Peralta Community College District
Retiree Health Benefit Program Fund
Retirement Board Meeting
Memorandum on Discretionary Trustee
September 14, 2011
The Retirement Board of the Peralta Community College District Public Retirement System, who is
charged with the fiduciary and financial oversight of the Retiree Health Benefit Program Fund, is
considering restructuring the program by hiring a discretionary trustee to be the exclusive provider
of fiduciary and investment services. Currently, Neuberger Berman is the investment manager
overseeing the investment of funds and Union Bank is the trustee for transactions and operations
for the Fund. Neuberger Berman has presented the idea that the Retirement Board hires Neuberger
Berman Trust Company as Discretionary Trust for the Fund.
A Discretionary Trustee’s role encompasses complete responsibility for the assets of the plan,
including the selection and monitoring of investments, selection and performance of service
providers, proper distribution of assets, and proper plan administration (ERISA Section 403(a) and
404(c). The Discretionary Trustee is prudently hired to have exclusive authority and discretion to
manage and control assets of the program.
This is in contrast to a Directed Trustee who has no discretionary authority with respect to the
investments of assets, selection of providers, distribution of assets, or plan administration and is
more in the role of custodian. For example, a Directed Trustee is responsible for custody and
safekeeping of the program’s assets; execution of directions from the plan administration, fiduciary
or investment manager; trust accounting. Union Bank currently performs this function for the
program.
In recent years there has been tremendous growth in the area of Discretionary Trustees. For many
years dominated by bank trust departments who controlled investment decisions for plans, now
there are a plethora of independent investment firms marketing the role of Discretionary Trustee to
plans including defined benefit plans, endowments, health and welfare plans, OPEB plans, and
foundations.
A part of the increased interest in a discretionary trustee role is the trend for investment committees
or those with fiduciary responsibility to outsource the management of a plan to third party
investment management. This is also referred to as CIO (Chief Investment Officer) outsourcing.
Specifically, a discretionary trustee assumes the fiduciary responsibility allowing the Retirement
Board to focus on the strategic and tactical allocation of assets. The actual selection of providers,
security selection and due diligence are those of the discretionary trustee. Examples of the largest
managers of outsourced assets are Russell Investments, Cambridge Associates, SEI Investment,
Mercer, State Street Global Advisors Northern Trust Global Advisors, and BlackRock. Smaller
firms are Wilshire Associates, TIAA-CREFF, Commonfund, and Marcos Consulting Group.
There are several considerations to be made by the Retirement Board as it approaches this decision.
One is what is the major focus of the Retirement Board and how involved the Board wants to be in
making implementation decisions. You may choose to focus a higher level of oversight and delegate
the implementation and manager selection to an outside advisor. How much time is the Retirement
Board willing to dedicate to this responsibility?
Two, what is the cost of outsourcing. The true measurement of cost is the assessment of the riskadjusted return net of fees, not the absolute costs in the particular model. Cost of oversight will vary
with the size and complexity of the fund. A large fund will have a lower oversight costs than a
smaller fund pursuing a designer specific strategy. Certain strategies, such as alternative investments
may require greater oversight. The Retirement Board is extremely interested in using local
investment firms; this customization may require higher fees and oversight of the trustee. Local
firms may not meet the investment criteria as established by the Retirement Board and the trustee.
All the parameters set forth by the Retirement Board will be quantified into a fee.
As part of understanding the costs of outsourcing, the Retirement Board must understand the pros
and cons of different models such as lock-up provisions and portfolio customizations. Some
providers have a one size fits all model and others customize using a series of proprietary funds-of
funds. In the instance of Neuberger Berman and the Neuberger Berman Trust Company there will
be a definite desire for the Trust company to use a higher percentage of Neuberger Berman
investment products.
What changes occur in the current plan administration if the Retirement Board elects to hire
Neuberger Berman Trust Company? William Wallace of Neuberger Berman will remain the primary
contact with specified visits to the District from the Trust Company who will review the plan
performance and administration. Retirement Board will continue to make decisions in regard to
strategy and tactical asset allocation and guidelines for the discretionary trustee. Bill Wallace
currently interfaces between the NB investment committee and the Retirement Board but with the
addition of the NBTC he will have a reduced role in this area, and the NBTC will have all nonNeuberger manage oversight. NBTC will have the final say on all decisions. NBTC assumes the
fiduciary responsibility for the program.
Neuberger Berman is paid as a percentage of the assets. In terms of costs, at this time, Neuberger
Berman is paid a flat 40 basis points which means for a $10,000,000 investment, they receive
$40,000. (A fee on one of the investments is higher and is rebated back to the fund account.) Union
Bank, with the responsibility to execute trades, is paid for the transactions and custodial fees. (Need
to confirm this). The fee for the NBTC would be variable depending on the investment. The base
fee would be 10 basis points plus any additional fees for the use of non-proprietary managers.
Increases in fees would occur, for example, with the mandate of the use of local Bay area investment
manager and alternative investments. Using the above example, the fee would become $50,000.
Further analysis needs to be done to determine the how the Retirement Board’s stated objectives
may increase the cost basis for any discretionary trustee i.e. alternative investments cost more. The
allocation of funds between proprietary and non-proprietary funds must be determined and how
that affects the NBTC fee. Also, we need an approximation on annual transaction costs (from
Union Bank) and if that number will increase. Solicitation of interest from other possible
discretionary trustee service providers seems reasonable to put all of this information in perspective.