Part 6 (Out of 10)
Suggested replacement funds were in the asset class to accommodate the diversification requirement of the Investment Policy Statement. We made it clear the total costs above 1% were too high. These alternatives cost less than 1% total. With the amount of expected assets coming from thousands of potential LAUSD customers, it makes sense to offer funds charging less than 1%, a little less than three times the original 42 bps. We are only following-up on what the AIG-VALIC’s VP said to the Board of Education: “… because of the institutional pricing and the size of LAUSD alone demands a low rate.”
The committee was unaware that the .27% additional cost was in the AIG-VALIC/LAUSD contract. When we recommended lower cost funds, our financial consultant ignored us. I was floored. I thought the Mercer’s slate of fund choices was a starting point because it’s the committee which selects the investments. I was wrong. Mercer would not even consider AIG-VALIC’s recommendations, 1a or 2a in Table 3. Then I discovered that the infamous 27 bsp was in the contract, quoting, “The target amount of such income is 0.27% and was taken into account in determining the administrative charges….” Mercer had an agenda and the committee was not a partner.
Revenue sharing was a contentious issue. The committee was so divided the Chair warned us with an email edict not to go against the consultant’s recommendations. We underestimated the consultant’s influence on the benefits administration and the committee Chair. He wrote, “Mercer is not willing to recommend the three funds you want to select because in their expert opinion they do not achieve our stated goal.”
Really? In my “expert” opinion, the Chair overlooked two procedural facts about the committee process and one was his own:
- Once again, two of the funds were AIG-VALIC’s initial recommendations. The committee members took a fiduciary position trying to eliminate the highest costing funds and still pay AIG-VALIC’s 42 bps. The three funds we recommended charged fees higher than 42 bps. So, what was the problem?
- The Chair forgot what he and Mercer reported to the Board of Education. He answered a question from one of the Board members about the selection process, “…in terms of selecting the program, this will be handled by the investment committee.” Mercer repeated what the committee Chair said at the Board of Education.
Our recommendations were legitimate and in complete accord with the IPS. It’s only three of the eighteen funds to lower costs and still pay what AIG-Valic needed—not a threat to Western Civilization.
Some committee members were going to vote no, but others were not knowledgeable about the machinations. With the district under pressure to get this plan running, there was no time to get everyone up to speed. I told the committee I would not vote for this selection of funds. Three of those funds were above the average cost and my sole rationale. The Chair’s blessing convinced enough members to vote for Mercer’s recommendations. In spite of absences at the next meeting, a quorum was reached and the committee approved Mercer’s hard-line recommendations.
I was disgusted and angry as I was misled into thinking that the committee selected the investments. Furthermore, we were unable to hold AIG-VALIC’s feet-to-the-fire. The mistake we made by not pressing AIG-VALIC and Mercer about the 42 bps came back to slap us upside-our-heads.
In Part 7 released tomorrow, discover great news for our employees! Hint: It’s about transparency. This time LAUSD had to go along with the committee and a follow-up article in the Los Angeles Times and other publications.