Fee negotiations will boost city’s retirement plans

A year ago, Spokane city benefits managers discovered an oversight that was potentially costing their employees and taxpayers thousands of dollars annually in higher fees for retirement accounts.

With approval of the City Council, they hired a $45,000-a-year Portland consultant who successfully negotiated fee reductions from two private firms worth at least $300,000 a year and possibly more.

Last week, the city’s retirement director told council members that employees as a whole would see an additional $200,000 a year accumulating in their “457 deferred compensation” accounts, and the general tax fund would get $100,000 a year in “revenue sharing” to offset the city’s cost of administering the accounts.

On Wednesday, city retirement Director Leo Griffin said that the savings are being handed out regularly to cities vigilant enough to demand them. But no one at City Hall had considered the possibility of saving on management fees by driving a harder bargain.

In addition, the city had apparently failed to provide adequate oversight, as required by federal law, to ensure that the 457 accounts were being managed well on behalf of employees.

“The city has become more sophisticated as the years have gone by,” Griffin said in explaining the lapses.

Assistant City Attorney Pat Dalton, who has worked on the issue, had a different take. “Nobody asked the questions,” he said.

Councilwoman Mary Verner, the council’s Finance Committee chairwoman, had yet another reaction to the fee reductions.

“I was really skeptical we were going to save money by spending $45,000,” she said.

The money is coming from two companies that manage mutual funds and other investment options for employees contributing to the city’s 457 retirement plan, the public sector equivalent of the better known 401(k) retirement plans in the private sector. The numbers refer to sections of the federal revenue code.

The 457 plan is offered as a supplement to the city’s regular “defined-benefit” employee pension plan.

About $80 million in employee money is managed by the International City/County Management Association, or ICMA, while ING, an international Dutch-based investment firm, handles about $20 million.

Both organizations charge annual management fees against the funds, which reduce earnings to individual account holders. The fees are higher when employees invest in funds not directly managed by ICMA and ING, funds offered by companies such as Fidelity or T. Rowe Price.

Griffin said many employers have been obtaining lower fees, especially if they are large enough to command the placement of $100 million in investments or more.

ICMA initially offered the city a $25,000 savings last year as an incentive to renew the city’s contract.

Griffin said that raised suspicion that even more money was available in fee reductions, so Griffin checked and learned that Tacoma, with a larger employee force, had recently negotiated $500,000 in reduced fees. He requested consultant bids and recommended hiring Arnerich & Massena of Portland to act as the city’s go-between.

In addition to the reduced management fees, ING will no longer charge redemption fees to employees who cash out of some funds, a change potentially worth $200,000 on top of the other fee savings.

Griffin and other city officials are organizing an oversight committee within City Hall to help monitor fund performance and be more selective in what choices of funds are available to employees.