms. Heurich reported a 14 percent decrease in transactions initiated by members. The International Fund received most of the money transferred by members. In 2005, approximately $8 million moved out of the Money Market Fund and in 2006, almost $3 million was moved into the Money Market Fund. For the Total Allocation Program (TAP) fund, there was an increase of $23 million from the self-directed program into the TAP.
Gary Bruebaker, Chief Investment Officer for the Washington State Investment Board (WSIB), provided a quarterly investment report for the period ending December 31, 2006. The Dow Jones Wilshire 5000, the broadest measure of U.S. Public Equities, had returns of 7.2 percent for the quarter and 15.8 percent for the year. The MSCI EAFE, the most often sited measure for International Markets, had returns of 10.4 percent for the quarter and 26.3 percent for the year. Value continues to outperform growth. The Teachers’ Retirement System (TRS) Plan 3 fund increased by $229 million to a total of $3.5 billion, School Employees’ Retirement System (SERS) increased by $52.9 million to a total of $942 million and PERS Plan 3 increased by $75.6 million to a total of $1.2 billion. The DCP fund increased by $133 million to a total of nearly $2.4 billion.
Mr. Bruebaker noted that the U.S Stock Market Fund, U.S. Large Stock Fund, International Stock fund and TAP are all meeting or beating their benchmarks. The U.S. Small Stock Fund, Social Balanced Fund, Horizon Funds and Bond Market Fund are underperforming their benchmarks. The Social Balanced Fund, however, over a 10 year period has performed very well. The Horizon Funds are underperforming slightly because of the Bond Fund. He reported the Bond Fund is internally managed and its performance is currently under review.
Jeff Wickman, Senior Assistant Director of Policy, provided a defined contribution activity report. He responded to a board request at the October meeting for information about the number of members who defaulted into the Total Allocation Portfolio (TAP) and, for those members who chose the Self-Directed program, how many defaulted to the Money Market fund. Mr. Wickman reported that there is no automated tracking method to determine which members have defaulted into TAP or the Money Market fund. If a member does not select an investment manager, the employer reports the contributions as going to the TAP, which means DRS cannot determine if the TAP was a conscious choice or a default.
If the member selects the Self-Direct program, the member must provide the record keeper with an asset allocation form. If the member does not complete an allocation form, their contributions go into the Money Market fund. Since a member could have defaulted but later changed their allocation, it is not possible to determine the original number of members who defaulted to the Money Market. Mr. Wickman stated that he is continuing to look at the data available and will report to the ERBB if he is able to provide more specific numbers.
Dave Nelsen, DRS Assistant Director, provided a report on the following proposed pension legislation.
Sandy Matheson introduced the concept of “life cycle” investment funds. Gary Bruebaker provided information about the option, also known as retirement “target date” funds. Investors face the challenges of making time to manage investment choice, understanding their risk tolerance and investment options, making the optimal asset allocation and changing their investment mix over time. Target date funds are professionally managed and the fund manager automatically changes the investment mix over time as appropriate for a participant’s age and career. The participant can monitor the investment but does not need to actively manage their investment.
The Horizon Funds currently offered are static balanced funds. An issue with static balanced funds is that the asset allocation never changes. Studies show that 80 percent of participants initiate no trades and 86 percent fail to rebalance over time. An investment choice made at the beginning of a career may not be the appropriate choice 20 years later. Retirement target based funds provide an appropriate risk level at every age and place the critical asset allocation and rebalancing decisions in the hands of investment professionals. WSIB staff recommends that DRS and WSIB work together to conduct a competitive process to identify retirement target based funds to replace the current static, risk-based Horizon Funds.
Al Symington made a motion, seconded by Robert Lenigan, to strongly support the continued review of life-cycle investment options. The motion passed unanimously.
Sandy Matheson reported that the default option is established in rule and can be changed by board action. The issue will be brought back to the ERBB when the life cycle funds option has been explored.
Sandy Matheson reviewed the revised meeting schedule for 2007 - January 23, May 15, September 18 and December 11.
Judi Owens made a motion, seconded by Robert Lenigan to approve the revised 2007 meeting dates as proposed. The motion passed unanimously.
Chair Sandy Matheson reviewed the proposed agenda for the May 15, 2007 meeting.
With no further business, the meeting adjourned at 12:00 p.m.
Approved:
Sandra J. Matheson, Chair