L.A. City Council asking why trustees for DC plan hired Nationwide

LOS ANGELES — The Los Angeles City Council on Sept. 14 voted to investigate the hiring of Nationwide Retirement Solutions Inc. by the $1.8 billion City of Los Angeles Deferred Compensation Plan.

The council sent the issue to its personnel committee, which has scheduled a hearing for Sept. 29. The full council is expected to discuss the results of the hearing Oct. 5.

The move follows an outcry over the vote by the plan's board of trustees that replaced Great-West Retirement Services despite the recommendation of the plan's staff and investment consultant to retain the firm. Great-West's contract is due to expire Dec. 31.

The plan's consultant, Mercer Investment Consulting, Richmond, Va., and staff recommended Great-West over Nationwide, which was selected in a 4-2 vote of the board Aug. 17.

Plan officials have received more than 1,000 messages from active and retired plan participants asking that the board change its decision and rehire Los Angeles-based Great-West, according to Steven Montagna, senior personnel analyst for the plan. Most of those participants, along with the two board members who opposed Nationwide's hiring, are most concerned about the Columbus, Ohio-based firm's fees, which are 25% higher than Great-West's, according to reports of the numbers submitted in the firm's bids. All fees are paid by plan participants.

Great-West, which had been administrator since 1999, actually proposed making a small cut in its fees, according to reports about its proposal.

Nationwide officials, in a statement, said the firm was hired "on the basis of our superior education and service model."

Nationwide representatives extensively lobbied plan board members in an effort to get the contract, according to Margaret Whelan, general manager of the city's personnel department and a plan board member. In the last six months, at least three Nationwide lobbyists were at each board meeting, she added. Ms. Whelan voted in favor of Great-West, because of its lower fees and she said their service was good.

Michael J. Galvin, vice chairman, who voted for Nationwide, "was partisan (toward Nationwide) from the get-go," said a source close to the board who asked not to be identified.

Mr. Galvin, in an interview with Pensions & Investments, denied being biased. He said he made his decision after the presentations made by both companies and he voted for Nationwide because of the education services and "services to the membership" promised by the firm. He said he thought the better education services were particularly important to the city's blue-collar workers who don't have much financial knowledge.

Also, the 25% fee increase is actually just $10 a year per participant, Mr. Galvin said.

The source who asked not to be identified also said that Mr. Galvin had a personal friendship with Darlene Kuba, one of the Nationwide lobbyists; Mr. Galvin said he has known Ms. Kuba for many years in her capacity as a lobbyist but has no personal relationship with her.

Another board member who voted for Nationwide, Javier Romano, said the reasons for picking the firm were "pretty obvious. They were going to provide more services." He would not elaborate.

Nationwide planned to have 11 local staff members servicing the plan, according to the company's statement; there are only four local Great-West staff members under the current contract, the statement read. Also, Nationwide said it planned to a far greater number of "employee consultations" over the five-year term of the contract, than Great-West.

However, Ms. Whelan and fellow board member Shelley Smith, who also voted for Great-West, said in a memo they sent to the City Council that they were "deeply skeptical" of that argument. "It has not been established that the plan currently has a staffing deficiency," according to the memo. They pointed out that Great-West already holds almost 200 group meetings a year and that Nationwide's proposal of 1,100 meetings annually would equate to "approximately five meetings held per working day."

Nationwide also included the cost of its investment advice program in its overall fee, despite having been asked in the RFP to quote those services separately, the memo said. In November 2002, the plan's board decided not to pursue an investment advice program until it could be provided through existing revenue streams, thus avoiding a fee increase, the memo said.

Additionally, the Whelan-Smith memo noted Great-West could offer an investment advice program whenever the board decides to implement one. The memo goes on to say an investment advice program should not involve an across-the-board fee increase and, if offered, should be offered on a voluntary basis, so that only the participants who want advice have to pay for it.

City Councilman Dennis Zine, who presented the motion to assume jurisdiction over the vote, said in the motion that "the actions of the board are even more puzzling in light of its responsibilities set forth in the (City's) Administrative Code," according to Brian Perry, a deputy to Mr. Zine. Under the code, the board is authorized to approve and execute new contracts with plan administrators as long as they have "no new costs to either the city or to any participants in the plan," according to the motion.

The code also says the board must periodically conduct sample surveys of plan participants "to determine member satisfaction, complaints, ideas for improvement of the plan and to obtain similar information," according to the motion.

Even if the council eventually vetoes the Nationwide decision, it does not have the authority to hire an administrator for the plan. "The decision is still the board's to make," said Mr. Perry.