Pepperdine University Retirement Plan Committee Meeting 08 ...
ATTENDEES: Ms. Lauren Cosentino
(Listed alphabetically Ms. Michelle del Guidice
by last name) Mr. Michael Feltner
Mr. Paul Lasiter
Mr. Jack McManus
Mr. Grant Nelson
Ms. Edna Powell
ABSENT: Mr. Jeff Pippin
GUESTS: Mr. Chris Rowey, Benefit Funding Services Group
Ms. Tina Schackman, Benefit Funding Services Group
Opening: The regularly scheduled meeting of the Pepperdine University Retirement Plan Committee commenced on December 10, 2010 at 1:04 p.m. in Malibu, CA and it was noted a quorum was present.
Approval of prior meeting minutes: The Committee reviewed the minutes from the September 3, 2010 meeting and Mr. Feltner motioned to approve the minutes noting the action items had been completed. Mr. McManus seconded the motion and the minutes were unanimously approved.
FIDUCIARY AGENDA
3rd Quarter 2010 Investment Review: Mr. Rowey provided a brief overview of the market and economic conditions during the third quarter outlining growth as measured by GDP, unemployment, inflation, interest rates and market sector returns. In the domestic equity markets, small and mid cap companies outperformed large cap companies during the quarter, while emerging markets were the leading sector in foreign markets. In the fixed income sectors, emerging market debt and high yield continue to be the leaders while mortgage-backed securities lag the overall market.
The Committee reviewed the relative performance of the investment options offered in the Diversified Plan against their respective peer groups on a quarter, year-to-date, 1, 3, 5 and 10 year annualized basis as of 9/30/2010.
The Committee discussed the following funds in further detail:
MainStay High Yield Bond: The Committee reviewed the fund’s portfolio composition to determine whether participants are getting the types of returns they would expect from a high yield fund. The fund’s conservative investment strategy will cause it to lag in risk-based rallies, but the Committee agreed they prefer a more conservative approach in this category and would like to consider other fixed income options that may be more aggressive, such as strategic and global fixed income. BFSG will prepare a fund search with options in both categories for the Committee’s review at the next meeting.
Eaton Vance Large Cap Value: The fund has several top holdings that have experienced headline risk over the past 12 months including BP, Anadarko and Hewlett Packard. Due to the fund’s below average performance over 3 and 5 year annualized periods, the Committee agreed to place the fund on the Watch List and requested BFSG prepare a due diligence review of the large cap value category to review at the next meeting.
Perkins Mid Cap Value T: This fund is closing to new investors on December 31, 2010 but will not have any impact to participants in the Plan that want to continue to invest in the fund.
Munder Mid Cap Growth: This fund’s performance has improved slightly over the short term; however, the Committee agreed to keep this fund on the Watch List.
BlackRock International Opportunities A: This fund has been reclassified by Morningstar into the foreign large cap equity category from the foreign small/mid category due to its all-cap strategy that allows it to invest in companies of any market cap. This fund will be reviewed in further detail later in the meeting during the Fund Search Analysis.
Van Eck Global Hard Assets: The lead manager, Derek Van Eck, died suddenly in September 2010. Management responsibilities have been assigned to 2 co-managers; 1) energy analyst with 10 years of portfolio management experience, and 2) head of trading and commodity analyst. Mr. Rowey suggested the Committee consider placing this fund on the Watch List due to the manager change and the Committee unanimously agreed.
The Committee reviewed the performance of the Portfolio Xpress models against the T. Rowe Price Retirement Date funds. The Portfolio Xpress models have outperformed the T. Rowe Price funds on a 3 and 5 year annualized basis.
The Diversified Plan, as allocated at the end of third quarter 2010, ranked in the top 10th percentile, which indicates an “outperform” status. Out of the 25 funds that receive an evaluation score, 22 scored in the top quartile and earned an “Outperform” ranking and 3 scored in the second quartile and earned a “Perform” ranking. There are currently no funds in the Plan with an “Underperform” ranking.
The Committee noted the Diversified Plan met or exceeded both the passive and active benchmarks on a 1, 3 and 5 year annualized basis and the weighted expense ratio of 60 bps is significantly less the custom benchmark at 93 bps.
Assets in the Diversified Plan exceeded $135 million at the end of the third quarter, up from $122 million from the previous quarter.
The Committee reviewed the asset allocation by age group for the Diversified Plan and noted more than 50% of participants age 29 and under have allocated their accounts into the T. Rowe Price target date funds with over 80% allocated to equities. The equity allocation for participants over the age of 60 is reduced to less than 50%.
The Committee reviewed the relative performance of the investment options offered in the TIAA-CREF plan relative to their respective benchmarks. Out of the 6 funds that receive an evaluation methodology score, 2 ranked in the top quartile and earned an “Outperform” ranking and 4 ranked in the second quartile and earned a “Perform” ranking. The Plan weighted rank is in the top 18th percentile. Plan assets at the end of the third quarter were approximately $140 million, up from last quarter’s balance at $136 million, largely due to the investment performance of the CREF Stock fund.
The Committee reviewed the investment options offered in the Prudential plan which had almost $3 million in assets at the end of the third quarter. Most of the assets are allocated to the Guaranteed Interest Account (61% of Plan assets) and the large cap growth options (23% of Plan assets). Out of the 7 funds that receive an evaluation methodology score, 3 ranked in the second quartile and earned a “Perform” ranking while the remaining 4 earned an “Underperform” ranking. The two large cap growth funds, Medley Capital Growth and Medley Equity have underperformed their peer groups over a 1 and 3 year annualized basis. The Medley Equity fund had an overweight to financials during 2008 and an underweight to technology in 2009 compared to the peer group which has led to its underperformance. The Medley Capital Growth fund is a concentrated portfolio with more of a value bias than the average large growth fund and also had poor stock performance in an outperforming category over the past year, consumer discretionary, which has led to its underperformance.
Fund Search Analysis: The Committee reviewed the Fund Search Analysis prepared by BFSG for the foreign small/mid category. The Committee conducted a due diligence review of the existing option, BlackRock International Opportunities, against three alternate options: DFA International Small Cap Value, MFS International New Discovery, and Vanguard International Explorer. Relative performance, risk characteristics, portfolio construction, management structure, investment strategy, style consistency and expenses were reviewed for each investment option. The DFA International Small Cap Value fund employs a passive strategy investing in 22 developed markets outside of the U.S. and does not invest in emerging markets. The MFS International New Discovery is an all cap strategy and has 40% of the portfolio invested in large cap stocks, so the strategy is similar to the Plan’s current investment option. The Vanguard International Explorer fund is sub-advised by Schroder and Wellington and has a more blend style than the other funds with low exposure to emerging markets. After careful consideration, the Committee agreed to keep the BlackRock International Opportunities fund and move it to the foreign large cap equity category and add the DFA International Small Cap Value fund due to its passive strategy and non-exposure to emerging markets.
Ms. Schackman will work with Diversified to request the fund change and prepare a participant notice that explains the Committee’s decision to add the DFA fund due to BlackRock’s migration into the foreign large cap category.
ADMINISTRATIVE AGENDA
Participant Education: Ms. Del Guidice commented that she is working with Diversified to develop a communication campaign around the new tax legislation that lowers the amount of social security tax taken out of employee’s paychecks by 2% and encourage participants to increase their deferral rates by the same amount.
Diversified Services: The Committee discussed the various options Diversified offers to participants in direct call campaigns, such as welcoming new enrollees to the Plan, educating participants on minimum required distributions (MRD), and assisting with transfers/rollovers into the Plan. Pepperdine currently allows Diversified to contact participants to assist with transfers/rollovers and the Committee agreed to leave the process as is and not add any additional features at this time.
Automatic Enrollment: As previously discussed, there would be a budget impact of approximately $500,000 if Pepperdine implemented an eligible automatic enrollment arrangement (EACA). It was noted that approximately 220 employees out of 1,400 are not participating in the Plan. The Committee discussed the possibility of offering automatic enrollment to new hires after 1 year of service which would not have as much of an impact on the budget. The Committee agreed to postpone this item due to budget constraints and continue discussions in 2011.
Committee Membership: The Committee members are still searching for qualified prospects to join the Committee. This item will remain on the agenda for future discussion.
Closing: Mr. Feltner inquired about the Roth 401(k) provision. This is a relatively new feature for 403(b) plans and the Committee requested to revisit this topic after the audit is completed in Fall 2011.
Adjournment: With no further items to address, the Committee meeting adjourned at 3:10 pm
Action Items:
1) (BFSG) Prepare fund search for strategic income and global fixed income categories for next meeting.
2) (BFSG) Place Eaton Vance LCV and Van Eck Global Hard Assets on Watch List.
3) (BFSG) Notify Diversified of fund change – add DFA Int’l Small Cap I as new option – no mapping.
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