DECEMBER 16, 1998

Aetna Retirement Services new provider of deferred comp services in San Francisco

MARKET VALUE ADJUSTMENT TO BE PAID OVER 5 YEARS

The Retirement Board has selected Aetna Retirement Services as the provider of investment services for the City and County of San Francisco Deferred Compensation Program and is not renewing the contract with Hartford Insurance. Aetna will pay off the "market value adjustment" immediately and recoup that payoff with a fee surcharge spread over five years.

A series of informational meetings will be held by the Retirement Board Staff and Aetna representatives beginning this month. Deferred compensation participants will be offered counseling and "mapping services" at these meetings which will allow them to match similar types of investment vehicles under Aetna to their current investment choices under Hartford, or an opportunity to reallocate their distribution of investments. Participants who do nothing will have their investments mapped for them to match similar investments under Aetna.

A Local 21 committee of Industrial Hygienist Laura O'Heir, Sr. Real Property Appraiser Alex Tharayil and Representative Bob Britton met with Retirement Board Executive Director Clare Murphy and Project Manager Kay Gulbengay to review the pending change to Aetna Retirement Services. The conclusion reached by the Local 21 committee, after hearing a comparison of the services and fees under Hartford and Aetna, was to agree that a change to Aetna would in the long term be a vast improvement for our members.

Unlike Hartford, Aetna's fee will be clearly enumerated on statements. Unlike Hartford, Aetna will provide a minimum of five licensed counselors working directly on our deferred compensation program. Unlike Hartford, Aetna will provide a portal to over 3500 mutual fund investment vehicles in addition to their standard choices. Unlike Hartford, Aetna will offer investment options over the Internet. Members will be able to review and change the allocation of their investments, via the Internet.

Fees charged and the clear reporting of those fees is one reason for choosing Aetna. Hartford's fees are not shown on their statements, but are, in fact, charged against earnings. Fees vary depending on the investment choices made, but on average, Aetna's fees will be far less than under Hartford. Furthermore, Aetna does not charge what are known as back end fees as does Hartford. Back end fees are charged when a participant withdraws funds from the program either by making a qualified withdrawal of funds such as for a medical emergency or other reason allowed under the IRS code or when the employer terminates the contract, such as now.

Aetna has agreed to absorb the costs of back end fees, or "contingent deferred sales charges", Hartford will levy as a result of the contract termination by the Retirement Board.

A thornier issue has been the "market value adjustment" for funds in Hartford's General Account. The General Account consists primarily of investments in bonds. These bonds have varying maturity dates and any cash out of those funds to rollover into similar Aetna markets necessarily means the cashing out of bonds prior to their date of maturity. This means a diminution of the stated value of the investment.

This has been our union's major concern with the changeover to Aetna. We have consulted with deferred compensation advisors and pension lawyers about what to do if this problem was not resolved.

On December 10, the Retirement Board considered various options to resolve the "market value adjustment" of funds in the General Account. They chose the option we supported, which we believe is fairest and which will not negatively impact anyone when compared to staying with Hartford.

Under this plan all accounts with Hartford, including the General Account, will transfer over to Aetna before the end of the year at 100% of book value. Aetna will pay the approximately $6.5 million market value adjustment to Hartford and will add a 0.2% surcharge to its fees. The 0.2% surcharge will continue for five years. Despite this surcharge, Aetna's fee will still be 0.82% compared to Hartford's 1.4%.

We believe this is the fairest method to resolve this problem. No one loses any value on their accounts and the fees charged will still be reduced considerably by switching to Aetna.

Contracting-out Alert (and Commentary)

Note: We were unable to include a referenced article from the S.F.Examiner, Sunday, November 21, 1998 entitled - STATE, HIGHWAY ENGINEERS REACH ACCORD/No delays expected in design of new span for Bay Bridge. The article is available in the hard copy versin of PIPELINE, Dec 16, 1998 or from the union office.

With the apparent end of an era of attacks on California's highway engineers large high profile outsourcing activities have begun returning to the City & County of San Francisco with the recent Booz-Allen management contract with MUNI and now a proposal from the Public Utilities Commission to contract upwards of $5 million a year for the next ten or 12 years for "program management services" to support the $3.5 billion S.F. PUC capital improvement program. This outlay would be in addition to the Utilities Engineering Bureau's own in-house program management. The request for proposal appears to have come "out of the blue", with contractors hearing about it prior to City staff. One of the problems cited by both the MUNI and PUC is the difficulty of hiring engineers through the civil service process (--a charter mandated merit process). Whereas our union is very aware of the failings of that system it would seem to us that realistic investment in human resources management is both fairer and cheaper than giving away municipal functions.

Buy back retirement with pre-tax dollars

Since 1995, we have repeatedly asked the Retirement Board and the Retirement System to give employees the opportunity to buy back their retirement shortages with pre-tax dollars. We received the same response for over three years, "We're looking into it. We need an affirmative response from the IRS."

The Internal Revenue Service has responded and the ball is now in the City's court. The City needs to enact an ordinance that provides that employees may not opt out of the buy-back program once they opt in, and that they may not reduce the amount they agree to have deducted from their paychecks. We approached Supervisor Michael Yaki and he is willing to sponsor an ordinance which will initiate the buy-back program. We also talked with Dan Maguire (Retirement System lawyer) who told us that he is drafting an ordinance but it is not yet done.

Retirement Board commissioner Herb Meiberger requested that Retirement System staff move on the buy-back issue because three years was too long a response time. We suggest that members begin lobbying the Retirement Board so that we don't have to wait another protracted period of time. You can write to Retirement Board members at 1155 Market Street, 2nd Floor, San Francisco, CA 94103 (Joseph Driscoll, President; William Breall, M.D., Vice Pres.; Al Casciato, Patricia Martel, Herb Meiberger, Brenda Wright, Commissioners; Michael Yaki, Supervisor).