SACRAMENTO, Calif. -- The California Public Employees' Retirement System is making a big push into the defined contribution business, augmenting the system's $156.4 billion in defined benefit assets with a revamped 457 plan and a new 401(a) plan for correctional peace officers and firefighters.
Also in the works are a 401(a) qualified money purchase plan for part-time school employees and a supplemental contribution after-tax defined contribution program that will be open to all state employees.
Both plans are expected to be up and running sometime next year.
"The design of the program has the principle of providing a simple, straightforward investment plan providing proprietary funds at low cost to the participants," said Dave Mullins, chief of CalPERS' supplemental savings program.
Although he would not say that the defined contribution plan programs will eventually rival CalPERS' defined benefit program, he did say, "I think we could realize great potential growth ahead of us."
State Street Bank & Trust Co., Boston, tentatively has been named master administrator for all of the defined contribution and deferred compensation programs, subject to contract negotiations, Mr. Mullins said.
He said CalPERS is not vying to replace its defined benefit program with defined contribution plans.
"We are putting a new emphasis on this area of the program," he said. "We view defined contribution as a plan that supplements and complements our defined benefit programs. It is not in competition with our defined benefit program."
The first step in settling the State Street contract came in May, when the board approved changes in the investment management options and their managers and drastically lowered fees in the $96.4 million 457 plan, the Public Agency Deferred Compensation Plan, Mr. Mullins said.
These are the first adjustments to the investment option lineup since the plan was started in 1995. Since inception, all assets coming in have been placed in funds that were either managed internally by CalPERS staffers who ran the defined benefit assets or run by managers under contract with the state for its defined benefit system.
Plan officials are expanding investment options to 12 from 11 by adding a small-cap Russell 2000 index fund managed by State Street Global Advisors, Boston.
Oppenheimer Capital, New York which oversaw the plan's actively managed large-cap fund, is being replaced by SSgA, said Marty Walton, manager of CalPERS' 457 program. And SSgA, which had actively managed an international equity fund on an interim basis since June 1995, is now the permanent manager.
Several choices from the original menu are being retained, including: a small-cap domestic equity fund run by Brown Capital Management, Baltimore; a stable value fund run by State Street Bank; and a money market, an intermediate bond and a Standard & Poor's 500 index fund, all managed internally.
Asset allocation portfolios
In addition to the seven core funds, the plan also had three internally managed asset allocation portfolios. "These proved to be somewhat difficult to manage," Mr. Mullins said.
Under the new design, these asset allocation portfolios will be replaced by State Street's Life Solutions passively managed funds: a growth, a balanced growth, and a growth and income fund.
"There is significantly better performance using these funds than the combination we had in the asset allocation funds," he said.
The plan is also keeping a self-managed account that will be managed by State Street Brokerage Services.
CalPERS officials also slashed fees. Under the simplified structure, participants can be charged only investment management and administration fees, Mr. Walton said. Under the revamped fee structure, administration fees will be dropped to 26 basis points from 70. Moreover, no participant will pay more than 1% of assets in his or her account per year in total fees, which are the sum of administration and investment management fees, he said.
"Participants will pay under 1% even if they choose the most expensive fund -- the international fund. With the administration fee that we have in place, that person would pay 94 basis points," he said.
These total fees are half those of competitors, said Randy Taylor, vice president at State Street Global Advisors. This is important because CalPERS must compete with private managers for business in the deferred compensation arena.
Mr. Taylor said the state Legislature could expand CalPERS' defined contribution program could even more.
"There's a movement at CalPERS toward looking at defined contribution as a supplement to defined benefit plans and to provide services if and when the Legislature acts," Mr. Taylor said.
So far, about 235 public entities have adopted the 457 program, Mr. Walton said.
CalPERS also has a new $10.8 million State Peace Officers and Firefighters 401(a) plan that began accepting funds Nov. 1.
The plan arose through labor negotiations between the state and the California Correctional Peace Officer Association, Mr. Mullins said.
The employer contributes 2% of base pay each month to the plan's sole option -- an internally managed moderate lifestyle fund, 62% of which is in stocks and 38% of which is in fixed income.
In July, the money will be transferred into a similar lifestyle fund, the balanced growth fund, which is 60% stocks and 40% bonds, managed by SSgA.
School part timers
Authorization to set up a separate 401(a) plan for part-time school employees as an alternative to Social Security passed the California Legislature last year, Mr. Mullins said.
The plan will be available to school employees who are not eligible to be in the CalPERS defined benefit program, he said.
It will function as a 401(a) money purchase plan with combined employer and employee contributions to be 7.5% of pay and immediate vesting at 100% of the value of participants' accounts, he said.
Because this would be the employees' sole retirement vehicle, investments probably would be directed to one "fairly conservative investment," controlled and invested by the CalPERS board, Mr. Mullins said.
Also under consideration is the Supplemental Contribution Program, a 401(a) plan. It would be available to state employee bargaining units.
While the legislative authority to form the plan was passed about four years ago, CalPERS officials are waiting for passage of cleanup legislation to expand participation to include all state, city, county and special district employees.
The bill was passed in the Senate and is scheduled to be heard in committee soon.
If the bill passes, it will become effective Jan. 1.